by Gabriele Steinhauser | The Wall Street Journal

The sharp drop in oil prices has already roiled markets and pummeled energy companies. But its impact on oil production and climate policies is likely to last years past the moment when prices have recovered.

The shale boom in the U.S., where oil production has nearly doubled over the past 10 years, and the refusal of the Organization of the Petroleum Exporting Countries to cut output, have contributed to a glut on global energy markets. At the same time, low growth in Europe and emerging markets is holding down demand, upending long-held assumptions of scarcity and ever-increasing prices.


“The expectations that have governed the world for over a decade have been overturned by a new reality,” says Daniel Yergin, vice chairman of energy research firm IHS and author of several books on the global oil market.

Since the beginning of the year, investment banks have sharply lowered their price forecasts, with some seeing oil averaging around $50 a barrel this year, and staying close to $60 in 2016.

That is about half of where prices stood last summer, squeezing margins across the oil sector. Energy producers, service providers and suppliers, such as steel companies, have started eliminating jobs and delaying projects. Just last week Royal Dutch Shell PLC scrapped plans for a big petrochemical plant in Qatar, and BP PLC laid off 300 workers at its North Sea hub in Aberdeen, Scotland. Analysts widely expect oil companies’ fourth-quarter earnings to be as much as one-fifth lower from a year earlier.

“At the current price, every company is cutting back and will be cutting back,” says Mr. Yergin, who believes oil prices could rebalance “halfway between $50 and $100” in the second half of this year.

Yet, although some companies have already delayed or even abandoned costly projects, the impact on supply will take much longer to materialize.

High upfront investments in the most expensive developments, such as oil sands or deep-water rigs, mean it makes little sense for these producers to cut output just yet. Surface mines in Canada’s oil sands, once they have been built, can be profitable at oil prices as low as $30 a barrel, while underground mines there could break even at $35.