Western oil firms must innovate or die

Guardian UK ^ | 28 December 2015 | Anatole Kaletsky

[Lorianne]

not all producers will lose equally. One group really is cutting back sharply: western oil companies, which have announced investment reductions worth about $200bn this year. That has contributed to the weakness of stock markets worldwide; yet, paradoxically, oil companies’ shareholders could end up benefiting handsomely from the new era of cheap oil.

Just one condition must be met. The managements of leading energy companies must face economic reality and abandon their wasteful obsession with finding new oil. The 75 biggest oil companies are still investing more than $650bn annually to find and extract fossil fuels in ever more challenging environments. This has been one of the greatest misallocations of capital in history – economically feasible only because of artificial monopoly prices.

But the monopoly has fallen on hard times. Assuming that a combination of shale development, environmental pressure, and advances in clean energy keep the OPEC cartel paralyzed, oil will now trade like any other commodity in a normal competitive market, as it did from 1986 to 2005. As investors appreciate this new reality, they will focus on a basic principle of economics: “marginal cost pricing.”

In a normal competitive market, prices will be set by the cost of producing an extra barrel from the cheapest oilfields with spare capacity. This means that all the reserves in Saudi Arabia, Iran, Iraq, Russia, and Central Asia would have to be fully developed and exhausted before anyone even bothered exploring under the Arctic ice cap or deep in the Gulf of Mexico or hundreds of miles off the Brazilian coast.

[Redcitizen]

Oil companies could diversify into firearms and weapons like napalm.

[ex91B10]

The managements of leading energy companies must face economic reality and abandon their wasteful obsession with finding new oil.

Wish they'd make journalists take Econ 101.

[henkster]

“Advances in clean energy?” Like what?

[who_would_fardels_bear]

They should continue to do at least enough exploration so as to keep their best people employed and enough new blood occupied so as to keep the pipeline of quality employees flowing.

Getting completely out of the exploration business and hoping to play catch up when the price of oil explodes (which it will at some point) will cost them more than what they lost by drilling test holes around the world.

[buffaloguy]

Learn something about oil wells before you write about them. Sheesh.
Ignorance is bliss.

[2 Kool 2 Be 4-Gotten]

The history of the oil patch has been boom and bust for as long as there has been an oil patch. My guess is that this will continue.

[AndyJackson]

Like all commodities, oil is subject to boom bust cycles. Supplies decline, price increase, exploration and innovation are encouraged bringing on new supplies and more efficient production and utilization. Supply increases relative to demand and prices fall. And so the world turns.

[AndyJackson]

great minds...

[Vision]

Maybe diversify into education for idiots like the author.

[ex91B10]

My point. The author injects his opinion that oil companies ‘waste’ resources looking for new sources of oil. If it didn’t pay off, they wouldn’t spend the dough.

[AndyJackson]

This means that all the reserves in Saudi Arabia, Iran, Iraq, Russia, and Central Asia would have to be fully developed and exhausted before anyone even bothered exploring under the Arctic ice cap or deep in the Gulf of Mexico or hundreds of miles off the Brazilian coast.

This is the part that does not jibe. Owners of a commodity have an incentive to sell it a rate to maximize their long term economic gain. This is not at a price so low that it undercuts all other competitors but at the marginal price set by the rest of the market. What has happened is that frackers only incentive is to make a reasonable return on production from land over which they have gained control through leasing. This has sharply reduced the market price for the rest of the world.

[ConservativeMind]

Thoughts?

[AndyJackson]

If it didn’t pay off, they wouldn’t spend the dough.

And because the market price is now set by the cost of production driven by fracking it probably won't pay off for the near term. But ok, we have oil and our kids and grandkids will have oil.

[Java4Jay]

It’s out duty to care for Earth

[econjack]

There are so many half-truths and simpleton explanations in this article it's a sham to call it journalism. If you were an investor in, or CEO of, a major oil company, does this makes sense:

But their ultimate goal should be to sell their existing oil reserves as quickly as possible and distribute the resulting tsunami of cash to their shareholders until all of their low-cost oilfields run dry.

Probably a good idea if you: 1) don't want your company to survive, or 2) don't think the future price of oil will rise...ever. Next, he says:

But the monopoly has fallen on hard times.

Monopoly? Really? Even OPEC is not a monopoly.

Then we have: In a normal competitive market, prices will be set by the cost of producing an extra barrel from the cheapest oilfields with spare capacity.

So, market demand plays no part in setting prices. Remember the tank in Tiananmen Square in 1989 China? Not a car to be seen. Today:

In India, there's similar growth in demand.

This clown ends his analysis by saying that growing a renewable resource like tobacco is the same as oil:

That is precisely the strategy of self-liquidation that tobacco companies used, to the benefit of their shareholders.

Sorry, but this guy's either an economic idiot or a shill for a pro-carbon tax lobby.

[ConservativeMind]

The following quote throws the whole article into disrepute:

“Redirecting just half the $50bn that oil companies are likely to spend this year on exploring for new reserves would more than double the $10bn for clean energy research announced this month by 20 governments at the Paris climate change conference. The financial returns from such investment would almost certainly be far higher than from oil exploration.”

Figures. Liberals really can't see truth.

[familyop]

They’re not dying. The smarter ones are taking a short vacation from the insane market and certain losses for staying in. Having fewer debts, they’ll be the first back in.

[familyop]

Russia and OPEC will be the big losers. Russia and the Saudis are on the verge of war with each other. Russia is going into debt, and the Saudis will be. That will be a rough, fast working combination against them.

[sparklite2]

It’s the Guardian, so you can expect a hard left worldview. In this case, they’re going from pushing unprofitable alternative energies and shutting down drilling because we’re going to run out of oil, to pushing unprofitable alternative energies and shutting down exploration because ... there’s plenty of oil.