The US has a LOT of small- and intermediate-sized oil companies competing actively right now, on all these dimensions, to lower their costs so they can continue to operate profitably even in the current price environment. Most are succeeding.
In contrast after running and royalties cash costs in the US are up towards $30/bbl and Canadian oil sands towards $40/bbl. But, the size of wells using these technologies are smaller. And, those wells cost more to discover, and tap. This means US / Canadian oil is more affected by marginal cost, both in terms of price flexibility and liquidity (both cash and oil).
And the biggest threat, in the medium term, to oil prices is some of the range of alternative energy sources. Solar costs are coming down quite rapidly. Wind is coming down but more slowly (a chunk of this is in real rather than nominal terms; depending on currency). And nuclear in time will probably come down if increasing investment leads to predicted efficiency gains.
Oil isn't going to disappear overnight, but it does have a bordering on existential threat in the medium term. The only largely protected part of this market I can see here is large scale transportation, i.e. sea and air transport.
The real threat to the medium/long term value of oil is a good battery.
If Gas prices rise or oil prices drop, we'll use oil for electricity generation too.
Currently commercial batteries are price limited (about the price of a gas tank + filling up the gas tank 400 times, which would keep a normal car moving for 5-10 years), and weight limited at about 5% of the energy/weight of a gas tank. Given how it's evolving, I'd expect another 2-3 years before the necessary technology becomes available.
I think 20% will be about the turning point because while gas tanks provide a 1000km range, if you can charge at home, then what's the problem with 200km range, decreasing to 160km over 2-3 years ? Especially if you can solar charge (and combined with a house battery ... watch out)
And Teslas don't count. Anything over 20000$ starting price just isn't going to start the migration.
"The short-term impacts for most utilities should be minimal and localized. There is a possibility, however, of isolated impacts on some distribution transformers and secondary drops, particularly in neighborhoods with older distribution systems including underground systems."
Edit: added quote.
In it, the author talks about a number of "stable" industries that had existing product lines with the R&D, customers, and sales processes to back them up. They were so invested in those structures that as innovations in their industry came along, they missed the innovations. It wasn't because those innovations were bad - many were great - but they didn't fulfill their existing customers' requirements. And so instead of trying to develop new markets (hard!), they ignored the innovations.
As a result, new entrants - without the cash cows to worry about - applied those innovations in new areas, building new markets. As those new products caught up with the requirements of the older products, those old customers switched to the new products.
I think the next great innovations in energy aren't going to come from the oil companies.
It's nothing nefarious, just the simple realization that most of their customers can't use [choose: solar, wind, nuclear, etc] for a variety of reasons. As those other energy sources change, improve, and simplify, those customers may be able to change but we should be looking for the new entrants building the new markets first.
> Yet, as one BP director replied when I asked why his company continued to risk deep-water drilling, instead of investing in alternative energy: “We are a drilling business, and that is our expertise. Why should we spend our time and money competing in new technology with General Electric or Toshiba?”
I think that's why the primary argument is that they should cease R&D entirely and just distribute profits to shareholders until they run out.
The problem with this argument is that it doesn't always apply very well. Yes, Kodak had distribution channels for photographs. But very little about the company gave it any particular advantage for digital photography from a technology perspective.
Somewhat ironically, Fujifilm--notwithstanding some recent success in relatively niche camera products--has largely weathered the post-film era by applying its technology to medical products and the like.
Yet they completely owned the pro digital camera space in the early 90s. Their problem was that they chose not to build on this lead since they didn't want to cannibalize their more profitable film business.
From the article:
> "more sophisticated than nineteenth-century “nodding donkeys.”"
That type of fields are getting rare. EOR  techniques are being applied everywhere. Although, AFAIK, some countries, such as Venezuela are somewhat backwards in their application of EOR. They wanted to nationalize oil fields and not invest in them, and look what happened.
> new technologies such as hydraulic fracturing (“fracking”)
Fracking  is now 40 years old "new" technology. The only reason it became popular in last 10 years was high oil prices.
1. What he said was true about nodding donkeys. OPEC countries are starting to use EOR, but most of their fields do not require it. Some countries like Saudi Arablia do have heavy oil and they are starting to invest in these areas, but that does not invalidate the authors point - that the U.S./Canada can help with that shift.
2. re: fracking being new. almost all reporting calls fracking "new", but they really are referring to the new form of fracking where it's done horizontally through shale. It's a minor misconception that can be forgiven considering the intent is really "new fracking technology".
Edit: here's a good video showing horizontal fracking -> https://m.youtube.com/watch?v=O0kmskvJFt0
2. Principal driver behind those horizontal wells is money. Those wells cost 2-3x more to complete. Horizontal tech has advanced, but in the end that advancement has been dollar driven. Expensive oil made it economical.
I agree oil price played a major role in developing horizontal tech, but it's become more about the cost being driven down and is why the U.S. is still doing it at $35 a barrel (which is, on a relative basis, the same as 10+ years ago). Either way I don't think your point #2 works against anything I've mentioned.
They'd still be doing it at any loss figure above operational costs to maintain cash flow. The cost to drill the well is already sunk. So it makes sense to operate the well at heavy loss. Some money is better than no money.
> Either way I don't think your point #2 works against anything I've mentioned.
My point was the economic reasons were why horizontal drilling became feasible. It could have been done in the eighties if oil prices were high enough back then.
Well some companies are in fact drilling wells at a loss, but only because they have to pay bills while they pray for oil prices return and potentially survive this supposed rough patch. However, that says more about their debt situation than it does the cost of horizontal drilling.
Bottom line is that some companies are in fact making a profit drilling horizontal shale wells @ $35 barrel.
If you magically had knowledge of the range of prices over 10+ years you could do all sorts of money making things.
Edit: Looked into this a bit. Futures on oil 2 years out are already over $50. So "the market" is far less certain then the author. I'd also imagine quite a bit of damage to oil producers if the price stays low. After they shut down, why wouldn't the price rise?
The author's position is less about predicting markets than it is about "if you're operating a horse & buggy business in 1885, you're best off winding it up". The debate here seems to be about whether 'today' is 1885 or 1855 or 1825, so to speak.
The idea being that if it turns out you are off by a few years (or a few hundred years) in the buggy whip vs. car situation, and buggy whips are a thing for a while longer, well, it's not that hard to ramp up buggy whip production. I mean, you've got some training effort, sure, but there are more buggy whips to be made.
The idea is that oil is different, simply because there's only so much of it. If it turns out you planned wrong and have to come up with a few more year's worth of oil, and you are out? yeah, you have a serious problem.
As an aside, the hole in my argument is what was shown by oil shale. There is a lot more oil available at $100 a barrel than there is available at $20 a barrel. but the point is that at some point, we'll actually run out of the stuff, and even before then, we won't be able to make more oil the same way we had made more oil in the past; to get more oil, periodically, you need to come up with new ways of getting oil, usually at great expense.
The much weaker argument of "over decades oil will have less importance" doesn't seem to be his argument at all.
The futures market by itself doesn't provide a magical way of predicting the price of oil in 2017. Roughly, since oil can be stored the best predictor we have for the price of oil in December 2017 is the current spot price, adjusted for borrowing costs and storage costs.
Let's say the current price is $40, and it costs $10 to store a barrel for 2 years. If the 2017 price were too high, say $100, you could make a profit by borrowing $50, buying a barrel and storing it, and selling a futures contract today; in 2017 you would collect $100, pay back $50 + interest, and would still make a profit.
So -- again roughly -- the futures price is as good a predictor as the current spot price. E.g. if we had an oracle that told us of a sudden shortage in 2017, that would cause an increase the futures price, but it would also immediately cause an increase in the current spot price.
They are probably right, that other players have high expenses, less cash on hand, and will have to fold first. Certainly US shale is hurting, and practically no new oil sand projects are starting in Canada. In fact, this probably signals a good time to buy new assets, for companies prepare for this.
What I think Saudi/ OPEC is missing from the equation is that market share is not something that can be won long-term. US shale may have to cut back this year, but I think the time scale to turn production back on is about one year once prices return. Oil sands are a longer-term investment, but this also means that low prices don't cut production - the expensive investment has already been made.
Another major thing the article is missing from the equation is the demand side. Decrease in demand at the moment has come from efficiency investments that were economically driven by high oil prices. People bought smaller cars, took fewer road trips, and invested in home insulation. With oil prices lower, many of these things become less economical. Demand will increase, prices will go up.
 - http://www.nasdaq.com/markets/crude-oil-brent.aspx?timeframe...
 - http://uk.businessinsider.com/saudi-arabia-has-no-plans-to-c...
Western oil interests are probably right to spend on discovery then, since they'd believe OPEC can't pump forever and non-OPEC sources will be profitable in the future and will take years to develop. This is probably where the author and oil executives differ in their belief, that there will be a market for oil in the future.
However the author doesn't present any evidence to suggest non-oil sources will be sufficiently more profitable, less expensive and widely available in the future. Further, there is no evidence presented that a non-binding climate change agreements will destroy the oil market.
My understanding is that OPEC has largely been a tragedy of the commons. The members all gain by limiting sale volume, but each member has an incentive to cheat and overproduce their quota. Historically, Saudi Arabia has underproduced to make up for the cheating and to hold the price line, but it sounds like they got fed up with doing that, and decided to show the other OPEC countries what life without OPEC would be like.
In regards to the competitors you mentions, you really have to split them into two groups: auto fuel and electric power generation.
OPEC really has no effect on electric power generation, mostly because no one burns oil for electricity. The main hydrocarbons people burn are coal and natural gas, and they're already really cheap.
It may be that Saudi Arabia wants to harm the shale-oil businesses, particularly the debt financed ones. I don't really know much about the business, but the thing to remember is that even if a business goes bust - its asses don't disappear. They get bought up by someone else. The high prices may discourage discovery work. The effect on currently producing wells is more difficult to predict.
In 50 years, OPEC will still have oil even at current consumption. But consumption is shrinking as energy production is already shifting to renewables and cars will have converted to electro/hydrogen by then.
Almost all that increase in consumption is attributable to Asia. Any downturn in the curve will be attributable to the economy of China slowing, not renewables taking the place of oil.
I don't disagree that the consumption of renewables is growing rapidly, but that doesn't mean they're making a dent in oil consumption. They may down the road at some point, but right now they're a spit in the ocean.
Also I am curious, do you have evidence that suggests consumption is shifting away from oil to renewables?
The yearly road tax for a "dirty" car where I live is about $1000. If that was 2k or 3k they would be off the roads within the year...
This leads into the liquidation issue. If companies such as BP were to liquidate, what would happen? The author mentions that non-oil countries should focus on providing resources and knowledge on oil extraction, but would that be enough to prevent price gouging? If there are no competitors selling oil, I could see the prices skyrocketing once the competition has liquidated all of their reserves. Would our knowledge, tools and "know how" be enough to prevent a monopoly on oil? Our only fallback would be to charge more on the services the author suggested we offer instead of oil.
Note I'm not taking a stance on whether or not the author is right, but I think that if he is, there are enough players to prevent price gouging, and if anything we'd see prices fall due to no one wanting to be left with stranded assets.
A fire sale of assets of questionable value is only going to prove their worthlessness and they will have to be marked down very quickly on the balance sheets of oil companies.
The result will not be a tsunami of cash but a tsunami of bankruptcies.
> If a consortium of private-equity investors raised the $118 billion needed to buy BP at its current share price, it could immediately start to liquidate 10.5 billion barrels of proven reserves worth over $360 billion, even at today’s “depressed” price of $36 a barrel.
Their oil reserves alone are worth nearly 3 times the market value of the company. The other assets you talk of could even have a negative value of $100b and the equation still works.
These assets are either profitable or not. If they are profitable, why sell them? If they are not profitable, why buy them? It can't be both. Not for an entire industry that is.
What is the break even of oil companies' proven reserves after not overspending on investment? That is the all important question. If that break even is below future long term oil prices, as he seems to suggest, then these assets are worth exactly $0.
That said, nearly everything else is, at least indirectly.
No, NGL isn't the fraction of crude oil that's synthesised into motor fuels such as gasoline, kersone (jet fuel), or diesel. But it does come from petroleum extraction, and if you're not extracting petroleum from the ground, you're not getting NGL -- dry up one source, and you're drying up the other.
That leaves natural gas, and I'd have to do some conversion to sort out what fraction of plastics production is represented by the billion cubic feet or so of gas EIA mentions. And yes, other carbon feedstocks, including ag waste or captured / segragated carbon could conceivably feed plastics.
Once you dismantle industrial capacity on a large enough scale, it's never coming back. See also the circumstances surrounding the last oil boom/bust in the 1980s.
This headended in the SNL crisis.
I'm very interested to see some medium term outlooks (10-30 year) from the oil industry recently. Anyone have any? The stranded assets problem is already starting to wreak havoc on utilities. If we can only burn about half or less of what currently exist in reserves, why isn't there more chatter about it on the medium or long term?
First off, let's get something out of the way. The current price environment is every bit as artificially low as $120/bbl oil was artificially high. Saudi Arabia is deliberately producing at very high rates to keep their market share and drive companies that can't operate at $40/bbl out of business. They want to be able to maintain their control over global oil markets in the future, and they're in a geologically unique position of having huge reserves that can be produced at high rates and are economic at very low oil prices. Therefore, they've flexed their muscles with the knowledge that unconventionals can't keep up.
Most majors are operating on the assumption that oil will be back in the ~$60/bbl range within two years.
This is reasonable for several reasons.
1) Unconventional oil production _will_ decrease significantly over the next year. Unconventional wells have very rapid decline rates.
2) It's not clear that Iran's production coming onto the global markets can offset the decline in unconventional production. Iran has huge reserves in what should be a relatively cheap operating environment, they they also have aging infrastructure.
3) Saudi Arabia is likely to drop production once US unconventional-focused companies are no longer a threat.
Next, yes, they've outlined a strategy that all of the majors are following, albeit to less of an extreme. To be precise:
> For Western oil companies, the rational strategy will be to stop oil exploration and seek profits by providing equipment, geological knowhow, and new technologies such as hydraulic fracturing (“fracking”) to oil-producing countries. But their ultimate goal should be to sell their existing oil reserves as quickly as possible and distribute the resulting tsunami of cash to their shareholders until all of their low-cost oilfields run dry.
The first half is exactly what every major, non-national upstream oil company does. We provide the know-how to 1) find, 2) develop infrastructure to produce, and 3) efficiently recover hydrocarbons to countries who don't have a national oil company with the know-how or capital to do it on their own.
Next, most of the equipment and services portion of that isn't provided, developed, or controlled by oil companies. It's done by service companies (e.g. Halliburton, Schlumberger, etc). The in-house knowledge oil companies have is mostly around geology and managing huge infrastructure projects. (I'm biased towards exploration and I'm dramatically oversimplifying there.)
Finally, yes, most companies are selling a lot of assets right now. However, you only sell what you don't think you can operate economically in the current price environment. You're typically selling it to someone who can operate it more efficiently or who has a different idea of the potential for enhancing reserves. At any rate, finding a buyer for the stuff you'd want to sell most is difficult, and a lot of the rest is currently profitable.
"Wasting money by seeking new reserves" is just a silly statement. If we don't keep exploring, we'll wind up in the same boat we were back in the early 00's. It takes decades to go from exploration to first production. You cut back on major capital expenditures for exploration, but you don't stop entirely.
Basically saying future pricing will stable at ~$50, anything higher will create opportunity for US Shale Oil companies, anything lower they will not be able to sustain their own economies.
( I actually said something similar / if not the same and got downvoted >< )
Which got me to think, why aren't countries buying lots of cheap oil now and store them somewhere if they know prices will bounce back to $50+ in two years time? Or do setting up the infrastructure cost more then then $15 oil savings.
Regardless of the current price environment, it's important to keep a portfolio of potential exploration opportunities.
However boats, trains and planes have at least double that lifespan.
Because of capital investments, surely an alternative to oil is still 20 years away?
It depends what you mean by alternative. The day when the last gallon of oil is burned may not ever even happen, but the day when 20% of things that currently burn oil have been replaced with something else could be very soon, and 50% only a few years after that, etc.
(Note that you can currently see it in action. Fossil fuel usage is very near an all time high while prices dropped 75% due to oversupply)
So now what we need is that law. A cross-subsidy would be perfect: Tax fossil fuels and use the money to subsidize fossil alternatives.
Oil is cheap now, so the tax wouldn't pinch much, but it would make alternatives more attractive for anyone in a position to make that choice (e.g. buy an electric car). Which would then correspondingly reduce demand for oil, which would reduce the price of oil. Then we can keep oil prices from crashing by increasing the tax, which provides more money for the subsidy, which makes oil comparatively even less attractive, which reduces demand for oil, and so on until we're off of oil. But the price of gas never needs to go back above ~$3/gallon -- it's just that by the end the $3/gallon you're paying is $2.50 of tax and the tax is paying for everybody to get an electric car.
Think about it; for most of history shipping was entirely wind-powered. Clearly not comparable to today's massive freighters, but don't rule out new technologies finding a way to harness more wind and sun at sea.
And at the end of the day if there's a surplus of renewable electricity, it can be converted into high density fuels such as gas or diesel. That technology exists today; it can only get better especially if a cost incentive existed.
Although if foreseeable future means obvious stuff, then yes, the huge number of non-nuclear ships means it'll take a long time even if everyone liked the idea tomorrow.
The long-term future of merchant shipping will probably be larger, more efficient ships running on liquid fuels (biofuels or direct chemical synthesis), plus automated auxiliary sails.
I think the big change in the market is fracking, some lifestyle change toward less driving and energy intensity, not so much alternatives yet. But it could happen.
He seems to be reading what can only be described as 'the worst microeconomics textbook known to man' if he believes the quote below. All economists I have ever heard of believe that people (countries, and companies) should diversify their portfolios and hedge against risks, and that even if that were not true, politicians are largely mercantilists.
>"Of course, the real world is never as simple as an economics textbook. Geopolitical tensions, transport costs, and infrastructure bottlenecks mean that oil-consuming countries are willing to pay a premium for energy security, including the accumulation of strategic supplies on their own territory."
Then he proceeds to read the minds of oil company executives, which is interesting, because I'm betting they know a lot of things this author does not, and they are no fools. In addition, an oil executive would have to be deaf, dumb, blind, and ignorant to believe in constantly rising oil prices after the last 10 years, and most of them seem quite intelligent and aware of reality.
>"That is precisely the strategy of self-liquidation that tobacco companies used, to the benefit of their shareholders. If oil managements refuse to put themselves out of business in the same way, activist shareholders or corporate raiders could do it for them. If a consortium of private-equity investors raised the $118 billion needed to buy BP at its current share price, it could immediately start to liquidate 10.5 billion barrels of proven reserves worth over $360 billion, even at today’s “depressed” price of $36 a barrel.
There are two reasons why this has not happened – yet. Oil company managements still believe, with quasi-religious fervor, in perpetually rising demand and prices. So they prefer to waste money seeking new reserves instead of maximizing shareholders’ cash payouts. And they contemptuously dismiss the only other plausible strategy: an investment shift from oil exploration to new energy technologies that will eventually replace fossil fuels."
TLDR; This article is just click-bait, and we should all disregard it. This man is no Andy Grove.
Scenarios where a fall in the price of oil triggers a recession are possible. For example, with bad monetary policy from the Fed you can always get a recession if they do the wrong thing, and drastic changes in oil prices could make that more likely by leading us into a more volatile environment, where past trends could be broken. More likely is that it could lead to deflation in the Eurozone, and since the European Central Bank isn't very good at monetary policy, it could lead to a further Eurozone recession because of sticky wages. If that recession were bad enough it could cause failure of the economies of one or more European countries and trigger global recession.
It's also possible that one or more oil-exporting nations could default on their sovereign debt (Russia, Venezuela), which could cause a panic-driven global recession.
Next time you're at the mall, consider that for every 100 cars you see, those drivers have an additional $100,000-150,000 to spend vs. peak has pricing.
This seems wrong as the marginal price is determined by the utility of an extra barrel of oil for the consumer not by production cost. Sounds like a fall back to the labor theory of value (aka classical economics and/or Marxism) to me.
Sure, there are reasons to do so, but they better be unassailable... like bootlegging equipment in 1933, or horse and buggies in 1908.
Does anyone have a source for that?
I don't believe there is compelling evidence to suggest clean energy is making substantive inroads against oil. Short term analysis seems to suggest oil consumption will increase. Past actuals suggest renewable energy as a percent of total energy had declined over the last 50 years.
At the moment OPEC are essentially overproducing and are telegraphing that they will cut supply in the future as they expect prices to rise. This is a vote of confidence for higher prices and economic growth in the future which is hardly a reason to start selling off reserves now.