The oil industry faces significant uncertainty and potential price swings as global market disruptions, including tariffs, continue to disrupt upstream production, investment, and supply chains, according to a new report by Wood Mackenzie.
The report, titled “Is Oil Price Volatility a Threat to Upstream Production, Investment, and Supply Chains?”, warns that if oil prices fall to US$50 per barrel, up to 1.2 million barrels per day of production could be at risk by 2026. The analysis highlights the far-reaching impact of ongoing geopolitical events, market volatility, and tariffs on the oil sector’s long-term stability.
Investment Challenges in a Price Downturn
Fraser McKay, Head of Upstream Analysis at Wood Mackenzie, explained that the oil industry has learned valuable lessons from past price crashes in 2015 and 2020, allowing it to react quickly to downturns. However, McKay noted that the US administration’s dual focus on lowering prices while encouraging increased drilling may lead to a more cautious approach in the short term.
“If operators and the supply chain anticipate a period of prolonged low prices, it would send shockwaves through the industry,” McKay said. “This near-term uncertainty becomes an investment killer, precisely when the focus should be on potential long-term demand growth.”
A Market Struggling With Short-Term Uncertainty
The report paints a picture of an industry caught between confidence in long-term demand growth and the challenges posed by excess supply and immediate uncertainty. While current oil prices of around US$65 per barrel are reducing margins, they are not yet low enough to force drastic changes to budget or development plans. Many companies are likely to delay growth capital expenditure (capex) and discretionary spending to preserve financial leverage and shareholder returns.
The flexibility built into portfolios and balance sheets since 2021 has allowed companies to weather current price pressures. However, this cautious approach may soon be tested if prices continue to decline.
Supply Chain Pressure and Tariff Impact
The service sector within the oil industry is also preparing for potential reductions in activity and downward pressure on costs. However, tariffs could exacerbate challenges by driving up input costs. According to the report, tariffs could increase costs in the US by up to 6% onshore and 15% offshore. This could force service companies to choose between maintaining market share and accepting margin erosion in well-supplied markets.
Investment Uncertainty and Decreased Spending
The uncertainty surrounding near-term oil demand and OPEC+ market strategies has caused oil and gas company share prices to fall, further complicating capital allocation decisions. This volatility is expected to lead to a year-on-year decline in global upstream development spending for the first time since 2020.
Ryan Duman, Director of Americas Upstream at Wood Mackenzie, noted that US tight oil operators are particularly sensitive to price drops. Given the flexibility of their operations, they would be among the first to reduce investment if prices continue to slide. However, international projects are also feeling the pressure, with some already experiencing delays and budget revisions. If oil prices remain below US$60 per barrel for an extended period, more significant budget cuts and delays are likely.
A Risk of Delayed Energy Transition
McKay emphasized that the oil industry is bracing for cautious investment decisions in 2025. The US tariffs have created a ripple effect that will lead to decision paralysis for some companies, funding challenges for others, and potential opportunities for a few.
He warned that if oil prices fall to US$50 per barrel, companies would quickly slash investment budgets to protect shareholder distributions. The longer the industry waits to act, the harder it will be to meet the demands of a delayed energy transition, setting the sector up for even more volatility in the coming years.
In conclusion, the ongoing market uncertainties, heightened by tariffs and geopolitical factors, are leaving the oil industry in a precarious position. As companies adjust their strategies to cope with falling prices and shifting market dynamics, the outlook for investment in the sector remains highly volatile.
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