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By: Patrick Breen

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December 10th, 2015

Oil at $40 - Living with the new normal

Featured | Financial Education

[Estimated time to read: 3 minutes]

Four lessons to protect your family's financial future

Oil at $40 - Living with the new normalExpats working in the Oil & Gas sector are enduring tough times – markets are volatile, and Oil is striking 7-year lows. Below we share our views on how we are advising international employees to manage for the future, and how to find the silver lining.

Much has been written by learned economists, traders and strategists about the direction of oil prices.  The heat and noise around last week's OPEC meeting left cartel members themselves no better informed than the hundreds of thousands of people working in Oil & Gas, and their millions of dependants, about the future of the industry and the oil prices that drive so many livelihoods.  As the weeks roll by, expats in the sector are battening down the hatches in anticipation of job cuts, reduced allowances and a future that looks less and less rosy.

While it seems a long time since the agonised discussions about Peak Oil and $200 Oil, a few lessons are worth remembering.  Notably, the industry has been here before. Like any cyclical sector, Oil & Gas, and particularly the upstream businesses, are vulnerable to dramatic market movements, forcing corporate leaders to respond to short-term financial cues in determining which long-term projects to support.

The implications for employees and their families can be huge. Financial markets tend to look many months or years into the future in an attempt to anticipate likely outcomes.  As a result, it is very normal for markets to overshoot – so the pressures on employees' savings plans, which are normally heavily weighted towards share and option schemes in their employers' companies, can be dramatic.  But history shows that almost all markets return to long term averages and those who are patient can benefit enormously.

Here at AES International, we have a team that focuses on supporting employees in the sector.  We understand the fear and confusion that is triggered by macro events and oil price moves; and we spend a lot of time working with people who are trying to help their families to secure a future in the face of serious employment and financial volatility.

Lesson 1 - It's critically important to have a savings and investment plan which means that you and your family are able to plan for the long term. 

There's an old saying: in the long term, we're all dead. More cheerfully, there is a lot of living to do before then. Getting the right plan in place, a plan which is resilient enough to cope with the volatility that we are currently enduring, is part of the answer.

Think about your financial health in two ways:

First, make sure you are able to keep the household afloat by maintaining enough cash to cover your 'must haves'- school fees, healthcare, house and car. In many cases, these are covered in expat packages but you should plan conservatively and keep a cash reserve that will let you survive for 6-12 months if things get tough.

Second, make sure your long-term investment plan is properly set up:  think about the right balance between stock & options in your employer company, and other assets that are part of your financial plan. As a rule of thumb, if 50% of your investable wealth is tied up in your stock benefits, then you are too exposed to your parent company and all the equity market volatility that it will experience.  

While now might not feel like a good time for anyone in Oil & Gas to sell down stock, don’t forget that markets might well go lower.  As a minimum, have a robust plan on how, and at what levels, you will sell stock, and where you will put the proceeds.

Lesson 2 - Make the most of the expat years. 

For most of us, expat postings are part of the appeal of working life.  But you've got to make sure that you take advantage of any tax breaks, or allowances, that come with the deal. One simple rule we use is that clients should aim to save at least the amount that they would have paid in tax if they weren't in a tax-advantaged posting.  And this is about saving in cash.  If you haven't done this already, you can, and should, start this today. The run-up to Christmas is a tough time to tighten belts, but it might be the best time to do it. 

Lesson 3 - Don't panic. 

It will get better.  Markets undershoot- so, if you can tough it out, things will likely improve.  We're not brave, or dumb enough, to predict what's going to happen to WTI or Brent over any time frame, but we know that Saudi production could ease tomorrow; that Iran's production is at least partly discounted; and that North American tight oil producers may be more resilient than first thought . Oil & Gas attracts too much commentary for it all to be taken as the literal truth. You'll have your views, as we have ours.  Just as you shouldn’t bet the house on oil prices returning to $100 or more in the short term, don’t assume that Goldman Sachs is right and that they'll continue to fall off a cliff. 

But it's a reasonable bet that, over the medium term – say, 18 months to 3 years – we will see some sort of return to levels that support E&P projects and more normal corporate planning and spending. You shouldn’t assume that this will happen, but the odds are that a recovery will come… it's the timing that is most uncertain.   

Lesson 4 - What's the worst that can happen?

For many of us, it is the fear of unemployment and keeping the family afloat. But history shows that all cyclical industries cut too deep when times are bad, and rush to hire when prices recover. While only a fool, or a deeply unhappy employee, wishes for job cuts, the fact is that it doesn’t need to be a disaster for those who have thought about the Lessons above to put them into action. 

Here at AES International, we are focused on helping families to create, and enact, financial plans that are all about the lessons above. There's no rocket science here: we aren't gung ho drillers, reservoir engineers with brains the size of planets, or geologists with PhDs. But we do spend all our time helping people to make sense of markets that stubbornly refuse to go up, no matter how much we will them to – and we do it in a way that matches the standards, professionalism and ethics that you would expect and require in your home country or your business. We'll be happy to help. Just complete the form below for a no obligation consultation.

About Patrick Breen

Patrick Breen was previously a Banking and Investment Executive at AES International.

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