By Graham Roeger
Abundantly rich in supplies and a historic leader in production, the United Kingdom has long reigned as one of the supreme oil producers in Europe. However, the impacts of the coronavirus combined with an ill-timed oil price war between Russia and Saudi Arabia have dragged oil prices down to their lowest point in over 17 years. To put that into perspective, Brent Crude, one of two major global benchmarks for oil, is trading for a mere $25 a barrel compared to roughly $60 on February 20th. If sustained, this shattering decline in the price of oil – a roughly 40% reduction – very well may cause a total collapse of the British oil industry.
The United Kingdom currently ranks second in raw oil produced in Western Europe, averaging about 45 million tons per year. However not all oil is created equal. Oil fields across the world produce different qualities of crude oil and these varying qualities require different processes of refinement before they can be used in oil based products. While there are many different types of oil worldwide, two primary global price benchmarks persist to ease the complexity of the oil trade. These benchmarks are Brent Crude Oil and West Texas Intermediate Crude Oil. For the function of the British oil industry, Brent Crude is the price to watch as this benchmark generally prices in the types of oil extracted across Britain. Although the United Kingdom is hailed as the origin of Brent Crude, oil extraction within Great Britain may stop functioning with the existing production costs and sale price.
British oil can be found onshore and offshore, however offshore production accounts for more than 95% of British oil and most of these fields are found in the North Sea. But, as one can imagine, the ocean floor beneath the deep and stormy waters of the North Sea does not relinquish its oil easily. Often, North Sea oil rigs must reach depths of 600 meters to begin drilling on the seabed and significant capital is required to overcome such obstacles. British production costs per barrel of oil roughly averages at $45; among the highest in Europe as well as dwarfing states such as Saudi Arabia who can produce oil for a mere $9 a barrel. At present, Brent Crude is currently trading for $25 a barrel and the decline in price will not stop there.
The demand for petrol is currently forecasted to drop by as much as 50% in the following months as people worldwide face coronavirus related restrictions. Fuelled primarily by oil, movement across the world has halted as global leaders enact travel restrictions to curb the spread of Covid-19. Roughly 1 in 5 people worldwide are currently facing restrictions and there is no sign of this easing up any time soon. In the oil world, only the strongest will be able to survive this price drop. Gulf states such as Saudi Arabia can sustain such low oil prices with their costs of production, but for British oil these prices are simply unsustainable.
The coronavirus has permeated Great Britain in unimaginable ways, completely altering how the country functions as a whole. While citizens will eventually be able to resume their daily lives, the economic toll of the virus may permanently alter British oil production. Without a rise in price or intervention, oil production facilities across Britain face costs far exceeding their profits on oil sales. By the time the dust settles, the British oil industry may cease to exist itself.