F-35 pilots need G-suits to survive the gyrations of fighter-jet flights. Well, you pretty much need one in this topsy-turvy industry, too. Imagine your sales cut in half over a three-year period, then they triple in the next two years, down by 33% the next, then up seven-fold in five years, followed by a 75% plunge in less than a year, back up two-and-a-half times in about as many years, hold for three years (whew), then cut in half in a matter of months. Would you choose to work in this industry? Well, welcome to the oil patch—it’s not for the faint of heart, but like fighter pilots, many in the industry thrive on the wild ride. Do they need to keep their G-suits handy?
With this kind of recent history, it’d be crazy to say no. But it does seem that activity has landed for the moment. Why? It’s really all about the narrative that explains the industry’s wild movements. In the early 2000s, we were well into a lengthy growth cycle, yet there were big concerns about oil supplies. There was a theory that all the easy stuff had been discovered in the ultra-low-price regime between 1986 and 2002, and that we were actually running out. Prices zoomed up to $100 per barrel and kept going, prompting bold projections of $200 in 2008. Then a brief crash in the Great Recession, and a return to $100 when the massive global stimulus program kicked in. Then things calmed down for a few years. But suddenly in mid-2014, markets were taken aback when over the next 18 months, prices halved—and they have basically stayed there since.
Stable at $100, then relatively steady at $50 to $60. Hmm, what’s going on? Well, post-recession stability at $100 was artificial. It was kept in place by fiscal stimulus, followed by extraordinary monetary stimulus (quantitative easing). With limited places to go, all that liquidity found its way into the commodity space, and propped things up—for a while. Renewed global growth saw the retraction of liquidity, which coincided with the oil price collapse. Seems that we had false stability, and now, realistic stability.
So, how does all that help with the outlook? In this industry, nothing is guaranteed—world events can shake things up in an instant. But for the moment, it’s looking like today’s prices are here to stay for a long while.
According to the latest outlook by the International Energy Agency (IEA), global oil demand will grow slowly, held back by declining demand in the developed world and by a sharp slowing of growth in the energy-hungry Asia-Pacific region through 2040. Sharp increases in demand over this timeframe are confined to India and Africa. Are these enough to push prices up sharply?
If we were running out of cheap crude, we’d be in trouble. However, shale oil production in the United States is well ahead of expectations and expected to continue growing. Projections see U.S. production hitting 22 million barrels per day in 2030, and it will account for 85% of global growth over this period. By 2030, U.S. production will be 70% greater than the next country on the list, Saudi Arabia. Much of the U.S. increase is coming from oil in tight geological formations, where production is expected to peak in 2035. This is a radical about-face in the U.S. oil story, and it isn’t over by any means. Why the change?
High prices typically have that effect. America has long known about tight oil and gas deposits, but the problem in the past was cost. Very recently, technology has enabled exploration of new wells, development of old wells and overall costs. This has led to a doubling in wells drilled in “sweet spots” from about 40% in 2012 to more than 60% currently. The lateral length of wells has multiplied, and the number of days of drilling per metre has almost been cut in half. As such, costs have been vastly reduced to the point that average wellhead break-even prices are down from more than $100 per barrel to less than $50 per barrel in the six-year period ending in 2018. That’s a stunning reduction. And it’s attracting the largest share of global investment.
