Something strange is happening in the oil world. A string of events and developments that should have pushed prices much closer to three-digit territory has, in fact, had only a transient effect on the benchmarks.
Could this trend suggest that the boom-bust cycle the oil industry has been following since its inception may be over?
U.S. sanctions against Venezuela and Iran have decimated these two countries’ oil production but have failed to push prices higher, the head of the International Energy Agency, Fatih Birol, said at the Baker Hughes AM2020 conference earlier this week. So have the attacks on Saudi oil infrastructure that cost 5.7 million bpd in temporarily lost production capacity and the U.S. assassination of Iranian General Qassem Soleimani.
Why are prices not going up?
The obvious answer is U.S. oil. While opinions on the longevity of U.S. oil production differ, it is a fact that the shale industry has changed the global oil game. OPEC, according to Birol, now accounts for a little over 45 percent of global oil production. That’s down from over half. U.S. oil, meanwhile, is joined by Norwegian, Brazilian, and Guyanese oil as a growing portion of the world’s total. OPEC is in a weaker position than ever because of this external supply growth. But this changed balance of power is not enough to change the boom-bust cycle on its own.
Here’s how the typical boom-bust cycle in oil looks in the most basic terms. When oil prices are low, demand begins to increase, prices start climbing up, oil companies reap higher revenues and invest in more production to satisfy the growing demand. Yet when prices reach a price too high for most consumers, demand begins to slow and prices begin to retreat. Of course, the actual cycle is a lot more complex, with a wide variety of factors at play that determine supply and demand decisions. But now there are two additional factors that, like U.S. oil, may change the game even more. Related: Iraq Is On The Brink Of An Energy Crisis
The first factor is climate change. The oil industry has taken a while to acknowledge what many are calling a climate emergency. But now that it has, some of its major players are embracing the vision of a cleaner energy future, investing heavily in technology that could effectively transform what we now know as the oil and gas industry.
Governments around the world are making long-term commitments to reduce their emissions of CO2, a gas that although a lot less potent in its greenhouse effect than methane, has been turned into a benchmark for how environmentally friendly a nation is. The oil and gas industry is, because of the very nature of its work, a major contributor to CO2 - and methane - emissions. So are its products, and governments are increasingly willing to make commitments that seriously affect demand for oil products.
The oil industry could be looking at consistently lower demand because of these climate change commitments, and it is also looking at increased competition from gas. In his AM2020 speech, IEA’s Birol referenced a “golden age” for gas that is beginning now. Considered a much cleaner fuel than oil and its derivatives, gas is largely replacing coal used for energy generation, but it is also replacing coal and oil used in heavy industry. It is this replacement that is ushering in this golden age of gas because heavy industry is a much bigger consumer of coal and oil than the power generation industry.
Gas, in short, is displacing oil from one of its top demand areas.
The second factor that is changing the face and nature of the oil industry is, interestingly enough, technology. That same technology that should transform the industry into a leaner, more flexible, and, most importantly, cleaner one, is challenging the boom-bust cycle, at least in the workforce aspect. Related: “Gasmaggedon” Sweeps Over Global Gas Market
At the peak of a boom cycle, jobs in oil abound and salaries are high. Once the cycle reaches its trough, it’s job-cut time, which has a ripple effect on regional economies, fueling the wider economic boom-bust cycle. Yet when you have a workforce that can be trained relatively easily and quickly to do different jobs, you can, if not completely smoothen the cycle, then at least reduce the amplitude between peaks and troughs, Taylor Shinn, VP of Ventures and Growth at Baker Hughes, told Oilprice.
There will always be macro factors driving the cyclicality of the industry, Shinn said. However, the digital tech transformation that the industry is going through right now could smoothen the peaks and troughs to some extent.
It seems flexibility is the keyword in this transformation. Digital technology - think automation, data visualization for more precise drilling, and virtual reality, to mention just a few - is making the oil industry better prepared to respond to any negative effects from the boom-bust cycle, minimizing the damage it could suffer. You don’t have to fire an oil rig worker when you can retrain him to do something else that is in demand. And you don’t need to “fire” a computer that does data analysis based on input from sensors on the drillstring. You can simply turn it off and save on electricity.
Thinking in the oil industry is changing. The knee-jerk chain of “Spend big when the going is good, cut deep when it gets rough” is on its way out. Now, it’s all about cost control, five years after the worst of the last crisis, and transforming the business into a more environmentally friendly, more flexible one. The transformation might not end the cyclicality of the industry. This is probably impossible. But it will certainly change it in radical ways.
By Irina Slav for Oilprice.com
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