*That is the exact title of the feature article in the latest Sierra Club magazine. Well, since I’m an oilman and a Sierra Club member, I couldn’t wait to read how the oil industry, which I have worked in for nearly 50 years, was going to go kaput. I won’t go into details of how the writer of the article came up with that eye-grabbing title, but let me just say this. The article is long, sleep inducing… and just plain wrong.
The writer is wrong for several reasons, and the first and foremost is the energy replacement for oil is just not here yet. Even the most optimistic scenarios for the use of the alternative energy still has oil and natural gas as the primary worldwide energy source for the next 30 years. The “End of Oil is not Near!”
But while we’re on the subject, let’s view the outlook for the oil and gas industry, the price of oil, and what will you pay for gasoline three years from now? The writer of the article correctly points out that the world’s oil and gas industry is going through tough times, and let me add to that. Oil industry analysts are predicting 150 additional oil and gas companies will go bankrupt within the next 12 months. Of course, that sure sounds as if it’s curtains for the industry. But it’s not, and this is why. The pandemic has reduced the overall demand for oil by between 17% and 20%. That simply means instead of 90 million barrels of oil a day the world only needs a little over 70 million barrels a day.
A few months back, when the worldwide oil consumption was 90 million barrels a day, and the pandemic hit, the demand for oil dropped like a rock, and there was immediately a huge surplus of oil on the market. That actually drove the price of oil down to below $0, and that whopping drop in the price of oil immediately caused the layoff of over 100,000 oil related workers and the scaling back of countless billions of new oil and gas drilling investments. The oil boom of the American shale oil horizontal wells was over for the time being, and as rigs were stacked and drilling was reduced, worldwide oil production began to drop. It continues to drop.
OPEC, by reducing production, has brought the price of oil back up to above $35/bbl, but most shale oil production needs for oil to sell for at least $50 per barrel, or they will lose money. That’s why the job losses and production decline will continue, and a company, which depends on cash flow from new shale oil wells that aren’t going to be drilled, won’t be able to pay their bank notes, and they will declare bankruptcy. Many of the shale oil wells have a first year decline of over 40%, so in order for a company to keep their production levels up, and pay their bankers, they must drill. So while the price of oil is well below break even, they are not going to drill, and the wells they have are going to steadily decline. The pandemic, by reducing the demand for oil, has already removed millions of barrels of oil from the market, and because thousands of these shale oil wells are approaching being uneconomical, they will be shut in and never produce again, and millions of barrels more will leave the market.
With the current near-term outlook and price of oil, small companies that were active shale oil drillers won’t be back to drill and the banks who financed them won’t return for another round. The shale plays will return some day, but not until another boom roars through the oil patch. Another boom? Yes, and that’s not my wild dream. It is from Christyan Malek, of JPMorgan Chase who is head of Europe, Middle East and African Oil and Gas research. He said the oil market could be on the cusp of a “supercycle” that sends Brent crude skyrocketing to as high as $190 a barrel in 2025.
The rational for higher oil prices says, as a virus vaccine stops the pandemic, the world will quickly ramp up travel etc, and the demand for oil will return to pre-pandemic levels. No one knows how quickly, but it will probably will take most of 2021 to return to pre-pandemic levels. However, the pent up demand to travel for business or pleasure may swell the world market need for oil back up to even higher that 90 million barrels of oil a day by the end of 2022, and that will cause a rush to add oil production to the current 70 million bbls that will be on the market. However, all of that extra 15 to 20 million barrels of oil won’t be readily available, and when demand outstrips supply, the price of oil will rise. The price of oil for the past 40 years or so has been a roller coaster that roared up to nearly $130 per bbl, and down to below $10/bbl. It seems to me that because the supply of oil will be definitively impacted by the crippling pandemic blow, restoring the level of production to keep the oil market in balance will be difficult. It will take years for oil companies to bring their exploration budgets back up to pre-pandemic levels, and years more to discover and bring more oil to the market. The huge 80 mile long Saudi field, Ghawar, the lynchpin of Saudi oil production, has been producing since the 1950s and industry experts believe it can only make up a portion of the needed oil production.
Yes, the pandemic gave us a wounded oil industry as it did the travel industry, but the difference is, while the travel industry can recover quickly, the oil industry is just the opposite. It will take years to recover, because banks aren’t going to be standing in line to get burned again after the shale fiascoes, and most of the former small shale players are long gone. But that’s not all. Every oil exploration company in the world cut their budget drastically when the pandemic hit, and that means a corresponding reduction in new oil coming on line. That, when combined with the normal yearly decline of existing wells, means there will be less worldwide capacity to make up the demand. In a few short years, we would need over 20 million barrels more of oil a day, when compared to today’s worldwide production, and by late 2021 and even more. Even with the Saudis and Russians cranking up production, it would be hard to reach that level, and OPEC would be in control again. A few years back a Saudi Oil Minister said “I think a hundred dollars a barrel is a fair price for oil.”
Would an undersupplied oil market drive the price of oil to a price of $190/bbl, which in turn would drive the price of gasoline to an unheard of $8 to $10 a gallon?
You Smackover independents with those 5 bbls of oil a day wells hang in there.
Richard Mason is a registered professional geologist, downtown developer, former chairman of the Department of Environmental Quality Board of Commissioners, past president of the Arkansas Wildlife Federation, and syndicated columnist. Email [email protected]