“All happy families resemble one another; every unhappy family is unhappy in its own way,” reads the opening line of Leo Tolstoy’s novel “Anna Karenina.”
Similarly, “I guess you could also say every unhappy price collapse is unhappy in its own way.”
That’s Daniel Yergin. Along with being a fan of Russian literature, he also happens to be a world renowned energy scholar, economic researcher, co-founder of the IHS Cambridge Energy Research Associates and its eponymous CERAWeek, vice chairman of IHS Markit, as well as a Pulitzer Prize-winning author for his bestselling “The Prize: The Epic Quest for Oil, Money and Power.”
And, Yergin also had the distinction of being the keynote speaker at the recent AAPG Centennial Gala during the Association’s 100th anniversary Annual Convention and Exhibition in Houston.
Addressing a packed ballroom of reveling geologists, Yergin shared his considerable expertise in oil market analysis to explore the question, “Where does oil go from here?”
The Great Stimulus of Pessimism
He noted that, according to his research, there have been five major shortages since oil became a global commodity in the early 20th century, and while each was “unhappy in its own way,” Yergin said they do share common features by which to make reasonable predictions about the current unhappiness.
The first shortage followed pretty quickly after AAPG’s founding, when humanity at large first learned of oil’s true power and value during World War I, which, Yergin pointed out, began with horses and ground troops but ended with airplanes, trucks and tanks.
“It was that war that really turned oil into a strategic commodity,” he said.
Meanwhile, there was an automobile boom afoot in the United States, with only 1.8 million cars in 1914 but 9.2 million in 1920.
All of this quickly led to a severe shortage of oil, which created “an era of extreme pessimism,” Yergin said, which was described by one official writing to U.S. President Woodrow Wilson that “lack of foreign oil supplies constituted the most serious international problem facing the United States.”
“I think we’ve heard something like that since, a few times,” Yergin quipped.
“Wilson’s reply was equally pessimistic. He said, ‘There seems to be no method by which we can assure ourselves of the necessary supply at home and abroad,’” he continued.
Wilson’s extreme pessimism was characteristic of the time, Yergin explained, because in the years immediately following AAPG’s founding, “the expectation of permanent shortage set in.”
“It was an early variant of Peak Oil,” he added.
The head of the U.S. Bureau of Mines officially declared in 1919 that, within less than five years, the oilfields in the United States would be “finished,” and the head of the U.S. Geological Survey warned of a “gasoline famine,” with the national supply exhausted in precisely nine years and three months.
As has unfailingly proven to be the case in the intervening decades, that shortage was a great stimulus for opportunity and innovation, which the newly formed knowledge-sharing community of AAPG was uniquely equipped to help meet.
The U.S. government encouraged oil finders to go overseas to explore for new supplies of oil, but the turning point came with discoveries in Oklahoma and east Texas, which Yergin described as “an incredible strategic reservoir that was critical to the success of the Allies in World War II.”
“Without those discoveries … it would have been a very different situation,” he added.
What was great news for the war effort soon became bad news for the oil industry. Right on the heels of a veritable national panic over shortages came a supply glut and a resultant price collapse to 10 cents a barrel.
Yergin noted that there was such desperation to offload supplies that some gas stations in Texas resorted to giving away free chickens to gasoline customers.
Lessons for Today
That cycle of shortage, glut and price collapse followed by recovery has been a recurring and now predictable pattern in the intervening decades. And, just as those past cycles have inevitably led to recovery, so is the current downturn plodding ever closer to a return to higher prices and opportunity, albeit in fits and starts.
“Recovery is here, but where does oil go from here?” Yergin asked.
Last year’s OPEC production cutting agreement provided a “gentle hand at the wheel” to rebalance the market, but it’s been a shaky balance.
“We’ve seen a recovery, but it’s been uneven and volatile,” Yergin said.
(And, by the time this goes to print, the OPEC will have decided at its meeting in late May whether or not to extend or alter those production cuts.)
“But, what a change,” he remarked. “A couple years ago, $55 a barrel would have been derided. Now it’s celebrated, because you’ve seen this kind of recalibration of the entire cost system of the industry. It’s shale, it’s conventional, it’s offshore, and it’s even oil sands.”
The price is volatile in the short-term, but what about the long cycle?
“Those big, multi-year projects – the ones that are also interesting to geologists? There we’ve seen delays, postponements, cancellations,” Yergin said.
This has cut upstream spending almost in half. IHS estimates that in 2019 it will be about half of what it was in 2014, he said.
“Some of that is just lower service costs; some of that is cutbacks,” Yergin said.
However, he said IHS estimates that U.S. spending will be up 25 percent this year. The rest of the world will be flat, or maybe even decline, but is expected to increase 15 percent in 2018.
And, Yergin said that will lead to an overall increase in costs of 2-4 percent, while costs for production of unconventionals will increase about 10 percent, and costs in the Permian Basin will increase by 15 percent or more.
Shortage is Imminent
“Another feature of the current period is, of course, the alarming drop in oil discoveries, which is highly relevant to you all,” Yergin continued.
And, that means the oil market will see yet another recalibration in the next three or four years.
“This leads to what my colleagues Bob Fryklund and Pete Stark have called, in their Discovery Thinking papers, ‘new thinking’ about super basins – about existing super basins and as the new building block of exploration, and turning geological mastery, as they put it, into commercial mastery,” Yergin said.
But, the ongoing and predictable cycle of the market isn’t the only force shaping the fortunes of petroleum geologists.
“Politics goes in cycles, too,” Yergin said.
He noted that there have been 145 recent or new regulations under the Obama administration, and drew some applause when he referenced the new administration, which is expected to be more favorable to the oil and gas industry.
But politicians don’t set policy in a vacuum, and Yergin noted cultural and social forces that are actively working against the industry, referencing, for instance, the anti-fracturing propaganda movie “Gasland,” which is required viewing in some state school curricula, along with the broader efforts of the “Keep It In the Ground” movement and their efforts to choke-off pipelines, literally and figuratively, by choking off financing by banks and investment funds through regulation.
Factors like these could hamper the industry’s capacity to find more supplies, but that can only exacerbate the inevitable increase in demand.
Yergin noted that broader dialogue within the industry has gone to from “Peak Oil” (supply) to “Peak Demand.”
“When will oil demand reach its high point?” he asked.
Yergin noted that there is a wide range of opinions on the answer, from the end of the next decade to 2040 and beyond, but his answer is, “We don’t know. It depends on many different things.”
Technology, the kinds of cars people drive, environmental policies, urban and pollution policies in Asian megacities along with the growth of income, gross domestic product and population – all of these factors relate to that answer, he said, and it’s a question IHS is working out in a research project called “Reinventing the Wheel,” which is an effort to understand how the global changes in transportation will affect the oil and gas industry
“One of the things that comes through is that much depends on attitudes, on values, toward cars,” said Yergin, to which he added, “There are generational factors involved.”
That said, he noted that according to the International Energy Agency, even if every other new car sold in the world between now and 2040 is an electric car, world oil demand will still go up, partly because automobile transportation is only about 35 percent of total oil demand.
Yergin concluded that, while all of the aforementioned factors will affect the future of oil and gas, “It also depends on how well the oil and gas industry tells its own story.”
“I really want to emphasize that – the importance of not simply talking within one’s community, but talking with other communities as well, and that emphasis on communication,” he said.
“Certainly, the future depends upon the rocks, and what the rocks tell you and what you find out, and on technology,” Yergin concluded. “But the future also depends very much on something else, which is you all, and people like you, because you are the people who visualize and make the future. Your training, your discipline, your creativity, your commitment and passion will be critical in shaping the century to come, for the AAPG, for the industry and what it all represents.”