Saturday, December 17, 2016

Musings on the Price of Oil

I still have a "Bloom County" cartoon from the Sunday Funnies published in the summer of 1986. In it, Opus was watching a man filling his car at the gas station, who was in ecstasy because gasoline was so cheap: "Louise, dump the milk, the cat drinks unleaded for now on!"

Opus opined "Oh, me thinks this doesn't bode well."

He was right of course, if you lived in Houston and worked in the oil industry, or like me, lived in Houston and had just lost your oil industry job along with a whole lot of other people. The running joke then was "What's the difference between a pigeon and a petroleum engineer? A pigeon can still put a deposit on a BMW."

Flash back five years prior. My first job out of school was as a petroleum engineer for Shell Oil. At the height of the 1980 recession, when my classmates were scrambling for a job, oil companies were lined up at the door to the geology department looking for candidates. The price of oil was climbing past $100/barrel in today's dollars, shortages were rampant, and everyone was talking about the "energy crisis."

By 1986, oil was down to $10/barrel and things that were rampant included idled drilling rigs, unemployed petroleum geologists, engineers, drillers, and empty office towers in cities like Houston and Dallas.

What the heck happened? Basically, Saudi Arabia turned on the spigot. They decided that market share was more important in the long run. Make oil cheap enough and people would stop looking for it or stop extracting it from marginal fields. Eventually, demand would exceed supply and the prices would go back up, which of course, is exactly what happened over several years.

Flash ahead to this year. The oil industry is in a major recession, drill rigs are idle, and layoffs are everywhere. One recently unemployed engineer lamented on a news segment how this was the first time in 30 years he'd been laid off. I sniggered because 30 years ago was the last time I'd been laid off.

Current estimates are that supply exceeds demand by about 2 million barrels a day.

What the heck is happening? Basically, Saudi Arabia has again turned on the spigot. Remind me again why they are supposed to be our allies?

Also in the mix are slowing economies in the developed and developing world.

In a lot of ways, what is happening now is far more dramatic than what happened 30 years ago, because the difference in extraction technology between then and now is like comparing a pocket calculator with an iPhone. Ultra-deep sea drilling, directional drilling, hydraulic fracturing (aka "fracking"), and tar sands extraction allow the exploitation of petroleum plays otherwise uneconomic with older methods.

Conversely, these technologies are only cost-effective when the price of oil is high.

Right now, the price is not high. As a result, the last lease offerings in the Gulf of Mexico had no takers. BP would never have drilled the ill-fated Macondo well in the Gulf of Mexico in 2010 if crude oil prices were as cheap as they are now. Shell just abandoned its efforts to drill in the offshore Arctic. New tar sands development in Canada is slowing considerably. The list goes on.

In a way, cheap oil is a good thing for the planet. Many of the most environmentally sensitive areas are also the most remote and difficult to develop.

Will the price of oil go back up? Most assuredly. The European economies won't be stagnant forever. The slowdown in China's economy is a reduction in the rate of growth, not a recession.

Political instability in the Middle East is a given. If the Straits of Hormuz were blocked tomorrow, prices would skyrocket on commodities exchanges throughout the world the next day, not because there would suddenly be less oil available, but because of the fear that it soon would be.

So, enjoy cheap gas while it lasts, because it won't.

Oh, and most cats turn their noses up unless it's premium.

Originally published 10/18/2015 in the Westborough News

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