Thursday, September 17, 2015

Too Late or Too Oily?

The Bureau of Labor Statistics tells us that there are about 200,000 jobs directly in the oil extraction and processing industry (600,000 total people working in the entire oil and gas sector)… rather there were, when oil was $100/barrel. But with oil down to about $40/barrel, layoffs are growing, not just directly in the extraction part of the business but in related entities that deal with petroleum products at every level. In April, CNN reported a loss of 51,000 of those American jobs. Many more are expected as the oil glut seems to have no real end in sight (unless there is a war in the Middle East!).
But what’s been bad for the petroleum industry has made life more comfortable for average Americans. It’s even accelerated the return of less-fuel-efficient trucks and SUVs to cherished positions in the auto sales business and made the cost of commuting that much more tolerable, as prices at the pump have tumbled by as much as a dollar a gallon or more. Life is just a little more affordable.
However, cheap oil and gas have also fueled (wince) a decline in the relative value and emphasis of green energy alternatives at point where our global climate change problems are becoming exceptionally serious, perhaps even past the tipping point of no return. Fires are burning across the West, droughts are killing agriculture, summer heat is killing people all over the Northern Hemisphere (the Southern Hemisphere will pick up in a few months), and tropical depressions are roiling towards major hurricane status with increasing frequency. “Records go back to 1880, but nine of the 10 hottest months on record have happened since 2005… The first seven months of 2015 are the hottest January-to-July span on record.”, August 20th.
The interaction of so many variables tells you how complicated and interdependent our business environment is within this nexus of oil. We are deeply invested in the gasoline business, from extraction, refining, wholesale to retail. There’s even a debate, between industry sources (National Petroleum News) – which puts the number of U.S. gas stations at well over 150,000 – and the Census, which sees the number more like 118,000. Both sources will tell you, however, that the number of such stations is declining. There are hundreds of billions of dollars of infrastructure in those stations, lots of jobs (most at a low level, I might add) attached, and changing our energy sources is going to require a whole pile of new cash to configure what we’ve got if alternative fuel sources are remotely going to replace traditional fossil fuels in automotive transportation.
How does the petroleum industry feel about itself, the market, and the expected economic future of the petroleum industry? Not particularly good, if recent events are any indication. Let’s start with objective criteria: how much are new prospective oil lease opportunities doing in the open market? Not well, it seems: “With oil prices collapsing and companies in retrenchment, a federal auction in the Gulf of Mexico on [August 19th] attracted the lowest interest from producers since 1986.
“It was the clearest sign yet that the fortunes of oil companies are skidding so fast that they now need to cut back on plans for production well into the future… The auction, for drilling leases, attracted a scant $22.7 million in sales from five companies, but energy analysts said that came as no surprise on a day when the American oil benchmark price plummeted by more than 4 percent. For the first time since the recession, it is approaching the symbolic $40-a-barrel level. Last summer, it was above $100 a barrel… Until now, most companies have insisted that they would not sacrifice production in future years when they said oil prices were sure to rebound strongly. But in recent weeks, executives have expressed concern that the oil price collapse could last through 2016 and even 2017, and it is important that they tighten their belts even more.
“‘The financial squeeze is tighter than people thought, so tight that the companies can’t even bargain-hunt for leases for future production,’ said Michael C. Lynch, president of Strategic Energy and Economic Research, a consultancy. ‘It’s the long-term production profile that is suffering now, and they will pay for it later.’” New York Times, August 19th.
Want to make money in the oil business today? Put it in oil storage facilities, where all that surplus output from Saudi to American oil has to be contained! “Domestic storage alone rose 2.6 million barrels in mid-August, the report noted, because of an unexpected surge in imports and a drop in refinery processing after a breakdown in the BP refinery in Whiting, Ind.
“Current crude stockpiles of 456 million barrels in the United States are at levels rarely if ever seen at this time of year since World War II. Once the summer driving season ends and other regional refineries begin their seasonal retooling, the domestic glut of crude is likely to grow even larger and the price of oil and gasoline will fall further, analysts said.” NY Times. In the longer term, particularly if the current failures to expand production continue, we can of course expect oil prices to rise again. Obviously.
So are we smiling or crying? Guess it depends on whether you are a winner or loser in the supply and demand war raging around us. But this ambiguity has also taken too many eyes off the much longer term and the corollary damage to our environment generated by not prioritizing non-fossil fuel energy alternatives. Any transition from massive dependence on any one form of energy to an entirely different set of energy-generation sources is going to be painful, with many winners and many losers along the way. Perhaps this economic chaos will allow that transitional pain to ease into the system, but the changes are both necessary and inevitable.
I’m Peter Dekom, and America really can no longer afford to kick the barrel… er… the can down the road without very serious self-inflicted negative consequences.

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