Quote of the Week

“By our calculations it will require additional debt formation of $39 trillion over the next decade to keep petroleum production operating.  Where that funding will originate from, when it is very unlikely to ever be repaid, will be of tantamount importance.  It will take very strong-willed societies to make such sacrifices.  If those sacrifices are not made, the integrated global production system will have disappeared by 2026.  2016 will be witness to the beginning of this event with dramatically increasing closures and bankruptcies throughout the world’s petroleum industry.”

The Hill’s Group — “an association of consulting petroleum engineers and professional project managers”


  1. Oil and the Global Economy
  2. The Middle East & North Africa
  3. China
  4. Russia/Ukraine
  5. The Briefs
  6. Top Ten Energy Stories of 2015

1.  Oil and the Global Economy

There were no surprises during the last week of trading for 2015. Prices moved sideways, with an occasional flurry of short-covering briefly offsetting the steady downwards trend of the markets. At the close Thursday, New York futures were at $37.04 a barrel, down 30 percent for the year, and London was at $37.28 down 35 percent during 2015. On Thursday, the EIA released US crude production data for the first nine months of 2015 showing production falling from a 44-year peak of 9.7 million b/d in April to 9.3 million in October.  This drop in production was less than many had anticipated given the severe cutbacks that have taken place in drilling rigs and capital expenditures.

Bloomberg says OPEC crude production in December was up slightly to 32.14 million b/d, reinforcing the notion that the cartel (read the Saudis and allies) has no intention of cutting back production until more high-cost shale oil, tar sands, and deep sea producers are driven from the market. Moscow reported that its production was up slightly to a post-Soviet high in December of 10.83 million b/d, further contributing to the glut.

There has been no change in the conventional wisdom that oil prices will continue to fall further in the coming months.  The CEO of BP said over the weekend that the low point could be in the first quarter.  Goldman Sachs continues to say that it may take prices as low as $20 per barrel to force the production cuts necessary to rebalance the markets.  European oil inventories are already at capacity, and there are reports that “oil inventories in Asia are going to get closer to saturation in the first quarter. “

Obviously there are too many forces at play in the global economy and oil markets this year to make any kind of responsible estimates of prices and production beyond the next few months. Optimists see recovery of the economy and oil prices later this year. Pessimists talk of a global recession. For the immediate future, the major exporters maintain they are going to keep up production and even the beleaguered US shale oil industry is maintaining production remarkably well.

A lot depends on how much lower prices go in the coming year and how long they stay at extremely low levels. For now, the most optimistic predictions about when a recovery will occur are coming from those with a vested interest in higher oil prices. such as exporting nations or financial institutions that start from the premise that too much pessimism will scare off customers. One thing that seems reasonably clear is that the very low prices will result in declining oil production, at least in the US, Canada, and in the non-OPEC countries where oil production is not the hands of a government that can swallow the low prices.

Estimates of the size of global overproduction currently run on the order of 500,000 to 1 million b/d with an occasional suggestion that it might be as much as 2 million b/d. We know that US domestic production fell by at least 400,000 b/d and possibly more in the last nine months. Few, however, are predicting that US production will fall more than another 500,000 b/d in 2016 – an amount that could easily be replaced by increased Iranian and/or Libyan production in the coming year.

An interesting corollary to the falling oil production question is whether an all-time peak in global oil production has already happened or whether production will simply take a dip in the next few years so that sometime during the 2020’s global oil production will climb higher than it was in 2015.  Those believing that we saw the all-time peak in oil production last year base their case on the statistics showing that except for eight major oil producers – Brazil, Canada, China, Iran, Iraq, Russia, Saudi Arabia, and of course the US – the rest of the world’s oil production has fallen steadily from 35 million b/d in 2004 to 29 million b/d this year. These forecasters say that if there is to be any major increase in global production after the current downturn, it will have to come from the big eight producers that have increased their combined production by about 10 million b/d since 2004. This seems like a reasonable proposition as production in the rest of the world shows no sign of doing other than declining slowly through depletion.

Thus, the issue of just when the all-time peak of world oil production will occur depends on what happens in the eight producers that have shown the ability to increase production, for one reason or another, in recent years.  Three of the eight are OPEC, low-cost, producers. Iran and Iraq have the reserves to increase production, but are also saddled with considerable geopolitical baggage that has restricted their production in one way or another for many years.  The US and Canada are high cost producers so that any major increases in their production will depend on the price of oil climbing to profitable levels. Given the financial setbacks currently being seen in the US oil industry, it seems unlikely that another round of shale oil deficit financing based on optimism and not profitability will happen. There is also the issue of costs of shale oil production as the sweet spots have or are being drilled so that when the shift is made to somewhat lower quality shale oil resources, costs per barrel will increase.

While Russia’s and China’s oil production have continued to grow slowly in recent years, most believe that conventional oil production in these countries has little room to grow. For now, geopolitics has largely cut Moscow off from exploiting arctic or possible reserves of shale oil.

Whether a combination of the eight oil producers with some potential to grow their production will be able, or if able, have the incentive to increase production sufficiently to surpass what is likely to be some sort of peak or plateau in 2015, remains to be seen.  There will be simply too many factors at work in the next 5-10 years, such as oil prices, the state of the world economy, demand growth global warming, geopolitical upheavals and technological innovation to make a judgment. For years, the peak oil community has said that the actual peak will only be seen in the rear view mirror years after it has happened. This remains true.

2.  The Middle East & North Africa

Iran: Just when all seemed on course for the lifting of the nuclear sanctions in the next few weeks, the situation lurched off into another issue last week as the Iranians tested a new ballistic missile in violation of a UN resolution. The White House then began preparing new sanctions on Iran as retaliation for the missile tests. This in turn led the Rouhani government to order an expansion of the missile program to snub Washington.  For now, the lifting of the sanctions still seems to be on track, but the situation is clearly volatile.

Saudi Arabia’s execution of a leading Shiite cleric along with 46 others, mostly Sunni members of al Qaeda, has created a major uproar. Not only did the execution raise a storm of protest against the Saudis in the Shiite world, it did so in many other countries and lost the kingdom a lot of friends.  The Shiite cleric who was executed had become the face of opposition to Saudi rule and was seen in Iran as the champion of the rights of the minority Saudi Shiite community. In Tehran, the government vowed revenge against the Saudis as a mob sacked and burned the Saudi embassy, leading the Saudis to break diplomatic relations with the Iranians.

Tehran continues to move ahead on its plans for increased exports in anticipation of the removal of the sanctions shortly. Iran’s National Oil Company says it has the ability to boost production by 500,000 b/d within a week of sanctions being lifted and by 1 million b/d shortly thereafter. The Iranians say they will enter the oil market in a way to ensure that the increased production will not cause a further drop in prices and will only produce as much as the market can absorb.

Tehran’s OPEC representative predicted last week that oil prices in 2016 will vary between $35 and $50 a barrel. The state budget is based on $35-$40 oil so the country is not worried about a fall in its income. Interestingly, the representative does not expect oil to go above $60 in the next four years, suggesting that the Iranians want high-cost producers to simply give up and leave the markets to OPEC with its low cost oil production.

Syria/Iraq: Not much news in the last week. The Observatory released its tally of the year’s deaths in Syria saying that 55,000 were killed in the fighting. Some 20,000 were civilians, 16,000 were government troops and allied militiamen, and 8,000 were rebel combatants. In Iraq, where the fighting has been more intense lately, the UN says 7,500 were killed during the year.

A detailed report on ISIL’s oil production and sales says that an intensified air campaign based on better intelligence has nearly shut down ISIL’s oil operations from captured fields in Iraq and has seriously hampered oil production and sales in Syria. The impact of this will take some months to be fully felt, but in the long run will have a major impact on ISIL’s mobility and its ability to maintain its control over major cities. The lack of fuel for power and water supplies is causing extreme hardships in the ISIL-controlled areas.

Saudi Arabia/Yemen: The newly aggressive Saudi government under King Salman stepped up religious tensions over the weekend by executing 47 prisoners including one Shiite Imam whose only crime was to call for the removal of the House of Saud. Some believe the execution of the Imam and three other Shiites was an effort to shore up its base with the more conservative elements in Saudi society by executing both Shiites and radical Sunnis opposed to the monarchy.

Reaction to the execution, however, was swift and harsh through the Shiite world with demonstrations and threats of reprisals coming from Iran, Iraq, Lebanon, the Houthis in Yemen and Bahrain. Even Washington, which is normally highly tolerant of Saudi human rights violations, called on the Saudis to respect human rights and permit peaceful dissent. The EU and the UN also expressed concern at the mass executions.

Last week the Saudi government announced a series of unprecedented subsidy cuts to counter the decline in oil prices. Oil revenues for 2015 were down 23 percent from 2014 and at the pace the Saudis are burning through their foreign reserves, they will be exhausted in another five years. Saudi Oil Minister al-Naimi told reporters last week that will not limit its output and it has the capacity to meet customers’ demands if needed. The minister said that current Saudi oil policy was “reliable” and that was no need for a change.

3.  China

There was little change in Beijing’s economic situation last week. Factory activity contracted for the fifth straight month in December. The government did announce that 13.2 percent of its energy consumption this year would come from non-fossil fuels as compared to 12 percent this year. The use of coal for energy is to decline from 64.4 percent to 62 percent this year.

The government intends to install 20 million kilowatts of wind and 15 million kilowatts of solar power in the next five years as well as numerous nuclear power plants along the polluted eastern coast. The government also announced that the apparent demand for crude oil will reach 11 million b/d in the coming year and demand for natural gas will also increase.  Given the economic difficulties facing China it would seem that these things would be hard to predict.

4. Russia/Ukraine

Oil output for 2015 averaged 10.73 million b/d, up slightly from the 10.58 million achieved in 2014. The continuing increases in production which have been going on almost continuously since 1998 come as a surprise to many who were predicting that Moscow’s aging oil industry would be going into decline anytime now.  Some of Moscow’s “oil” production has been gas condensate. Gazprom increased its condensate production by 5.3 percent for the year; however overall Russian natural gas production declined by 0.8 percent last year. Warmer weather and deteriorating relations with Europe are behind the drop despite the increased gas flow to China.

Most of last year’s increased production came from medium sized producers while the largest oil companies such as Rosneft and Lukoil saw a circa 1 percent drop in production last year.

The ruble had a bad week, ending up at 73 to the dollar. Russia’s manufacturing index contracted to 48.7 in December after two months of growth. Economists say that Russia’s economy will likely contract by 3.7 percent in 2015 and will like continue to contract this year. Although the government is forecasting an increase in economic activity this year, a former finance minister says that if oil prices continue to remain low for the next six months, Russia will see a second year of contraction.

5.  The Briefs

Global economic growth will be “disappointing” next year, the head of the International Monetary Fund wrote in an op-ed. IMF Managing Director Christine Lagarde said the prospect of rising interest rates in the US and an economic slowdown in China were contributing to uncertainty and a higher risk of economic vulnerability worldwide. (12/30)

In Ireland, Shell and its partners began piping gas from the offshore Corrib field to an inland terminal after gaining final consent from Ireland’s Department of Communications, Energy and Natural Resources. The Corrib gas field, one of four commercial gas finds in Ireland’s history, was found by Enterprise Oil PLC in 1996 but controversy about location of on-shore pipelines delayed project completion for nearly two decades. (12/31)

In Milan, Italy, bicyclists had free rein of city streets Monday during a six-hour ban on private cars in a bid to alleviate persistent smog. Pollution levels in Italy’s business capital have exceeded levels considered healthy for more than 30 days straight, prompting a five-day ban. (12/29)

In Russia, a ship-building company has signed a contract with an Iranian firm to construct oil rigs for the Iranian side in the Persian Gulf. Russian shipyard Krasnye Barrikady will build the rigs and transfer the needed technology. (1/1/16)

Russia’s crude ESPO Blend is as far from becoming a regional benchmark as it was after its first export shipment six years ago. It remains an also-ran in Asia-Pacific despite its high quality, annual shipments of 30 million tons, and the proximity of Japan, China and South Korea, Asia’s major crude importers. Traders attribute the lack of progress to ongoing late releases of shipment schedules. (12/31)

OPEC says that $10 trillion worth of investment will need to flow into oil and gas through 2040 in order to meet the world’s energy needs. OPEC does not see oil prices returning to triple-digit territory within the next 25 years, a strikingly bearish conclusion. The group expects oil prices to rise by an average of about $5 per year over the course of this decade, only reaching $80 per barrel in 2020. From there, it sees oil prices rising slowly, hitting $95 per barrel in 2040. (12/31)

Iraq aims to sell shares to the public in the $1.3 billion Grand Faw container port first proposed in 2011 before falling oil prices crimped the government’s ability to support the project on its own. (12/30)

China’s revival of the ancient Silk Road, through actual road construction and other investments, seeks to secure a share of Central Asia’s rich natural resources to fuel China’s industrial economy; it is building a network of security cooperation in Central Asia as a bulwark against Islamist extremism that could leak into China’s restive western province of Xinjiang, and it wants to create alternative trading routes to Europe that bypass Asia’s narrow, congested shipping lanes. It hopes to create new markets for Chinese goods, especially for heavy industries such as steel and cement that have suffered as the Chinese economy has slowed. (12/28)

In Angola, oil was the driving force behind Angola’s economic growth. Now it’s the driving force behind its high inflation, depreciating currency and broader economic crisis. (12/28)

Tanzania, as drought continues to cripple its hydropower plants, is struggling to produce enough electricity and is moving toward using more fossil fuels to make up the shortfall. Hydropower plants normally produce about 35 percent of Tanzania’s electricity needs, with gas and oil plants making up most of the difference. In October the east African nation was forced to shut down its main hydropower facility for nearly a month because the water level was too low to run the turbines. (12/30)

Nile deal: Leaders from Egypt, Ethiopia and Sudan have signed an agreement designed to assuage Egyptian worries over the construction of the Grand Ethiopian Renaissance Dam. Egypt previously expressed concern over the dam’s storage capacity and its effect on Egyptian water security and energy production by Egypt’s Aswan High Dam. (12/30)

In Nigeria, there are strong indications that the United States will soon resume buying Nigeria’s crude oil following ongoing talks in this regard between the US and Nigeria’s government. (12/29)

In Nigeria, dozens of people were killed and scores more wounded in bombings and other attacks in the north on Monday and overnight Sunday. In the city of Maiduguri, 52 people died and 124 were injured in attacks. (12/29)

For Brazil’s Petrobras, the most important company in Latin America’s biggest economy, simply surviving what has been an annus horribilis in 2015 ranks as an achievement. Reeling from one of the world’s largest corruption scandals, the company in April published much-delayed results for 2014 in which it plunged to a net loss of R$21.6bn after a one-off hit of R$50.8bn (US$16.8bn) — of which R$6.2bn related to investigations into the company, with much of the remainder involving write-downs stemming from the oil price crash. (12/31)

Venezuela’s state oil company PDVSA is temporarily halting natural-gas exports across the border to Colombia, citing climate factors (probably drought) and the need to generate electricity. The agreement between the two countries calls for Venezuela to send 39 million cubic feet of gas a day to Colombia, about 3% of Colombia’s supply. Tensions between Colombia and its neighbor boiled over in August when President Maduro cracked down on undocumented Colombians residing in Venezuela and closed the border. The countries agreed in September to normalize relations and gradually reopen the border. (1/2)

In Venezuela, a report by an NGO says the homicide rate climbed in 2015, putting the country on track to be the most violent in the world. The group said that killings in Venezuela, a country whose budget is suffering from low crude-oil prices, surpassed those in Honduras during 2015 and that the country now rivals El Salvador as the world’s deadliest. (12/29)

The 2015 US rig count: Oil explorers shut down more rigs last week to finish out the worst year for drilling cutbacks in almost three decades. Rigs targeting crude in the US fell by 2 to 536 in the past week, Baker Hughes said Thursday. Natural gas rigs were unchanged at 162, bringing the total of working rigs to 698. Two-thirds of oil rigs in the U.S. have been parked since drilling peaked at 1,609 units in October 2014. About 70 percent of the vertical rigs were dismantled during 2015, compared with 59 percent of horizontal drilling units. (1/1)

US oil and gas companies are selling assets and acreage piecemeal as they jockey to survive a downturn in energy prices, and the trend for small transactions looks likely to heat up during 2016. Few energy companies have engaged in the large-scale mergers that many industry experts predicted would occur after oil prices plunged a year ago. (12/31)

LNG exports: Cheniere Energy began production at what will become the first terminal to export natural gas from America’s shale formations. The company is receiving about 50 million cubic feet of the fuel a day, chilling it into liquefied natural gas at the Sabine Pass terminal in Louisiana, and storing it in tanks before the first export. Cheniere has previously said the inaugural cargo will be shipped during January. (1/1)

Oil exports: ConocoPhillips supplied the first cargo of US shale oil on December 31st to be exported since a 40-year ban on such shipments was lifted earlier this month. The cargo will be comprised of crude and a type of ultra-light oil known as condensate from wells in the Eagle Ford Shale formation in south Texas. The cargo was sold to merchant trader Vitol Group. (12/31)

Exporting fuels vs. crude: Energy companies and oil trading firms that teamed up to build several mini-refineries that convert a swelling surplus of ultra-light US crude into fuels for export seemed like a pretty safe investment bet for a while. Now, as U.S. oil output reverses its five-year rise and after lawmakers ended the 40-year-old export ban this month, oil executives and analysts question the wisdom of nearly $1 billion worth of so-called condensate splitters built over the past year, and the future of another $1.2 billion planned. (12/31)

Flood impacts: Residents of southern states along the Mississippi River are bracing for the flooding that has swamped communities from the Ohio River Valley to eastern Oklahoma over the last week, causing thousands of evacuations and killing at least 31 people. Officials in Louisiana are checking levees daily, and Exxon Mobil Corp has decided to shut its 340,571 barrel-per-day refined products terminal in Memphis, Tennessee, as floodwaters threatened to inundate the facility. (1/2)

Offshore rig day rates have plummeted as a function of significant oversupply. Many of these rigs were ordered in the previous up-cycle, but have only recently entered the fleet at a time when the demand for offshore drilling is poor. The number of offshore oil and gas discoveries made in 2015 dropped by 60 percent and 45 percent when compared to 2013 and 2014 respectively. Recovery will only happen with higher prices. Most industry observers expect that the supply overhang that has suppressed prices through 2015 will linger well into 2016. (12/29)

Chesapeake Energy Corp. is having its worst year since 1998 after halting dividend payouts, slashing drilling budgets, and cutting one of every six employees failed to rescue the energy explorer from the deepest gas-market rout in 16 years. Chesapeake lost 79 percent of its market value this year, on pace for 2015’s weakest performance in the Standard & Poor’s 500 Index amid heightening concern that Chesapeake will struggle to raise enough cash to avoid defaulting on its debts. (12/29)

Rig company Transocean said Monday its contract for the Polar Pioneer rig, deployed offshore Alaska, was canceled early by Royal Dutch Shell. The contract was set to expire in July. The rig company said it will be compensated for the early termination of the lease through an undisclosed lump sum. The rig recently had a day rate of $561,000 per day. (12/29)

Easy on the wallet: Massive stockpiles of crude globally turned 2015 into the year of the pain-free fill up. More of the same is expected for 2016 as oil prices remain low. AAA says Americans saved a collective $115 billion during 2015 on trips to the gas station. The average licensed driver pocketed more than $550. (1/1)

The sharp decline in crude prices in the latter half of 2014, and its attendant drop in gasoline prices, was supposed to be a boon for the economy in 2015. Alas, it wasn’t. Instead, sharp declines in oil-patch investment cut into economic growth and people opted to hang onto much of the cash they were saving at the pump rather than spend it elsewhere. (12/28)

Housing markets are slumping in communities that were recently flush from the US shale oil fracking boom. Home sales are down sharply this year in North Dakota and the West Texas cities of Midland and Odessa. Home sales have also slowed in El Paso, and, more recently, in Houston. (12/29)

Utility-scale solar is reaching “grid parity” (i.e., cost equivalency) with traditional generation in more areas across the US. Solar also received a major boost when the federal tax incentive was recently extended through 2021. (12/30)

El Nino: NASA has warned that the effects of the current El Nino weather phenomenon could be as bad as those of 1998, the strongest on record. That El Nino played havoc with world weather systems and was blamed for several extreme weather events. El Nino, which occurs every two to seven years, usually peaks late in the calendar year, although the effects can persist well into the following spring and last up to 12 months. NASA says the current El Nino “shows no signs of waning”, based on the latest satellite image of the Pacific Ocean. (12/30)

A powerful winter cyclone — the same storm that led to two tornado outbreaks in the United States and disastrous river flooding — drove temperatures at the North Pole up to the freezing point last week, 50 degrees above average for this time of year. From Tuesday evening to Wednesday morning, a mind-boggling pressure drop was recorded in Iceland: 54 millibars in just 18 hours. (12/31)

6. Top Ten Energy Stories of 2015

Compiled by Steve Andrews and Tom Whipple

#1.  The great oil price slide continues: The topic of oil prices dominated coverage of the broader energy story throughout 2015, thanks to a supply-vs.-demand imbalance variously estimated between 0.5 and 2 million b/d.  After the sustained 50 percent oil price decline during the second half of 2014 (from $107.52/barrel on June 16 to $53 at year-end), the price drop during 2015 was more modest yet more profound.  Oil started 2015 at $53 and ended the year at $37—down roughly 30%.  But the average price of oil during the two years tells a different tale: while a barrel of oil averaged $91 during 2014, the average price during 2015 was less than $49—down 46%.  Hopes for a substantial recovery of prices sometime during the year helped prop up a rally from the $40 range during the winter to the high $50s/low $60s in April.  But by mid-summer the rally fizzled.  Since August, oil hasn’t gotten above the $40s/barrel and spent all of December in the $30s.

What’s next? While everyone agrees that these low oil prices aren’t sustainable, the fundamentals don’t point to a price recovery anytime soon. During November and December of 2015, Goldman Sachs and a few other analysts fretted about oil bottoming towards $20 during 2016.  Bulging crude inventories in the U.S. and elsewhere will tend to keep prices low or drag them even lower; by mid-December 2015, storage had increased by 102 million barrels, or more than 25 percent year-over-year, hitting a new record according to EIA.
Commitments by OPEC to sustain current levels of production offer no relief, nor does the looming increase in exports by Iran, bookended by sustained output by large non-OPEC producers Russia and China.  Only the recent modest slowdown in US production since a peak last spring gives some analysts any sense that the sustained price bust will turn later in 2016.

#2.  Oil industry devastated by rapid drop in prices: The sudden price decline has left many high-cost oil producers (mostly producing fracked shale, deepwater and heavy oils) with costs of new production well above current selling prices. This in turn has resulted in a massive reduction in exploration for oil and drilling of new wells with serious implications for the industry’s production in the years ahead, depending on how soon, how fast and how far oil prices recover. The prevailing sentiment within the industry is more gloom and doom, with some expecting an even tougher year in 2016 than they have just endured.

New projects are not economic at today’s oil prices.  That’s why the active U.S. oil rig count declined from 1482 units during the first week of 2015 to 536 at the year’s close—a drop of 64%. That’s primarily why Shell shut down its Arctic drilling campaign. Chevron announced Dec. 9 that it would slash capital spending plans by 24 percent to $26.6 billion during 2016. Devon Energy, one of the larger independents active in US shale oil plays, said it would cut between $2 – $2.5 billion from its 2016 plans, down from about $4 billion during 2015. And the list goes on…

Perhaps Prince Abdulaziz bin Salman al Saud, Saudi Arabia’s vice minister of petroleum and mineral resources, best summarized the carnage last month: “Around $200 billion of investments in energy have been canceled this year [2015], with energy companies planning to cut another 3 to 8 percent from their investments next year. This is the first time since the mid-1980s that the oil and gas industry will have cut investment in two consecutive years.”

While industry players with stronger balance sheets can survive through cost cutting and commitments to efficiency and “drilling the best rocks,” debt and cash flow problems are swamping others.  As of mid-December, EnerCom Analytics reported that 41 oil and gas companies, indebted to the collective tune of $16.7 billion, filed with the courts for protection under either Chapter 11 or Chapter 7 of the US bankruptcy code.  Note, however, that companies which have filed are generally small players with none of the diversification, such as refining and retailing, of the oil majors.

Unless prices recover soon, shifting into survival mode may get even harder for many smaller drillers.  Every six months, the Securities and Exchange Commission “redetermines” both the value and the amount of the reserves against which companies can borrow.  Last October, that borrowing base was reduced by nearly 12 percent on average; if prices remain in the $30s/barrel during the first quarter, the next redetermination will further erode industry borrowing power.

At the boots-on-the-ground level, last month Swift Worldwide Resources estimated that the number of oil industry jobs had declined by 233,000 since the price crash began.  In the early 2000s, an aging industry that was losing a disproportionate amount of experienced staff was struggling to bring in new blood during the early stages of the recent boom; now it is faced with yet another employment downturn that may slow the next recovery cycle.  Apart from direct industry employment, the broader impact on overall economy—from less pipe manufacturing to less truck driving to fewer home builders and service workers in the oil patch—is much larger than just direct industry jobs lost.

#3.  Major oil-exporting governments suffering greatly: Nearly all members of OPEC and several non-OPEC oil exporters such as Russia, Canada, and Mexico are suffering from large revenue losses brought about by the severe price drop. Ten out of 12 OPEC nations are dependent on oil exports for over 85 percent of their export revenues; when those revenues dropped during 2015, national budgets got squeezed and deficits grew, often explosively. Countries such as Venezuela, Nigeria, and Angola are facing political instability in the next year or so.

Consider Saudi Arabia, the world’s largest oil exporter with the strongest balance sheet.  During the first nine months of 2015, the International Monetary Fund (IMF) calculated the kingdom had spent $73 billion of its foreign reserves to cover their deficit.  That deficit would be the equivalent of 20 percent of the nation’s GDP.  The IMF said that if foreign reserves continued being tapped at the same rate, they will be gone in five years.  The reality of the long price battle they may face has convinced the Kingdom to cut popular gasoline subsidies at the start of 2016, with more budget belt tightening to come.

On the other end of the spectrum, the IMF assumes that Libya will rely on heavy borrowing through 2020.  Its 2015 deficit could reach nearly 70% of its GDP this year and over 40% during 2016, while the country struggles with low oil prices and its civil war.  Oil provides Venezuela with 95% of its export earnings and roughly 25% of its GDP, leaving it extremely vulnerable to continued low oil prices, especially in the aftermath of its recent election in which the ruling party lost badly.

The impact of lower oil prices on Russia’s economy remains serious but mixed.  On the downside, their economy slipped into a serious recession during 2015 as GDP dropped roughly 4 percent; their currency continued sinking, apparently to its lowest level on record; the value of exports dropped dramatically and the cost of imports rose; accordingly, inflation grew to 15+ percent; and geopolitical risks continue unabated. On the upside, oil production hit a new post-Soviet high in 2015; domestic oil production costs are lower than international costs due to currency problems; the agriculture sector is doing better; and the industrial sector is stabilizing.

#4.  Little economic growth seen from low gas and oil prices:  Despite economic theory saying that a large reduction in the retail price of oil products and natural gas should give a major boost to economic growth in the industrialized and oil-importing nations, so far little of this has occurred. Conversely, the rapid contraction of the oil and gas industry in the US is bringing economic hardships to many localities.

In the larger oil producing states, tax revenues are down due to lower oil prices plus job losses in the energy and related sectors. That led to substantial budget revisions in oil-producing states like North Dakota, Texas, Oklahoma, Louisiana, New Mexico and Alaska this fiscal year. More downward revisions are projected by Moody’s Investors Service for fiscal year 2016. In Oklahoma, for example, Moody’s says the cut for the remainder of the fiscal year will be 8 percent with a 13 percent cut for the following year. Loss of oil revenues in Alaska may lead to the reestablishment of a state income tax.

Declining fuel costs are often likened to a tax cut—in this case of 2015 a $290 billion cut—that puts money back in the pockets of consumers who then usually spend the windfall.  Not this time around.  Savings from $2 gasoline have gone into savings accounts, not shopping sprees, leading to a lackluster growth in GDP of 2% (annual rate) during the third quarter of 2015.  This doesn’t align with normal expectations, and perhaps wisely so.  Edward C. Chow, an energy expert at the Center for Strategic and International Studies, was recently quoted in the Washington Post as follows: “There’s something else going on. There’s some anxiety out there that is not comforted by low oil prices.”

Additionally, sectors of US industrial production have slowed, in part due to the dramatic slowdown in oil drilling nationwide, though auto, SUV and truck sales are up.  Some businesses appear to be taking profits and working their way through inventories, rather than passing savings from lower-cost oil on to consumers.  Finally, crashing oil prices have undercut efforts to trim fossil fuel consumption, especially oil.  The IEA said in a recent annual report that if crude oil stays near $50 a barrel through 2020, cheaper conventional fuels will slow down adoption of electric cars and development efforts towards an ever-illusive advanced biofuel alternative.

#5.  Turmoil in the Middle East and North Africa increases: Moscow’s military intervention into the Syrian civil war on behalf of the Assad government has prolonged the situation indefinitely or, less likely, offered a path to a settlement. Prior to the Russian intervention rebel groups, newly armed by the West and the Saudis, were threatening to overrun areas of Syria still loyal to the Assad government. As an adjunct to the Russian intervention there was a marked increase in Iranian and Hezbollah militia fighting the rebels which gave the Assad government more offensive military capability than it has had for a long time.

Indiscriminate Russian bombing, mostly of the more moderate rebel groups which posed an immediate threat to the Assad government, initially had some success, but recently the situation seems to have evolved into a stalemate with Tehran pulling out some of its forces due to heavy casualties.

The significant increase in airpower being used against ISIL last year is beginning to take a toll on the group’s military capabilities in Iraq and Syria. So long as the caliphate can keep its military assets mostly in urban areas it is relatively safe, but its ability to advance and hold fixed military positions is becoming limited. Thus we are seeing the group step up activities in the EU and elsewhere as the means of keeping up morale and attracting recruits.  At a minimum the increased, less inhibited, and better targeted bombing is resulting in the destruction of what remains of Syria’s oil production that has been in the hands of ISIL.

As military pressure increases on the Islamic State in Iraq and Syria, the organization has been increasing its recruiting of new adherents in Libya and has recently been in a position to begin threatening some oil production. There are indications that the growth of the Islamic State could eventually lead to European intervention to suppress the organization, stop its threat of infiltrating Europe via the refugee stream, and to maintain the oil supply.

Over the longer term, however, the increasingly savage fighting has major implications for state, tribal and theological relationships throughout the region. Saudi Arabia’s direct military intervention into the Yemeni civil war and support for the anti-Assad forces in Syria during the past year has further exacerbated the situation and could eventually lead to political instability in the kingdom. The bottom line is that national boundaries and political institutions that have been in place for many years are slowly crumbling.  So far there has not been a major impact on the region’s oil production, but given the trends this may not be the case for much longer.

#6.  Repercussions from Russian involvement in Ukraine: Moscow’s continuing efforts to keep Ukraine within its sphere of influence and prevent the country from aligning with the EU have triggered a series of repercussions affecting the oil markets. The sanctions, counter sanctions and animosities resulting from the confrontation have left many European countries looking for ways to reduce their dependence on Russian gas and oil. Meanwhile, Moscow is seeking to offset the decline in oil and gas sales to the EU with increased sales in China and Asia at the time when demand in the Far East for oil and gas seems to be lessening.

A combination of low oil and gas prices, the US and EU sanctions, and the Putin government’s efforts to reestablish itself as a major player in world politics are placing severe strains on the Russian economy. While oil production from Moscow’ older fields continues to creep higher for now, new and potentially productive ventures such as shale or Arctic oil, which Moscow had been counting on to offset a decline in conventional oil production, are on hold indefinitely due to the sanctions and lack of foreign investment.

#7.  The Iranian nuclear agreement and the lifting of sanctions: As the year closes, it seems likely, but not certain, that the sanctions against Tehran will be lifted soon, freeing the country to produce and export as much oil as it can. The Iranian government already has millions of barrels of oil stored aboard tankers ready for immediate delivery and hopes to increase its oil production by 500,000 to 1 million b/d during the coming year. The lifting of the sanctions will also free Iranian assets that have been frozen for years, which many believe will enable to Tehran to increase its involvement on behalf of its fellow Shiites throughout the region.

The immediate effect of the pending sanctions removal has been an effort on the part of Tehran to regain its previous share of the global oil markets. To do this, the Iranians have been offering to lower the price of their relatively cheap-to-produce crude as much as necessary to gain an increased share of exports going to South and East Asia. These discount prices could have a major impact on the markets in the year ahead.

However, fears are rising among the conservative elements in Iran that the new agreement will lead to more Western influence and in the long the erosion of their position in Iran’s power elite. Resistance to the agreement in parts of the Iranian government has already led to highly provocative actions by conservative forces designed to warn the Rouhani government against becoming too close to the West and particularly the US. This has resulted in new pressures to cancel the agreement, which still seems safe for the moment, but the situation could change.

Iran’s efforts to protect Shiite minorities in the Middle East against the majority Sunnis puts the country squarely in the middle of a growing religious confrontation as the recent reaction to the Saudi’s execution of a Shiite imam shows.  The year ahead should tell how successful Iran will be in rejuvenating its economy through increased oil sales or whether its involvement in so many regional confrontations will lead to still more troubles. The deteriorating climate in Iran will become an increasing important issue governing the country’s behavior in the next few years.

#8.  China’s economy continues to slow: For the last 35 years, Beijing’s spectacular economic growth has led to steady increases in its demand for oil. During the past year, however, many signs point to a slowdown in China’s industrial production as the country shifts from an export-oriented economy to one based on domestic consumption. So far, numerous government efforts to get the economy back on track seem to have had little effect. Many fear that China’s economy will continue to contract, eventually leading to a global recession and a reduction in the demand for oil.

While admitting that annual GDP growth has fallen from some 12-13 percent a few years ago to around 7 percent today, the government remains optimistic and predicts that oil consumption will increase in the coming year even as it undertakes major efforts to reduce air pollution and switch the country away from fossil fuels. China’s leaders realize that cutting back on the use of fossil fuels is essential for the future of the country, but fear the social and economic repercussions of moving too quickly. Beijing seems to be at another turning point in its tumultuous history. Its economic and social well-being over the next decade will have a major impact on the global economy and the demand for oil.

#9. Increasing concern about global warming and hazardous air pollution: Recent surveys show that some 87 percent of the world’s population is living in unhealthy air due to the burning of fossil fuels. Only those in the advanced countries that have been working for decades to mitigate air pollution have seen improvements in air quality. In some places, such as northern China, India, Iran and even now in Italy, the air pollution has become so critical in recent weeks that governments have had to place restrictions on the use of motor vehicles.

The agreements at the Paris climate change conference, while not binding, clearly show that the majority of the world’s leaders have come to appreciate the dangers of climate change and the need to restrict the use of fossil fuels as quickly and completely as possible. Until recently a few major polluters such China and Russia were reluctant to make any effort to reduce emissions, believing that the cost of such efforts would be too heavy. Now this seems to be changing due to the deteriorating climatic and air quality situation.

In the long run this situation will have major consequences for the fossil fuel industry. Although there are non-polluting alternatives to fossil fuels, the transition to new sources of energy will be a lengthy and expensive process.

#10. New policies — Keystone XL, US crude exports, renewables subsidies: Keystone XL pipeline:  After a multi-year contentious campaign by the oil industry to gain approval for completion of the Keystone XL from Calgary down to the US Gulf states, President Obama rejected the proposed oil pipeline in early November.  The President’s decision was not a surprise; the actual surprise may be the decision’s very limited impact. After the announcement, a number of analysts opined that the decision wouldn’t hurt the industry since imports of Canadian crude, which set a record in August (3.4 million b/d), are moving down other pathways to American refiners.

Ending crude oil export ban:  Supporters of the lifting of US oil exports finally won their multi-year battle when the $1.1 trillion omnibus spending and tax bill was passed December 18.  Yet it may end up being a Pyrrhic victory, or at least another decision with minimal impact.  Since the campaign started several years ago, the $5 to $10 differential between lower-priced US oil and higher-priced oil elsewhere has disappeared.  As OPEC’s secretary-general Abdalla El-Badri observed, “The net effect of export of American oil on the market is zero. This will have no effect on the price because the U.S. still is an importing country. They export some, but they need to import the same quantity from somewhere else.”

Oil producers have argued for years that the ban is an outdated relic that needs to be lifted in order to let free markets work efficiently.  And indeed, the first shipment of crude oil left U.S. shores on the last day of December, less than two weeks after passage of the bill. Yet significant transportation costs from the primary potential export region—Texas and Louisiana—may undercut the economics of shipping much crude, other than blend-mismatched oil, to foreign refineries.  It may take five or ten years before an evaluation of the ban’s repeal determines whether it had has much impact.

Renewable energy tax breaks extended: Manufacturers, installers and purchasers of renewable energy equipment may end up being the biggest energy industry winners from the new omnibus budget deal.  As part of the bill’s grand compromise, those opposed to lifting the oil export ban were lured by their likely support for the bill’s extension of wind energy’s Production Tax Credit (PTC) and solar energy’s Investment Tax Credit (ITC).

Renewable energy advocate and writer Chris Nelder summarized the key details: “In a display of bipartisan compromise that has been vanishingly rare in recent years, Congress has agreed to extend the solar ITC at the current 30-percent rate through 2019, after which it will fall to 26 percent in 2020, 22 percent in 2021, and 10 percent in 2022. An additional commence-construction clause will extend the credit to any project in development before 2024. And the wind PTC will be retroactively applied to 2015 and extended through 2016, after which it will decline each year until it fully expires in 2020.”

The bottom line here: solar and wind energy, which have been growing rapidly in the U.S. during this century, are becoming more and more cost-competitive with traditional fossil fuels, thanks in part to previous tax breaks.  If costs keep coming down, by the time the newly extended tax credits fade away, those two industries may be sufficiently robust to survive and thrive in a non-subsidized environment.