Oil the Way Down: The effect of lower oil prices on the legal sector
August 14, 2020
3 min read
What's going on here?
Falling oil prices have a deflationary effect on the global economy. Oil prices have fluctuated greatly throughout 2020, dropping significantly from their price at the start of the year. Two significant events have contributed to this, namely COVID-19 and the oil price war between Saudi Arabia and Russia.
What does this mean?
Global oil demand has retracted for the first time since 2009, which was caused by the 2008 financial crisis. It is estimated that demand is expected to fall by a record 9.3 million barrels per day (mbd) year-on-year in 2020. COVID-19 has drastically reduced the demand for oil, as production and transport worldwide has been adversely affected.
The Organisation of the Petroleum Exporting Countries (OPEC) proposed to stabilise global oil prices which had started 2020 at $61.2 a barrel (WTI crude). OPEC proposed a 1.5 mbd production cut for Q2 2020, of which 1 mbd would be by OPEC countries and 0.5 mbd from non-OPEC but aligned producers (most prominently, the Russian Federation). The following day, the Russian Federation rejected the proposal, and Saudi Arabia also announced unprecedented discounts of almost 20% in key markets.
The resulting oil price war led to a more than 30% plunge in prices to as low as $31.1 per barrel on 9 March. Together with increasing COVID-19 fears, oil prices were driven into negative territory for the first time in history, falling to minus $37.63 per barrel on 21 April. Oil producers were paying buyers to take the commodity off their hands over fears that storage capacity could have run out come May. This event was described as “off-the-charts wacky,” by Stewart Glickman, an energy equity analyst at CFRA Research.
Since then, oil prices have gradually increased as global demand begins to move towards pre COVID-19 levels. At the time of writing (14 August) the price of oil was $41.95 per barrel .
What's the big picture effect?
Commodities such as oil play a key part in the day-to-day lives of people, and the trading of businesses. For those countries that are heavily reliant on the oil market for their economic growth, households and businesses are likely to be negatively affected. The impact of the most recent oil price crash is likely to affect law firms in several ways.
Law firms with large M&A practices are likely to experience lower demand as investments are generally weakened by a wider downturn in the global economy. However, more specific to the oil industry, oil producers may seek to merge in order to reduce their costs through improved economies of scale. This occurred following the 1970s oil crisis which resulted in a significant reduction in the number of major International Oil Companies (IOCs) as they began to merge.
Additionally, there are likely to be fewer project proposals in the oil and gas sector as the economic viability of exploration is diminished by weaker oil price. This reduction in activity will be passed onto law firms who have clientele in the industry. Notably, for firms with IOCs as their clients, the reduction in projects is likely to have a worse effect. IOCs had already seen their ability to partake in resource sharing agreements with National Oil Companies (NOCs) fall over time as many countries in the Middle East wish to extract higher profits from their resources. Thus, the need for IOC involvement in exploration projects has reduced. Instead, IOCs rely more heavily on selling their technical expertise to assist NOCs. Lawyers may benefit from this trend as oil prices fall, due to NOCs outsourcing more technical tasks, in an attempt to cut production costs.
More positively, law firms will be relied upon to settle the many disputes that may arise from this price war. Disputes may arise from existing off-take agreements as buyers struggle to sell their oil, resulting in a surplus of supply. The demand for force majeure related proceedings is also set to increase, in order to settle various disputes resulting from COVID-19.
Report written by Kasey Cummings
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