Published on June 19th, 2017 | by George Harvey0
One View of the Fall of Oil & Gas
June 19th, 2017 by George Harvey
I took Zachary Shahan’s article “What Happens When The Oil Economy Collapses?” as a bit of a challenge. It poses a question that has many potential answers. Some possibilities, however, would be easy to miss. What I actually think might happen may be one of these.
Many people have expressed an expectation that with peak oil, depleted resources would reduce production in the face of rising demand; this would lead to rising prices; and this would force some people to give up using oil, possibly by simply going without and suffering. The law of supply and demand would keep prices high in a market with declining volumes, because the loss of the supply would lead the falling demand.
Peak oil has recently turned out to be very different. Prices dropped because declines in demand actually preceded declines in production. And the result is a market most people, possibly even OPEC leaders, have found unpredictable.
We should also bear in mind one other thing that can be less than obvious but may play a large role in the overall picture. It is that a small loss of revenue can sometimes produce large financial losses, putting profits into negative territory. In a stressed company, this can end in complete collapse.
The possibility I would like to run by readers is this:
- Demand for fossil fuels falls due to a number of factors. Increases in oil prices only result in further declines in demand, as customers defect to cheaper electric transport and renewable energy. The result is that prices cannot stay up for long. This situation seems to be the case now.
- Production of crude oil falls on lower prices. The result is greatly lowered revenues, leaving oil companies vulnerable, but without necessarily increasing prices. Some companies go out of business, but their competitors do not profit from this because demand continues to fall.
- Production losses are further driven by failure to develop new wells. A CleanTechnica article, “Global Oil Discoveries & Oil Projects Fall To Record Lows In 2016,” addresses the lack of exploration and development. It paints a shocking picture of a deeply stressed market.
- With declining productivity, equipment runs less efficiently. Production overheads reduce profits, possibly into negative territory. This applies to both producers and suppliers.
- Companies that transport and process petrochemicals are put under stress because of falling revenues resulting from lower production. Many of these also go out of business. In particular, new pipelines may never be paid off, because their design was based on unreasonably optimistic economic models.
- The plastics industry, facing increasing regulations because of ocean pollution, reduces production of non-biodegradable plastics and reduces its use of oil.
- Local dealers of gasoline, oil, and natural gas have supply problems because of the unstable market. Many are tied to specific producers that might go out of business. When they need products, some have to scramble but are unable to find supplies. If stressed local companies are unable to service customers, it can drive them out of business. Some of those that stay in business experience loss of revenues on falling sales. This produces losses of profits, even if retail prices rise.
- Failures in the fossil fuels industries make it increasingly difficult to find financing. Financing sources are not willing to provide money when assets could become stranded. This leads to more failures.
- At the same time, taxes on fossil fuels, intended to slow their sales to slow climate change, prove insufficient as temperatures continue a relentless rise from carbon dioxide already in the atmosphere. This leads to pushes for higher taxes as people are hurt by the effects of rising temperatures. This may begin as early as this summer, depending on the weather.
- Those local dealers who remain in business cannot meet demand consistently, because they are overextended in an unstable market. Customers who are able to pay for oil and gas have to buy at a premium because supplies are unreliable. This results in increasing customer defection to alternate sources of energy. And this makes things more difficult for everyone who deals with petrochemicals, right back to the well head.
- Governments, non-profit organizations, and business of nearly all descriptions defect from the use of fossil fuels. This is partly to fight pollution and climate change, but partly to save money and increase energy security.
- Disruptive technologies cut into fossil fuels sales. Wind and solar power are already disruptive. The combination of solar with battery backup is becoming highly competitive with natural gas, the least expensive fossil fuel for producing electricity. CleanTechnica’s article “New Solar Price Record: Tucson Utility Inks Deal For Solar Power That Costs Less Than 3 Cents Per Kilowatt-Hour!” points out the disruptive potential. Another article pointing to this is,“Tony Seba: By 2030, 95% of People Won’t Own a Private Car — Automaker Death Spiral Coming.”
- Lawsuits come against the fossil fuels companies because they have engaged in deceit, at the expenses of human health, human life, the environment, and the reputations of competing technologies. An article at desmogblog.com, “US Senators: Heartland Institute Mailings to Grade School Science Teachers ‘Possibly Fraudulent,’” spoke to the pervasive nature of the fraud. It related to attempts by the Heartland Institute to influence school children to deny climate science. But, in fact, legal actions may be for criminal activities – possibly including charges for crimes against humanity. As an example of how widely different views of the same thing are, I also would mention a pair of articles providing data on the same subject that appeared only days apart. One appeared in CleanTechnica, “Solar & Wind Costs To Plummet And Global Emissions To Peak In 2026, Forecasts BNEF.” It said that BNEF predicted wind and solar power would produce 34% of our electric generation in 2040. The other article appeared at The Daily Caller, “Solar & Wind Will Provide Only 2.9% Of World’s Energy By 2040.” Such material may leave a reader wondering who to believe. I would point out to such a person that BNEF gets its money from investment clients who are looking for correct information and will go elsewhere if they are not satisfied. By contrast, The Daily Caller data comes from an organization with a proven record of bad projections. The material from the Alt-Right media makes me think of Baghdad Bob, standing on a Baghdad street, talking about how the Iraqi army was driving out the Americans, while in the background, American tanks were driving along unhindered, only a few hundred yards away.
- The ability of the fossil fuels industries to buy the good opinions of legislative bodies fails, because they are running out of money. This ultimately leads to the collapse of the Alt-Right wing of the Republican Party, with the remainder of the party discredited or not, depending on how quickly they can detach themselves from that group.
A short statement of what I expect is that a collapse of the oil and gas industry could see the price of crude oil depressed at the same time that the prices of retail oil and gas kept high, with no one in the middle making much money. And the political ramifications would be profound.
The cost to the economy of the failure of the fossil fuels industries could easily dwarf that of any previous economic turmoil that has ever taken place, including the Great Depression. There are a number of reasons why I think this type of collapse in the oil and gas market could be nearly at hand.
Nevertheless, there is hope. A new era for renewable energy seems to be at hand as well.
Image by Hedgeye.com.