The Fading Allure of The Illustrious Oil Industry

December 3, 2018

“Peak oil”, in the past, pertained to the Malthusian fear of the eminent growth of population exceeding the finite resources necessary for its subsistence, leaving us with a world devoid of fuel to run the wheels of humanity. However, now, the converse seems to be true, with Wood Mackenzie expecting demand to peak in about 20 years from now, leading to a point where tons of reserves might be left untouched.

 

Crude oil is such an important asset that its business stability should be impeccable. However, when it goes through “one of its periodic downturns” it sends shivers down the spine of the industry. Despite having stable returns in the past, large oil companies and U.S shale companies must now seriously consider the substitutability of a good such as oil.

 

 

Last week, the Brent, the benchmark for international crude oil, plunged to $61.71, which a fall of 7.6% or $5.08 per barrel of oil, according to The Financial Times. This mark is the lowest point in about a year. Having said this, Bret prices in Asia and WTI prices both have seen a minor bounce-back of 1.5% to $63.48 and $54.25 respectively. Other oils seeing a yearly low include the West Texas Intermediate crude which saw a drop of about 7% or about $4 per barrel, to $53.77.

 

Since the start of October, the price of Brent has dropped by a staggering 29% after reaching a 4 year high of $86. This fall is mainly down to the import allowances that the U.S. government stipulated on the big purchasers of Iranian oil after imposing sanctions against the economy of Tehran at the beginning of the month.

 

Still, Donald Trump has been an avid supporter of lower oil prices and the actions of the Saudi-Arabian producers who continue to drown the economy with gallons upon gallons of oil. This support for Saudi-Arabia remained despite the alleged killing of the US-based journalist, Jamal Khashoggi by Mohammed bin Salman, the crown prince of Saudi Arabia. Trump continues to call Saudi-Arabia a “steadfast partner” who, according to him, have been “very responsive to my requests to keeping oil prices at reasonable levels”. He later reinforced his support for this plummet in prices by saying, “I’d like to see it go down even lower” and that breaking the treaty could result in the prices “going through the roof”.

 

Furthermore, during this time of unprecedented uncertainty in the oil industry, the exponentially increasing production of U.S. shale field could further deteriorate its value.

 

The drop-off for a commodity that once seemed inseparable from life to one that seems next to worthless would tremendously affect the global economy. Looking from society’s point of view, the ascension of clean and efficient renewable energy over the polluting non-renewable resources, is an evident upgrade. But this puts a dark cloud over the heads of the oil companies.

At this point, there are 3 options for the future of these companies –

  1. Shift from oil to gas – Like Shell has done by investing progressively into the exploration of gas and in the operation of facilities for liquefied natural gas. Although gas is non-renewable, its combustion is much cleaner and less detrimental to the environment (relative to oil). There is also an anticipated continued rise in the demand for gas. Moreover, this allows the companies to function with little reforms.

  2. Shift from oil into clean energy production – This shift is much more arduous: from rebranding to requiring different industrial machinery. This whole change, both internally and externally, would be extremely difficult but in the long-run it could be beneficial.

  3. Shift from oil into processing chemicals – With several engineers working in the oil industry having past experience in the refinement of chemicals and that may be a field to explore and according to The Financial Times, it could be a “less exciting but steadier business”.

The same advancement that brought them to the pinnacle of modern industrial dominance is the same one that is pushing them of the apex of the world of energy as it ushers a new era of global energy dominance. With this in mind, the upcoming summit of ministers representing OPEC countries clearly grows in importance.

 

Keep an eye out, because I believe they can do little to salvage this once illustrious industry as it struggles to live out its last few years in an increasingly hostile environment for it continue to prosper in.

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