Russell Gold, senior energy reporter for The Wall Street Journal and the inaugural Energy Journalism Fellow at UT Austin, offered his perspective on the energy bust at panel during UT Energy Week. Below are highlights from Gold’s remarks, reflecting his own opinion.
“We are clearly in an epochal moment of energy, combined with a period of energy transition. It’s a fascinating time,” Gold said. “And the changes that came about in the Boom – the rise of abundant supplies of fossil fuel – have shaped the Bust and will continue to shape energy going forward.”
First, Gold took a look at the oil bust.
What caused the price of oil to collapse?
- Miscalculation by OPEC about the price sensitivity of marginal operators. OPEC thought the lower oil price would curtail supply, but the price had to drop much further for that to happen. Before the price dropped, businesses were keeping supplies and crews around waiting to drill as quickly as possible. Operations were not lean. When the prices fell, operators cut the fat.
- Lessons learned in the 1980s by Saudi Arabia. In the 1980s, oil prices began to fall and Saudi Arabia cut its production to counter the effects. However, its market share fell from 16% to 6% of global production. It took 24 years for the country to match its 1980 output and it never recaptured the 16% share. So, when the price of oil began to collapse in 2014 and throughout 2015, Saudi Arabia increased its output rather than cut production. And other nations have followed suit.
If your basement is flooding, you turn of the water. But that hasn’t been what the oil market has done.
Next, Gold evaluated the current industry.
If the industry isn’t turning off the spigot of oil production, what are they doing?
Companies are slashing their capital spending and their dividends. Big oil producing nations are fighting to hold on to their market share and not cutting their production. And the private western companies are scrambling to shore up their balance sheets to prepare for a long period of low prices.
Why is everyone charging ahead with production, refusing to give up market share?
They are looking ahead and gravely concerned about the future and future demand for oil and oil products. The oil supply won’t dwindle in the next hundred years, but demand certainly will because technology will change and governmental action against carbon emissions will tamp down on the oil market or incentivize an alternative transportation market.
In the past, companies might be willing to lose a few million barrels a day of market share to stabilize the market and raise prices, because all things being equal they would sell the foregone barrels later at a higher price—the “oil in the ground was worth more than money in the bank” theory.
“Global warming has turned that adage on its head. Oil not produced today may never be produced. Consequently, producers are rushing to extract crude before it is too late,” said energy economist Phil Verleger in October.
When you look at the bust and try to understand what is happening – the strange decisions in the face of an oil glut brought on by the fracking boom and extended by the end to Iranian sanctions – the conclusion is that the oil industry is beginning to see the end.