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Cheap Oil Won't Kill Exploration

By Kassia Yanosek,David G. Victor
- via Foreign Affairs    Feb 04, 2015

For the second time in a decade, oil prices have taken a major tumble. If energy stays relatively cheap for a few years, a massive redrawing of the economic and political landscape could follow.

Some of the consequences are easy to predict—because they happen every time oil prices drop. China, India, the United States, and other oil importers will gain because falling energy costs will free up money for growth in other sectors. As in the past, it is also likely that major oil-exporting countries—Russia and the countries of the Middle East and Latin America—will face pressure to adopt massive energy sector reforms to attract new, taxable investment.

Cheaper oil could also redraw the geoeconomic landscape in subtler ways. Of course, low oil prices could force some oil and gas producers to stop drilling, since some fields will no longer be economically viable. It could also reduce the capital budgets of the biggest oil firms, whose cash balances are already strained in today’s environment. But the price slump may also create a sizable opportunity for new oil exploration projects, such as deep-water oil and gas fields, which have long lead times (five to eight years) and do not rely solely on today’s oil prices—provided these projects attract funding for critical infrastructure, such as new pipelines. Already, these projects have shown surprising resilience as the excess supply of drilling rigs drives down exploration and development costs.

Winners in this new cheap-oil world will be the firms that have cash to spend and governments that are good at attracting scarce new investments. The result could be a shift in oil exploration—the drilling of new we...

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