Thursday, October 8, 2020

End of Oil? Not Yet

 Today, various environmental groups are dancing on the grave of the petroleum industry. 

The pandemic has driven demand through the floor. We have a huge glut of crude oil. Tankers with as much as 20 million barrels of oil sit off the U.S. west coast, acting as floating storage tanks because onshore tanks are full to the brim. At the same time, oil producing countries have not cut back on production hoping to capture what limited market share there still is. Crude oil prices have collapsed to $36/barrel. Daily demand for oil dropped 29 million barrels per day last April compared to 2019.

In the US, small independent oil and gas companies are declaring bankruptcy in job lots. A few years back, there was not enough housing for oil field workers in the boom towns around the shale oil fields of the Dakotas. The boom towns are now ghost towns. Rigs rust and oil field workers are collecting unemployment. 

Most of these companies started up during the fracking boom and were never profitable. They were over-leveraged, owing millions to investors to keep them going. When prices collapsed, they did too. 

Even the majors, like Exxon Mobil, Shell and Chevron, are hurting. Their stock prices have tumbled by 50% in the last year.  Exxon has been dropped from the Dow Index. Oil and gas reserves have been devalued dramatically. Large investors are no longer interested in loaning them the funds to find new fields, let alone keep existing fields producing. Drilling in the Arctic or Atlantic is off the table.

Oil has always been a boom and bust industry. In the 1970s, oil was cheap at $25/barrel in today’s dollars. Then the price shocks starting in 1973 doubled the price in a matter of months, due to Middle Eastern wars and political instability. Everything changed - lines at gas stations, worries that the world would soon run out of oil. The “Energy Crisis” loomed over everything for many years.

In economic terms, oil demand appeared inelastic. We needed it at any price. 

In 1981, I went to work for Shell Oil when I graduated from college. A barrel of oil sold for $100. However, it soon turned out that oil demand was stretchier than we thought.

By 1986, the price of crude oil plummeted to $31/barrel. Everything had changed - fuel efficiency became a major selling point for cars. The national speed limit was set at 55 mph. Saudi Arabia flooded the market to gain market share. No surprise, I joined the ranks of unemployed oil workers and decided it was time to change careers. 

It boomed again in the 2000s. Recruiters even contacted me even though I’d been out of the industry 30 years at that point. I told them they were nuts.

The boom and the bust cycle has occurred at least 5 times since oil was first discovered 160 years ago, but this bust is a very big one. 

Is it over for the petroleum industry? Currently, the International Energy Agency predicts that demand will recover to 2019 levels within a year. Worldwide oil demand has almost always increased over time, doubling over the last 50 years from 343 to 647 million barrels a year. The question is whether this trend will continue forever. 

Oil companies themselves apparently think not. Many petroleum companies are writing off reserves, increasing investments in alternative energy and even saying that peak oil demand may soon occur. According to the IEA, even if government policies do not change, demand will flatten. If sustainable policies are adopted, demand could decrease 25% by 2040. 

In fact, those policies are changing. Many US states (including Massachusetts) and nations now mandate weaning ourselves off fossil fuels as the environmental and economic impacts of climate change become clearer to just about everyone. Big tech companies like Google and Apple have pledged to go carbon free. 

We will still need oil. Barring a massive technological change, jet aircraft will still run on kerosene. Naval and cargo ships will still need fuel oil. Cars and trucks put in service today will still be on the road 10 to 15 years from now, but even they are more fuel efficient than their 10 to 15-year-old equivalents.

The petroleum industry isn’t dead, but I don’t think it will ever be the same. I certainly could be wrong but I think that just like coal, the petroleum industry’s best days are behind it.

Published in the Village News, September 25th, 2020

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