Oil is one of the main drivers of the global economy, but prices went into freefall at the start of this year with rates reaching as little as $28 a barrel in January. While it has recovered somewhat since then, the heady days of prices reaching $100 a barrel are little more than a distant memory. The new reality is a two-year slump that shows no signs of ending anytime soon: with hopes of a production freeze fading, the reality of oversupply continues to bog down the market.

Simply speaking, the reasons behind the price decrease in oil are excessive supply coupled with decreased demand. China’s economic slowdown is affecting a lot of commodities at the same time as Saudi Arabia, in an effort to maintain its large market share as a crude oil producer, is refusing to reduce productions. And across the Atlantic we have increasing shale production by the US leading it to becoming a self-sufficient energy nation.

It’s now becoming increasingly difficult for oil companies in the North Sea, like BP, Shell and Total, to operate with these low prices and we’ve already seen a number of projects stalled. Oil’s lowered price is already hitting construction companies in two directions. On one hand half of all firms are reporting a decline in fuel costs but the flip side is the possible cancellation of major projects, particularly in oil producing countries in the Middle East. As nations come under increasing budgetary pressures, construction projects are under threat. Abu Dhabi, for example, have stalled or cancelled US$200 billion worth of projects.

The positive side of the oil slump is that many producer countries are looking seriously at the prospect of renewable energy to guarantee future consumption and export growth in an environment growing increasingly hostile to fossil fuels.

Following the historic climate deal in Paris, in which nearly 200 countries participated, Russia, Saudi Arabia, Kuwait and other major oil producers have announced plans to overhaul their energy strategy in order to diversify away from fossil fuels. For these and other oil exporting countries, crude oil and liquefied gas are no longer seen as reliable in generating the state revenues needed to foster economic growth and development.

In many ways, the world is already preparing for the end of the oil industry, though the final blow to crude prices – the largescale use of electric cars – is still a few years away. As major automakers ramp up production of affordable electric and hybrid cars, many analysts believe that oil demand could drop further still.

In the wake of such projections, the importance of focusing on green building methods has never been greater. Assuming lower prices for the two benchmark crude oils, Brent (Europe, North Sea) and WTI (West Texas Intermediate), for a sustained period, the effect on the construction industry would be noticeable. Those companies that will be stand out as able to succeed in this brave new world will be those who have embraced new, green technologies and who continue to promote and push for further innovations.

Nikolas Xenofontos, Director of Risk Management at easyMarkets on 06/09/2016

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