Didn’t see the 2014 oil price shock coming? nope neither did I. Having missed that one I am going to explore in a couple of blog posts the question of whether we are walking into another “unseen” and bigger industry shakeup.
At the Oil Council conference in summer 2014 there was a panel on HSE – or whatever acronym is currently used to cover our myriad concerns – and a question was asked, “What keeps you awake at night?”. It became a bit of a race to the top for the moral high-ground, of how each panelist had deeper and more sincere concerns than the previous on safety, security, environment, social etc. Although the HSE issue is rightly a cornerstone of our industry, the question itself got me thinking; and the thing that keeps me awake at night is nothing to do with our industry.
Before getting there, lets look at just how insular we might be. Our first big blind-spot – nobody (with very rare exceptions) – saw the 2014 collapse coming. And that despite many super smart and/or super well paid people looking at it every day. Even the sub-prime was predicted (indeed by some too early), with certain individuals and institutions coming out very wealthy after reading it right – have you heard of anyone making money by calling the 2014 oil price crash?
Yet the 2014 crash was not complex – although it was somewhat hidden (and as noted above, no, I didn’t call it either… so this is in the best tradition of hindsight analysis). The best one-pager is here; and simply put, supply was increasing month on month in the US with an almost linear climb. Demand was essentially flat, with no clear catalyst for change. Simple supply and demand economics should have prevailed but were disguised by losses of supply from geopolitical disruptions (Syria, Libya etc) that matched almost barrel for barrel the 2010-2014 US unconventional supply increase – until, that is, Libya came back on and flipped the whole system into oversupply.
I strongly suspect that we, as an industry, didn’t see it coming because, by and large, we were actually pretty happy with $110/bbl oil, and didn’t want to see it coming. Wilful Blindness perhaps? Quite why traders and/or specialised investment banks didn’t see it is another question…
2010-2014 was a sort of “Good Times”, that was in fact, not so good. Net margins were no better at $110/bbl than at $60/bbl. Service costs had gone through the roof, companies got ‘fat and lazy’ with less fiscal discipline on capex and on G&A, and host countries enacted various forms of fiscal tightening (windfall taxes, CGT, tighter PSCs etc). So a price correction may not be so bad for the industry despite significant pain.
Indeed the other unintended consequence of high oil prices is strong drive for substitution. We saw this in the 1970s and 1980s with supply-side substitution (North Sea, GOM, Alaska etc). More recently this has been seen as demand-side substitution (renewables, gas fuelled busses, hybrid/electric cars etc).
So what else are we not seeing?