NEWS RELEASE                                                                                                    DECEMBER 2014

Oil Price Fall will Impact Revenues for Flow Control and Treatment Equipment

Revenue forecasts for pumps, valves, instrumentation, filters, turbines, etc. have to be reviewed due to the dramatic fall in world oil prices.  Here are aspects to be considered:

Chronology

• Time from order date to revenue posting by flow equipment supplier.

Large capital equipment such as big pumps experience a multiyear revenue cycle, so 2015 revenues are in part based on 2013/2014 orders.

• Duration of oil prices at any one level:

• OPEC policies:

Could be permanent dissolution of OPEC or temporary.

• Chinese and world demand:

Chinese demand could slow down reducing oil consumption. However, lower prices will boost expenditures in the rest of Asia and total demand could rise as in the past.  World GDP growth pegged at 3.6 percent next year.

• Shale oil/gas cost vs. oil price:

Some shale gas will be economic at less than $40/barrel oil but at $60/barrel oil possibly only two thirds of current production would be above break even. At the low price point for shale, production stops and the price of oil then rises. This is one possible OPEC strategy.

• CTG and CTL cost vs. oil:

The cost of these alternatives sets the price of oil.  At low coal prices synfuels are more attractive even with low oil prices.

Relationship to price of other fuels:

• Natural Gas

In some regions the price of natural gas is pegged to oil. In the U.S. this is not true.  Natural gas prices are already low and may even increase this winter.

• Nuclear

Lower oil prices will further weaken the nuclear investment.

• Coal

Coal prices have fallen by more than 30 percent making coal still the fuel of choice in much of Asia. However, U.S. utilities assured of long-term low gas prices would replace up to 100,000 MW of coal-fired boilers.

Measurement metric:

• Dollars or world currencies

The oil price rise based on the increasing strength of the dollar has to be discounted. For example, if oil costs 50 Euros/barrel and it takes two dollars to equal one Euro then oil prices are $100/barrel. But at parity the price in dollars is only $50.

Impact of oil prices on the world economy:

• GDP and consumer expenditures and savings

Expenditures by consumers due to cheaper oil offset reduced purchases by oil suppliers. So the net effect is positive.

• Impact is unequal

Russia will be the most negatively impacted, but this could lead to instability and then conflict throughout Europe.

These potential impacts have been factored into adjustments in future revenue forecasts for pumps, valves, filters and instrumentation as follows:

 

The main effect of steep reductions in the price of oil is a redistribution from oil producers, who receive less for the effort of extraction, to consumers who benefit from cheaper transportation and energy. This enables them to spend more money on other goods and services or to boost savings. The expenditures by the consumers exceed the reduction in expenditures by the producers creating a rise in net world consumption.

There are no precise consequences at any price level.  Some projects will proceed at low prices and some will be uneconomical at relatively high prices. Consumption of steel for automobiles will increase, but consumption for oil well equipment will decrease.  It is necessary to avoid false precision of the type displayed by the child given an Indian arrowhead. When asked how old it was, he replied: 201 years and one day.  When queried about the precision he explained that it was 200 years old when given to him and he had owned it for one year and one day. False precision was on display during the last energy crisis.

McIlvaine has been following energy since 1974.  Here is the optimistic outlook as contained in Exxon’s “The Role of Synthetic Fuels in the United States Energy Future," which appeared in the early summer of 1980. Synfuels were to be a 15 million barrel-per-day answer to the nation's thirst for energy. Cracking rocks laced with oil would provide 12 percent of our energy needs by the early part of the 21st century, and 8 million barrels would come from oil shale in Colorado's Piceance Basin and the Uintah Basin to the west. Another 7 million barrels would come from coal, mostly from the Powder River Basin in Wyoming and Montana, the Dakotas, and the Southern Rockies. As for workers, there would be one million people employed by the synfuels industry in Western Colorado. Wyoming would house nearly three times its current population.

The arc from excessive optimism to complete abandonment was only a few years. Here it is chronicled in McIlvaine newsletters.

McIlvaine Coal Gasification and Liquefaction Newsletter

 

There is the potential that there could be a repetition of this experience where the price of oil plummets and remains low for decades.  Experience tells us that we were overly optimistic about a quick rise in oil prices. We were also optimistic about the willingness of the U.S. to pay for energy security.  The situation is different this time around since the shale oil and gas is a proven technology with predictable costs.  More important is that production can be reduced or accelerated quickly.  The problem with the earlier experience was that billions of dollars and years of construction would have been needed to start producing the product. The shale industry can produce at various levels depending on the current price. So we are not likely to repeat the experience of the 1980s. But the bottom line is that our precision is no better than with determining the age of the arrowhead.

Revenue adjustments are being made to: 

N028 Industrial Valves: World Market

N019 Pumps World Market  

N031 Air and Water Monitoring: World Market

N024 Cartridge Filters: World Market

N049 Oil, Gas, Shale and Refining Markets and Projects

N043 Fossil and Nuclear Power Generation: World Analysis and Forecast