The predominant economic model in the current international world is advancing on the basis of an accelerated process of innovations and an extraordinary speed of technological changes. The industrial model has meant strong growth and important economic transformations but also enormous differences between developed and underdeveloped countries, with processes of exclusion and regressive income distributions. In the last three decades, the industrial model has turned into financial capitalism, and, currently, it suffers one of the most significant crises. The economic ideology has been quite relevant in generating the financial crisis that is happening today in the developed world and in the proposed solutions to try to resolve it.
This is especially worrying in terms of the mining and oil industries today. Regarding the first one, the need to address the decrease in profitability has made productivity now the main risk. The effects of the extremely weakened productivity are more noticeable now since the prices of the products keep falling, the margins have been reduced, and there is nowhere to look for gaining more profitability. The significant decline in productivity over the last ten years is the result of a decision by industry participants that have sought volume growth at any cost during a period of high product prices which have never been seen.
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Several companies have tried to manage this reduction in productivity through a series of cost reduction exercises or specific solutions. However, the problem is too big and cannot be solved with specific solutions since they usually transfer the problem into the supply chains.
On the other hand, the new world of resource nationalism requires maintaining the balance between promoting investment and maximizing benefits within the producing countries. With less investment, some governments have begun to promote initiatives to attract mining investments to their jurisdictions. At the same time, we still see waves of resource nationalism in countries that want to get a larger share of the increasingly lower returns from the mining sector. Nowadays, companies are experiencing a moment of high volatility while the market tries to return to its balance after years of price stimuli.
Mining companies now realize that they cannot stay on the sidelines and expect volatility to happen a few years later. Working within volatility is the new norm and companies must adapt to it. Primarily, they need to put more emphasis on volatility risk management.
As for the oil industry, the picture is not less encouraging. Most of the world oil production has reached its zenith and begins to fall. The value of the energy produced by oil has diminished by half in just the first decades of the current century. This only means one thing: Economic recession and energy crisis. It is well known that in times of financial slowdown oil prices suffer certain fluctuations. Even this could be the indicator of a symptom, since the rise in prices from this point triggers, in turn, other problems that fuel the financial slowdown itself. The price of each barrel goes up to sixty dollars, while in times of financial stability, this price drops twenty dollars. That’s is happening now.
Since last year, and perhaps until 2020, the production of countries that don’t belong to the OPEC will remain stagnant because there is a huge decline in the conventional oil production. However, the OPEC will keep increasing the oil production gradually. That is the reason why the idle capacity has been so scarce throughout this year. What does this mean? That the risk of a big shock in the world oil supply could occur in 2018, and thus tremendously affect the prices.
The zenith of demand has arrived. The demand for oil has stopped growing, and this has left the whole world flooded with too much supply. The main problem that can occur is that, although we live in a world that grows more slowly than the current demand for oil, it is very difficult to compensate such decline in the production of fields that have been efficiently demolished during the last twenty years. What could happen, then, is a reduction in the global oil supply much earlier than how it has been expected for decades.
In the current overabundance of supply, in part, thanks to the growing unconventional production, the fall in oil prices has damaged the profitability of the industry and has led to significant cuts in new investments when it comes to production.
However, it is essential to bear in mind that the production of oil in the world has not reached the rate of growth of total energy, and probably never will because the population growth must rise at par, and it does not. Even though many states do everything possible to improve their respective income through the efficient use of energy, others seek to exploit alternative sources, taking into account the lessons of the seventies (which many should remember.)
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