Oil advisory firm FRP has predicted the market price of oil -- which has fallen dramatically recently -- could lead to industry failure in the United Kingdom's oil capital, Aberdeen. The U.K.'s oil industry could be headed toward its first recession in as many as three decades, and the current field of executives is likely unfamiliar with crisis response should that happen, the Telegraph reported.
The biggest effect will be felt among smaller oil producers in Aberdeen, said the advisory firm, which specializes in distressed properties. The falling oil prices have already resulted in a more than 2 billion-pound drop in tax revenue for the nation from last year to this year.
And the U.K. isn't the only country whose production could be impacted in this way. In the United States, where oil extraction is much more expensive than in leading producer countries like Saudi Arabia, low prices could make it economically questionable to continue to expand shale field drilling and oil production.
World oil prices rose dramatically during the early 2000s and reached historic highs late in the decade, peaking at $145 a barrel in 2008. After that, prices remained relatively high -- compared to pre-21st century levels -- before they dropped dramatically in the past year to $42.51 a barrel this month. That’s good news for those behind the wheel but bad news for smaller oil companies.
That decline is the result of several factors, including OPEC production and U.S production, as well as the global economy and Iranian sanctions. Prices have continued to plummet to potentials as low as $20 a barrel, but OPEC has so far refused to cut production. And OPEC is not expected to reverse course unless other large producers also cut their own output. Resistance to cutting back may in part be a pushback against U.S. oil extraction, which increased nearly twofold in the past six years and has decreased the demand for foreign oil imports to the country. The global economic slowdown, led by China, has also lowered prices by decreasing demand globally. And Iran, which negotiated sanctions relief with the United States and others this year, is expected to begin pumping large amounts of oil into the global oil economy once its sanctions are lifted.
For banks in the U.K. that have financed oil ventures in Aberdeen and elsewhere, that spells trouble. There has been a threefold uptick in the number of analyses of the economic viability of those oil companies recently.
Beyond the U.K. oil industry, the hotel and restaurant industries could also feel a hit. It is expected that businesses that house oil workers in Aberdeen may be the first to go should recent trends continue. To avoid catastrophe, the oil industry could need a tax cut to keep it afloat.