Despite the correction this week, global oil prices remain through the roof, and the global push to move away from fossil fuels seems to be reversing its course as the global economy reverberates from the continued fallout of the novel coronavirus pandemic and the geopolitical turmoil spurred by Russia’s invasion of Ukraine. But despite the fact that the oil sector is making a roaring comeback, don’t expect another shale boom.
Last time oil prices rose over $100 a barrel, it set off a real estate and investing boom across oil country that rippled out to give a boost to the United States economy as a whole, with overall economic benefits by and large outweighing consumers’ pain at the pumps. But experts are saying that this time, it’s different. Any optimism about the future of the oil and gas sector is tempered by overwhelming uncertainty. Indeed, the extreme market volatility seen this week underscores just how unreliable the current fossil fuel renaissance really is.
In the past, oil and gas companies followed a reliably predictable boom and bust cycle. When oil prices were low, oil producers would cut back on production and OPEC would impose temporary production caps, but the moment that prices rebounded the industry would rush headlong into a “drill, baby, drill!” mentality, restarting the cycle. While this pattern held true for decades, the Covid-19 pandemic has ushered in a new era of restraint for a sector that previously erred on the bullish side.
The last time that oil prices hit $100 a barrel nearly a decade ago, oil industry epicenters saw a flurry of growth and investment to accommodate legions of new hires, spiking demand for office space and stoking the real estate market. Not so this time around. “Even with oil prices expected to climb higher, energy companies — burned by two wrenching oil busts in five years — aren’t clamoring for more real estate,” The Houston Chronicle reported this week. “Under pressure from Wall Street to control costs, they’ve figured out how to do more with less - including fewer employees and fewer desks — while incorporating remote and flexible working arrangements that became popular with employees during the pandemic.”
What’s more, there seems to be the prevailing sense that the current fossil fuel boom is the exception rather than the rule. The global community has gotten behind the green energy transition more earnestly than ever before, and deadlines for global climate pledges are fast approaching. In order to avoid the worst impacts of climate change, rapid decarbonization is imperative. The world is “perilously close” to hitting an average of 1.5 degrees Celsius over pre-industrial averages, the threshold earmarked by the Intergovernmental Panel on Climate Change and reinforced by the Paris agreement.
Clean energies are rapidly improving and becoming more cost-effective as more and more investment pours into new technologies and industries such as solar and wind outgrow subsidies as they tap into economies of scale. To be certain, oil, gas, and coal have their benefits – no single era has showcased this better than the current moment of global uncertainty. Conflict in Europe and the disruption of global supply chains have caused an unprecedented energy crunch that has driven countries back to the most reliable and independent forms of energy available. For most, this has meant a return to fossil fuels. But this pattern is not sustainable.
The writing is on the wall for Big Oil. While the industry is enjoying an unexpected windfall, it may very well be the last. The case of Houston real estate underlines this fact. The boost in oil prices no longer inspires optimism and a growth mentality. Instead, companies are adopting a “wait and see” approach, which seems to be the only safe option in an era of uncertainty.
By Haley Zaremba for Oilprice.com
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