{"id":2826,"date":"2016-03-22T09:07:45","date_gmt":"2016-03-22T16:07:45","guid":{"rendered":"http:\/\/financegourmet.com\/blog\/?p=2826"},"modified":"2016-03-22T09:07:46","modified_gmt":"2016-03-22T16:07:46","slug":"oil-drillers-oil-industry-outlook","status":"publish","type":"post","link":"https:\/\/financegourmet.com\/blog\/investing\/oil-drillers-oil-industry-outlook\/","title":{"rendered":"Oil Drillers and Oil Industry Outlook"},"content":{"rendered":"

There was recently a fascinating presentation regarding the state of the oil industry<\/a>. The presentation is from\u00a0Schlumberger CEO Paal Kibsgaard. Schlumberger is one of the biggest oil drillers in the business, so he knows what he’s talking about. The surprising candor of this oil industry outlook presentation is what makes it so fascinating.<\/p>\n

In the presentation, Kibsgaard notes that unlike previous oil price implosions that were caused by what he calls “demand events,” this one is caused by OPEC’s decision to protect its market share rather than protecting the price per barrel. This creates a very different world for the oil industry.<\/p>\n

He goes on to describe what his particular company is looking at doing in the future. For our purpose though, what is interesting the confirmation that things really are different this time.<\/p>\n

Boom and Bust in Oil<\/h3>\n

The oil industry is no stranger to the boom and bust cycle. The oil bust of the 1980s hammered the local Denver economy until the internet bubble managed to rescue the city. The resulting merger and consolidation turned one-word household name energy companies into combined energy companies such as ExxonMobil (formerly two separate companies Exxon and Mobil). In the end, however, the result was the same as always. If you wait long enough, oil prices and demand will come back.<\/p>\n

\"oil<\/a><\/p>\n

What is new is a different philosophy for OPEC. Before the mid-2010s, OPEC was always most concerned about the price per barrel of oil. Its members would agree to cut production in order to drive up the price per oil. The member countries all fudged their production a bit, but an OPEC cut meant an increase in price.<\/p>\n

Back then, U.S. oil production, in particular was limited by the amount of oil that could be found and drilled in America. There was simply no way for the U.S. to increase its oil production, which, within the prevailing economic and political conditions was basically always set to flat out, full production. In fact, finding new oil required going to new, controversial places, like Alaska and ocean based drilling.<\/p>\n

But, in the last decade, fracking turned once nearly unextractible oil fields in place like North Dakota into profitable, and frankly easy to access, oil operations. With oil prices above $100 per barrel, profits were nearly guaranteed no matter where you drilled. If there was oil down there, there was profit up here.<\/p>\n

Of course, this increased production began to affect the price of oil with the per barrel price dropping steadily. Traditionally, this would have caused OPEC to lower production and drive the price per barrel back up. But, with additional fracking-based production in the U.S., that increased price per barrel would benefit non-OPEC producers more than it would benefit OPEC’s own member nations. So, instead of cutting production, they increased it.<\/p>\n

The idea is that here in the U.S., a fracking-based oil drilling operation needs something like a $50 to $60 per barrel price of oil to be profitable, while only a $30 or $40 price per barrel is needed to make money in the easier drilled oil within OPEC countries. So, while the price cut lowered their profits, they could make it up in volume. But, for American drillers, that meant smaller, or no profits.<\/p>\n

The effect was exactly what OPEC wanted. New U.S. drilling has all but stopped, and existing wells are cutting back production, or stopping entirely.<\/p>\n

What Is Next For Oil Industry Outlook<\/h3>\n

The thing to realize about the future of oil drillers, the oil service industry, and big oil companies themselves, is that this problem isn’t going away soon, and under some scenarios, it will never go away.<\/p>\n

Consider that OPEC has more oil than it can pump in the next several decades. So, pumping more to make the same amount of money is really no loss to OPEC. Sure, it isn’t quite as profitable, or quite as great, but it isn’t a disaster either. But, with every extra barrel pumped, the price stays lower.<\/p>\n

Oil is currently rallying a little bit, but will it help?<\/p>\n

The problem is that there is a lot of capacity in the U.S. currently sitting idle because low prices make turning it on unprofitable. However, that capacity is still there. In some cases, turning it back on is as simple as throwing the switch. The wells are still drilled, the equipment is still there, all someone needs is a reason to turn it on.<\/p>\n

That reason would be increasing oil prices. In a perfect world, oil companies might keep that production off as long as possible to allow prices to climb higher. However, many of these companies are hurting, and that hurt will only get worse. To them, squeezing a few bucks out of there investments at $55 per barrel is a better option than going bankrupt while waiting for $70 per barrel.<\/p>\n

And, the catch-22 here is that as those oil pumps turn back on, OPEC can (and probably will) turn production back up in order to keep those wells off. Even if it doesn’t, for every dollar that oil rises, there is another production company that finds a reason to turn its wells on. The result, is a very tough environment for oil prices to rise in, short of some sort of calamity.<\/p>\n

Will Oil Ever Rise Again?<\/h3>\n

All of this is taking shape against an consumer backdrop that is radically changing. Increasing demand for oil used to be a given. Consumers, especially American consumers, were always buying more, and bigger, cars and trucks, and each one needed more oil.<\/p>\n

But, in the past few years, the environment has begun to change. Hybrid cars are becoming increasingly common, with several automakers even offering a hybrid option on its “regular” cars. While this remains a niche today, the technology gets easier and cheaper every year. We aren’t more than a decade from a hybrid car being as cheap, or cheaper to product than a gasoline powered car.<\/p>\n

If that weren’t enough, all electric cars are just beginning to go mainstream. While Tesla is the best known, other automakers are quietly rolling out their first electrics too. As with Tesla before them, they are starting it out on higher-end, higher-cost cars. But, as each company learns tricks, develops technology, and creates economies of scale, those costs start to come down, and as they do, that technology starts moving into mainstream cars.<\/p>\n

Within 20 years, it is hard to see an auto industry that even makes gasoline powered cars, other than as a specialty niche. With decent, and cheap batteries, cars become much simpler and easier to make. The Tesla itself already has two trunks (the front one is called the ‘frunk’) because it doesn’t need all that space in the front compartment for an engine.<\/p>\n

And, as the technology and design improve, electric cars are just a better all around design. Electric cars don’t need elaborate cooling systems, transmissions, or differentials. Just putting a motor right near a wheel and rotating it with exactly the power and timing required results in a much better driving experience.<\/p>\n

In other words, in the near term, dormant capacity in U.S. production lies waiting to chop off any non-OPEC inspired price increase. And, for the long-term, that extra production just may not bee needed as non-gasoline powered automobiles steadily increase in market share. Oil stocks are going to be a tough place to be, pretty much from now on.<\/p>\n

This article is for informational purposes only. This is not advice to buy or sell stocks. I am not a financial advisor, nor do I hold myself out to be one. Consult your own tax and investment professionals for specific advice on your situation.<\/em><\/p>\n

 <\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

There was recently a fascinating presentation regarding the state of the oil industry. The presentation is from\u00a0Schlumberger CEO Paal Kibsgaard. Schlumberger is one of the biggest oil drillers in the business, so he knows what he’s talking about. The surprising candor of this oil industry outlook presentation is what makes it so fascinating. In the presentation, Kibsgaard notes that unlike previous oil price implosions that were caused by what he calls “demand events,” this one is caused by OPEC’s decision to protect its market share rather than protecting the price per barrel. This creates a very different world for the oil industry. He goes on to describe what his particular company is looking at doing in the future. For our purpose though, what is interesting the confirmation that things really are different this time. Boom and Bust in Oil The oil industry is no stranger to the boom and bust cycle. The oil bust of the 1980s hammered the local Denver economy until the internet bubble managed to rescue the city. The resulting merger and consolidation turned one-word household name energy companies into combined energy companies such as ExxonMobil (formerly two separate companies Exxon and Mobil). In the end, however, … <\/p>\n

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