By Tina Olivero – The OGM –
Robert Glenn Richey, Jr., Ph.D. is a Harbert Eminent Scholar in Supply Chain Management. Having followed international oil and gas distribution for two decades, he branched out to teach supply chain management, distribution, and import-export on six continents including the oil and gas-rich regions in the Middle East, North Africa, South America, the Gulf of Mexico, and Scandinavia.
Interviewing Richey has been an interesting mission for The OGM as Richey answers some of today’s pressing questions about the price of oil. He predicts an oil price upturn and here’s why!
“Over the last four weeks of November, while oil prices and energy stocks have plunged, at the same time, insider buying in energy companies jumped. That’s a great indicator that oil prices have hit bottom and are on the way up. OPEC cuts and the increased consumption of energy over the holiday season will only push the price of oil higher.”
Richey’s wholistic oil perspective describes what he believes are the top oil price factors. He says, “At the highest level, the primary factor impacting oil price, is, of course, supply and demand and market sentiment. Market sentiment relates to both investor sentiment and consumer sentiment. Supply and Demand are dynamically complex and heavily influenced by sentiment and government intervention. But I would summarize it this way:
OPEC has a heavy hand in determining global prices since they still account for 60% of the petroleum traded internationally. Despite two years of attempts to control costs and lower breakeven points, the major OPEC players need cash. We tend to think of these economies as being similar to our own, but that isn’t the case. When the monarchy stops paying for things, the people get upset and soon the King is out of a job. Salman has a number of internal issues (as well as a significant international issue) to manage, and he still funds his government largely through oil and gas. He even uses Oil and Gas revenue to import sand to the dessert for construction purposes! He needs to be heavily in the black. When financial analysts report the Saudi breakeven price, always expect that price to ignore much of the country’s future (and perhaps hidden) domestic policy.
OPEC likes to float policy and price changes to the media to test the water for where production might land. It seems that once again, consumers and the media were caught off guard, but I don’t believe the sky is falling. Short-term estimates suggest Brent around 72-75$ in early 2019 and WTI around $65-$68(USD).
Derek Leith at EY suggests a 2019 price near $70. US shale producers are pencilling in $55-$60-a-barrel prices for their 2019 budgets. Deloitte thinks the Saudis will back off the 500000 bbl reduction.
Russia is a different story as Putin sees O&G (largely gas) as an opportunity to expand his influence and recent events show how serious he is about that expansion, especially towards the EU.
Qatar has declared to leave the OPEC group. This is a small hit for the collective in terms of revenue, but a big blemish when it comes to keeping the group cohesive. As the power players construct more policy in isolation, expect smaller economies with healthier corporations and lower breakeven points to create turmoil.
Iran is an unknown variable. Pending relationship problems with the West, who knows what will happen here!
US production is stepping back from the “drill baby drill” 2017 run towards $54/bbl. President Trump pushed heavily for increased production but seems to be stepping back from that original move. It may be that his team recognizes the impact oil company success has on our North American economies. Lower gas prices help manufacturing, transportation, and the customer at the pump, but the profitability of O&G companies impacts the nation’s economic status. Since the Trump administration views the economy as its main calling, expect O&G companies to be provided the opportunity to improve top-line revenue. This is also related to Canada’s direct call for reduced production.
Alberta has increasingly become a cornerstone of the new North American oil and gas economy. The region has contributed substantially to our increasing oil and gas independence. OPEC production cuts will only make this region more important, and production from the region stands to reduce some of the price volatility in North America if the market is allowed to adjust. I fully understand the concerns Suncor Energy Inc., Husky Energy Inc., and Imperial Oil have with future government-mandated production cuts in Alberta and Canada. That type of move is more traditional to state-owned companies, resources, and nations that don’t subscribe to free market-based economies.
When you are encouraged by the market to increase capacity, and then you are told by your government that you will not be using that capacity – business strategy breaks down, and oil prices climb.
Rather than cut production, perhaps the Canadian government should push companies like Cenovus and CNR to become more efficient making them more price competitive and extending that savings to the local customer.
If the Hibernia type mega oil field is what industry expects, it could be a huge economic gain for Canada similar to the deep water success of Norway in terms of production and innovation.
However, if the government insists on manipulating the market, don’t expect exploration bids to continue at a lucrative pace. Exploration is one of the most expensive parts of the oil and gas business and in a world where fracking is cheap, interventionism could have a negative impact on the future of the Canadian natural resource exploration and expansion.
That’s a great question, and the answer is a balance. Truthfully, if anyone could pinpoint the answer to this question, he or she would be one of the most important people in the world right now. Ten out of the last eleven US recessions have been correlated with economic downturns preceded by oil price hikes. Major price fluctuations interfere with consumer’s spending and business strategies. We need stability, and that is why our countries have pushed for energy independence, but complexities in global supply make oil prices volatile and difficult to predict.
We should all be looking for new sources of energy and have goals of improving environmental conditions and our general quality of life. However, I honestly believe we aren’t there yet. For alternative sources to make a real impact, there will have to be a Schumpeterian shock.
While our politicians and green parties fight the environmental fight, the consumer keeps on trucking via oil and gas. This is why the projections continue to show growth well into the middle of the 21st century. Unless the customer is forced to change, oil and gas consumption will continue to grow.
Consumer behaviour experts seem to think that providing premier parking spots for electric cars and minor tax advantages for solar will dramatically change behaviour. I’m here to tell you, that is like trying to melt the Columbia Ice-field with a hairdryer.
My research shows that even the most environmentally oriented customer will “morally disengage” from alternative forms when they incur new costs. Liberal-leaning college students like electric cars for environmental reasons, but as a group refuses to spend more on alternative transport. They don’t even want to spend more on recycled commodities (e.g., paper). Only extreme changes in policy and major world events will change this behaviour.
Consider the fact that 17 countries have now proposed some form of ban on non-electric vehicle sales with start dates from 2020 to 2050, yet the worldwide consumption projections continue to grow.
For environmental adjustment to take place, it must be global. For instance, in Alabama, we ship dirty coal to Colombia in exchange for clean burning coal. It is a 4-hour flight to Colombia from here, so that’s not doing a lot to help the environment of the Americas, but it does comply with our national environmental policy. It isn’t a solution that works. Again, we aren’t there yet. Nevertheless, emission reduction is a major environmental issue and political platform, so expect the electric and alternative options to become more of an issue past 2050.
If you watch the nightly news, you might expect that we will all be driving electric cars soon. That isn’t what the US energy information administration is forecasting. They report that the 2747 billion light vehicle miles recorded in 2016 will reach 3302 billion miles by 2050. The growth trend is steady. Only domestic shipping shows a 1% mileage decrease heading towards 2050, which I find highly unlikely as we continue to UBERize urban freight delivery. We are probably trading modes of transportation and consuming more oil and gas in the process.
The long-term vision is efficiency, innovation, and exploration of alternative sources. The reality is that fossil fuels remain highly sought after and will continue to be one of our most important resources.
This interview with Robert Richey is brought to you by The OGM.
Robert Glenn RICHEY, Jr., Ph.D.
Harbert Eminent Scholar in Supply Chain Management
Harbert College of Business @ Auburn University
446 Lowder Hall: 405 West Magnolia Ave., Auburn, AL 36849
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