The precipitous drop in the price of oil and an almost equal sell off in oil stocks has been the most significant financial and perhaps industrial event of 2014. Even bigger than Alibaba’s IPO in September.
The reality is that we shouldn’t be surprised. In the last forty years, the price of WTI has only trended over $100 per barrel six times. Except for 1980, each time WTI reached this level it fell off a cliff. In 2008, it fell from $140 to $40 in five months. In 2011 it fell from $133 to $88 in three months. In 2012 it fell from $103 to $86 in two months. This year it fell from $107 to $55 in five months.
One thing that is for sure; big oil has seen this before and will batten down the hatches to weather the storm. In the last two weeks, dividends have been cut and capital expenditures have been ripped to shreds. Here in Canada, Canada Oil Sands was the first out of the block to cut dividends by 42% on December 4th. On December 12th, Cenovus Energy cuts its capital expenditures 15% to $2.5 billion. Penn West announced yesterday that it was cutting dividends from 14 cents to 3 cents and capital expenditure from $625 million to $215 million. Similarly, Husky announced yesterday that it is cutting capital expenditures from $5.1 billion to $3.4 billion. More cuts were announced today and more will follow.
The oil industry has been whacked but will survive. It has done so in the past and it will do so again. However, there will be a significant impact to world markets, currencies and countries.
Russia is in deep trouble. The average Russian is becoming an expert in currency control. Closer to home, Jim Prentice, the Premier of Alberta, said last week that no Albertan will be spared pain if oil prices remain low.
But what will a long term drop in the price of oil mean for cleantech, advanced materials and venture capital as a whole.
So as we depart 2014, the drop in the price of oil has made significant news. It has rocked countries, companies and shareholders. I predict that the worst is over and that oil has reached its bottom. Consumers, countries and companies are making adjustments and adjusting to the new oil reality. Advanced materials will emerge as a winner and cleantech will have some bruises.