The Petroleum Industry, A Victim of its own Success

Ten to fifteen years ago all of the talk around oil and gas was the notion of "peak oil".  That is, we had developed all of the oil fields we could develop so there was no way to add production to meet demand.  As a result, the price of oil would continue to rise pretty much forever.

Alot of companies and political jurisdictions made some big business and policy choices based on that notion and for a time they worked.  The price of oil did continue to rise to the point where even the Tar Sands in Alberta was able to make money without the perennial handouts from Governments.  Not that existing handouts were eliminated it was just new ones were not needed.

The problem was the notion of peak oil was wrong.  The rise in oil prices just made other ways of developing oil reserves economically viable and companies did just that.  Fracking comes to mind.  In fact, production rose so much that the US went from being a net importer of oil to being a net exporter of it.  As an aside, I knew when I read that little piece of news that Alberta was going to be in big trouble in the not too distant future.  The US is the biggest importer of Alberta Tar Sands oil and if they had so much of there own that they were exporting it demand for Tar Sands oil would dry up.

The other impact of those persistently high oil prices was making alternatives to oil economically viable.  Wind and solar became increasingly viable alternatives and investment in both climbed so that they could be improved, made more efficient and made even more economically viable.  As well, car companies started seeing that they could make money by manufacturing and selling motor vehicles that did not use a fossil fuel distillate to run an engine.  So those companies began to invest in that technology to make it more efficient and cost effective.

All of this went on for some time.  The number of barrels of oil produced each day climbed until there was a glut in the market.  The first victims of that glut was the Tar Sands.   At one point the price of Tar Sands oil was US$40 off of the benchmark price for oil and those few years where it was profitable to develop it became a memory.  Then people began to notice that the Chinese economy was slowing down, that demand for oil in the rest of the world had also fallen and that there was way more oil in the market than there were reliable customers for it.  The result was basis economics.  The price fell and then it collapsed in the panic selling that followed.

So that is where we sit right now.  Fracking has dropped off considerably because it is no longer profitable to develop oil reserves that way.  The price of Alberta Tar Sands oil is so low that Tar Sands companies are laying off employees at a prodigious rate, despite billions of dollars in "bail out" money from the Alberta government.   Wind and solar are still being developed at the same pace as before the collapse of oil prices and automotive companies are forging ahead with developing and selling electric and hybrid motor vehicles.

So there does not appear to be any end in sight for the low energy prices we have seen for the last couple of years.  Indeed, many are now saying that we have reached or even gone beyond "peak demand" and that oil prices are going to continue to fall in the long-term.  That is having some impacts.  Exxon is no longer on the Dow Jones, BP has indicated that they have stopped oil exploration and Teck Mines has shut down their efforts to build a new Tar Sands pit in Alberta.  

I am not so certain about the notion of peak demand.  They were wrong about peak oil so I do not trust their analysis in the other direction.  We will have to see what happens but I believe we will see energy prices recover in the coming years although not to the level they were just five years ago.  

What the last five years have proven to us is that the development and sale of petroleum products is subject to the same economic laws of supply and demand for which every other product and service are subject.  Many in the industry and in the governments that have fallen over themselves to support that industry appeared to have forgotten that fact and in some cases they have still not accepted it.  There is no mystery in the current restructuring that is currently brutalizing the petroleum industry and those whose livelihoods depend on it.  They are the inevitable victims of the runaway success that the petroleum industry experienced during the first 15 years of this century.