It’s clear by now that the oil industry is in store for big changes in 2018 and beyond. But precisely what form those changes will take is very much an unanswered question.
Movers and shakers in the oil industry appear divided. Some experts believe OPEC (Organization of the Petroleum Exporting Countries) and the rest of the oil-producing world will finally manage to reduce the oversupply that has resulted in lower prices for barrels of crude over the last many months. Other experts believe prices will remain low and supplies will remain high.
At the center of this uncertainty is a range of questions, problems and challenges for actors in the industry to overcome.
Why the Experts Disagree
Oil works a bit like a pendulum. When one entity in the industry floods the market with newly drilled-for shale oil, as the U.S. has been doing recently, other entities rush to correct the supply-demand balance. That’s exactly what’s happening as we speak and why oil industry experts appear so conflicted about the future of the industry.
OPEC and Russia worked together throughout 2017 to reduce their own supplies in answer to the recent boom in American drilling for shale oil. This back-and-forth between hemispheres is a big part of why experts remain divided. This unlikely alliance resulted in, by the end of 2017, a reduction of the global oil surplus by some 111 million barrels.
However, whether this strategy continues paying dividends into 2018 is the point at which some of these industry prognosticators diverge in their hypotheses.
The ‘Why’ and ‘What’ Behind These Diverging Estimates
This fundamental disagreement has arisen first and foremost because of mismatched forecasts after 2018 begins. OPEC and the IEA — the International Energy Agency — expect the OPEC-Russia gambit to result in dwindling oil reserves and rising prices through roughly the first half of 2018. Beyond that, estimates become shakier.
OPEC forecasts that its international rivals will expand their oil supplies by about 1 million barrels while the IEA expects non-OPEC oil to grow by 1.6 million barrels instead. Another wrinkle? The IEA expects crude production in the U.S. to outpace OPEC’s estimates of American shale oil production by about 20 percent. The organizations have made a science out of tweaking supply and demand to manipulate the market and out-earn each other. Like any other profitable industrial concern, the oil industry is full of rival organizations that meet behind closed doors to extrapolate existing trends into the future and hopefully outperform their rivals.
Some of those meetings see American shale oil production standing on very uncertain ground. The political driving forces are obvious: subsidies for big oil are unpopular and only growing more so. The public outcry against hydraulic fracturing is increasingly vocal and difficult to ignore, with lawmakers and several entire states moving to eliminate the practice within their borders. Finally, of course, the push for more sustainable energies and technologies — and even cleaner extraction techniques for oil as we know it — means it’s an awkward time for oil companies and their investors and stakeholders.
How Your Operation Can Make the Most of 2018
Given how volatile the oil market is expected to remain, a big question is how oil operations can make the most of 2018 even with some of these unanswered questions, uncertain politics and machinations of foreign rivals.
An obvious first step is to apply “lean” philosophies to everything you do. A great case study comes in the form of Hess Corp, which invested some $6 billion to make its operations more efficient and less wasteful. The result could be a 40 percent reduction in construction time required for oil-related apparatus. Naturally, your operation might not have a war chest full of billions of dollars. So what can you do?
Exceeding expectations in 2018 might not require you to rewrite the whole rulebook — in some cases, it might be a question of reevaluating some of the technologies and techniques you use. In recent years, drillers and oil companies, in response to unpredictable multi-continental economics and politics, have sought to increase output from their existing operations rather than spooling up brand-new ones. A great example is the proliferation of directional, rather than vertical, drilling. Embracing this technique can lead to a decrease in dry wells, potentially greatly improved success rates and less wasted effort and expense throughout your operation.
The World and Big Oil Through 2050
The United States alone could, if it wished to, account for all of the 2018 growth OPEC expects for the entire industry. This fact makes the IEA’s predictions, which we’ve been discussing, more compelling than OPEC’s. Moreover, the U.S. appears poised to ramp up shale oil production this year, despite how politically fraught the industry has become. As expected, the Trump Administration is looking to vastly expand American drilling efforts in the Atlantic and Arctic regions. Not to be left out, Russia is also seeking unprecedented expansions in Atlantic drilling. Whereas the race in previous years was to drive down supplies and buoy prices in the market, national players are now simply trying to out-drill and out-frack one another to preserve their market share.
And it appears nobody in the world wants to lose market share to the U.S. What happens from 2018 to 2050 should prove a diverting game of one-upmanship as, all the while, alternative technologies increasingly render these questions moot.
Here’s a final wrinkle: in 2016, the cumulative debt of the oil industry stood at more than $2 trillion. Industry experts expect less than half that sum to be paid back because some of the entities with money tied up in the equation might not exist long enough to balance the books. Unless major players in oil sense the winds of change and begin pivoting to more environmentally and politically friendly technologies, including renewable energies, 2050 might arrive with barrels of oil priced at $117 or more, since all of the least expensive sources will have run dry by then.
By then, experts say, the U.S. is expected to have become a net exporter of energy rather than primarily an importer. As always, along with uncertainty comes significant opportunity.