David Fuller's view -
If Helm is to be believed the oil market downturn is only getting started. The latest collapse is the harbinger of a global Energy revolution which could spell the end-game for fossil fuels. These theories were laughable less than a decade ago when oil prices grazed highs of more than $140 a barrel. But the burn out of the oil industry is approaching quicker than was first thought, and the most senior leaders within the industry are beginning to take note.
In the past, the International Energy Agency (IEA) has faced down criticism that its global Energy market forecasts have overestimated the role of oil and underplayed the boom in renewable Energy sources. But last month the tone changed. The agency warned oil and gas companies that failing to adapt to the climate policy shift away from fossil fuels and towards cleaner Energy would leave a total of $1 trillion in oil assets and $300bn in natural gas assets stranded.
For oil companies who heed Helm’s advice, the route ahead is a ruthless harvest-and-exit strategy. This would mean an aggressive slashing of capital expenditure, pumping of remaining oil reserves while keeping costs to the floor and paying out very high dividends.
“They’d never do it because no company board would contemplate running a smaller company tomorrow than today. It’s not in the zeitgeist of the corporate world we’re in, but that’s what they should do,” Helm says.
BP and Royal Dutch Shell are slowly shifting from oil to gas and making even more tentative steps in the direction of low-carbon Energy. But Helm is not entirely convinced that oil companies have grasped the speed with which the industry is undergoing irrevocable change.
“As the oil price fell, at each point, oil executives said that the price would go back up again,” says Helm. “What the oil companies did was borrow to pay their dividends on the assumption that this is a temporary problem. It’s my view that it is permanent,” he adds.
For a start, there is scant precedent for the price highs of recent decades. Between 1900 to the late Sixties oil prices fluctuated in a range between $15 a barrel to just above $30 a barrel – even through two world wars, population growth and a revolution in transport and industry.
It was geopolitical events which caused oil prices to surge by more than $100 a barrel following the Middle East oil embargoes of the late sixties and early seventies. They collapsed back to $20 by the Eighties.
So, what drove oil prices to the heady levels of $140 a barrel just less than 10 years ago?
“China,” says Helm, barely missing a beat. “If you look at both the rapid growth in emissions and the rapid growth of oil, fossil fuel and all commodity prices, it was while China was doubling its economy every seven years. This is a phenomenal rate.
Oil prices spiked above $140 a barrel in 2008 because of supply reductions from OPEC countries, not least due to regional wars. This has never been fully recognised as a huge factor in what is generally remembered as the credit crisis recession which followed.
In 2009 OPEC lowered production once again, leading to a move back above $120 a barrel two years later. By 2014 subsidised renewables were gradually eroding the market for crude oil. However, the really big change was the US development of fracking technology, leading to a surge in the production of crude oil and natural gas.
We should always remember these two adages, particularly with commodities: 1) the cure for high prices is high prices. These lower demand somewhat but the bigger overall influence is an increase in supply. Conversely, the cure for low prices is low prices. Demand increases somewhat when prices are lower but more importantly, supply is eventually reduced.
How have these adages influenced commodity prices in recent years and what can we expect over the lengthy medium term?
This item continues in the Subscriber’s Area, where a PDF of the article is also posted.
This section continues in the Subscriber's Area.
Back to top