Does oil have a future?
Twenty years ago I was where most of you are now, just completing my degree, which in my case was in economics and politics. A few months later I embarked on my first job. I am now at roughly the midpoint of my career. It’s a time for reflection, when you start to look back at what you’ve accomplished, the strange turns your career has taken along the way, and what you still want to accomplish in the remaining 20 or 30 years of working life.
I started working on 17 August 1996. Just over a year later, the East Asian financial crisis erupted, starting in Thailand and rippling across the region. Emerging market economies became submerging ones. Oil supply began to run ahead of demand, stocks rose, and prices fell. In December 1998, oil prices dipped briefly below $10 per barrel (worth around $14-15 today). The financial press was full of stories about the world drowning in oil and prices never recovering.
In the next couple of years, I spent a lot of time analysing and writing about whether OPEC could or would do anything to stabilise the market, whether Russia and other producers would cooperate, what would happen to all the massive stockpile of oil that had built up, and what impact low oil prices would have on major producers such as Saudi Arabia. We tried to analyse whether low prices would force Saudi Arabia to reform its economy and politics to become less dependent on oil.
Fast forward a few years and by 2002, oil prices had begun their relentless rise to a peak of more than $140 per barrel by July 2008. After a brief hiatus during the global financial crisis prices remained above $100 per barrel for more than three years between 2011 and the first half of 2014.
Since then, oil prices have fallen by more than 70 percent, thanks to the shale revolution in North America and increases in energy efficiency in North America and Europe.
In the late 1990s, we spent a lot of time talking about a world in which oil would never be scarce and expensive again. In the 2000s, there was renewed talk about peaking oil supplies and prices continuing to rise. Now we are back to talking about a glut and whether oil prices will ever recover.
In my working life, I have lived through one complete oil industry cycle, from bust to boom and back again. If I am lucky enough to be working in this sector for another 20-25 years, I will probably witness at least one more complete cycle of boom and bust.
The point is that the oil industry is inherently cyclical. Volatility is not just an incidental part of the oil industry. It is the industry’s defining characteristic.
As chemical engineers, I am sure most of you will have studied control theory. By analogy, the oil industry is like a giant system or a biological community.
In the long run, negative feedback mechanisms promote stability and convergence equilibrium. But the long run can be a very long time coming. In the short term, there are strong positive feedback elements, which can amplify rather than dampen price movements. The oil industry is always a wild ride because we are stuck in a succession of short terms.
Because this is a cyclical industry, you should be wary of anyone who tells you they know with confidence what prices will be in 2 or 3 years time, let alone in 5 or 10 years. Price cycles are deep, long and unpredictable.
Rex Tillerson, the chief executive of Exxon Mobil, the world’s largest investor-owned oil company, is nearing the end of his career (and he earns a lot more than I do). Here’s what he had to say about the oil price cycle in a Q&A with investors on Wednesday:
“We’ve never been any good at predicting these [price] cycles, neither when they occur nor their duration. We don’t spend a lot of time even trying.
“How the future is going to look, we take no particular view on it, other than to recognize that whatever it is today it will be different sometime in the future, and after that it will be different again.
“In my nearly 41 years [with Exxon], that’s been my experience. I didn’t learn anything about my ability to foresee that. I learned a lot about how you deal with it.”
The solution to the problem of cycling prices is not to create better forecasts but to build lots of flexibility and optionality into your business (and your career) to deal with the unexpected and the boom-bust cycle. We need to be humble as forecasters and recognise the severe limits on our ability to foretell the future.
The big question tonight is “Does oil have a future?” None of us here knows. It depends on a host of factors and the time horizon we are talking about.
Combustion of fossil fuels is gradually changing our climate. There are sufficient known resources of oil, gas, coal and other hydrocarbons available to us that we could cook the planet many times over before they run out.
Global warming has become an important priority for policymakers and may imply strict limits on the consumption of oil and other fossil fuels in future, though the political will remains highly uncertain.
But we do know that crude petroleum and especially the fuels refined from it are superb energy carriers with an attractive combination of being compact, easy to handle and with a high energy density, which make them very attractive in some applications, notably transportation.
In the long term, oil could be replaced by electricity as a transportation fuel. Oil has already been largely replaced as a fuel for heating and power generation in the western world.
Electric vehicles are already a reality and have been growing rapidly, at least until oil prices crashed, but their market penetration remains very small. Perhaps EVs will eventually replace petrol and diesel-powered cars and trucks, but any transition will take time.
Grand energy transitions take decades. There have already been several grand fuel transitions, either completed or underway, from wood to coal and then oil, gas, nuclear and now renewables.
But experience suggests energy transitions take 50 years or more. Oil is likely to remain a major transportation fuel, as well as a petrochemical feedstock, for the rest of my working lifetime, and probably for at least the first half of yours.