CT Blue

If Joe Costello, writing here at Naked Capitalism is correct, and I suspect that he is, the oil industry may be in for a period of decline:

Over the last year, some deep truths about oil and the oil industry have begun to bubble to the surface. Not necessarily that they were ever hard to see, but they were easy to obscure and maybe more importantly, without too much effort, ignore. No longer. Spread across the oil companies’ quarterly reports and the pronouncements of government agencies from the U.S. Energy Information Agency to the International Energy Agency are the hard facts that the era of cheap oil is over. It’s impacting the U.S. and global economies and forcing a fundamental rethinking and restructuring of our economic activities and thinking.

…

With the global recession, supply constraints gained a short reprieve as demand slackened, going down over 12% in the U.S. and over 20% in parts of Europe. Yet, after a brief dip, oil prices remained stubbornly high. For the past two years, even though the global economy remains lackluster, oil remains at $100 barrel. In the past year, the tightening supply and growing cost of any new oil began showing-up in the quarterly reports of the oil companies, who despite having plus a $100 barrel prices, revealed increasingly small profit margins, growing expenditures for all new oil and declining production. In the second quarter of 2013, the oil companies balance sheets became increasingly alarming led by Exxon’s 57% profit decline and eight consecutive quarters of production declines.

This disruption continues with the oil companies 2014 first quarter reports. All five top oil companies announced declining production numbers despite increased expenditures. At an oil conference last month, the Houston Chronicle reported Chevron CEO John Watson stated, “That new reality for our industry is that costs have caught up to revenues for many classes of projects. Essentially, for a company like mine and many others, $100 a barrel is becoming the new $20 in our business.”

This is an extremely important development, especially for an industry which for over a century printed money. The oil industry is now becoming ever more capital intensive, not a printer of a money, but a growing capital black hole. Yet incredibly, as shareholders begin to grumble, the old majors begin to cut their expenditures and divest of future reserves to maintain non-sustainable dividend levels. The Los Angeles Times reports, “Exxon’s capital and exploration expenditures fell 28 percent in the first quarter(2014), which helped deliver higher profits even though oil and gas production fell 5.6 percent.”

Obviously, not a long term strategy, but what is the oil industry’s long term strategy? Well for the last few years, we’ve heard a lot about the great “shale revolution,” even President Obama hailed it in his 2012 State of the Union speech. Yet, as oil analyst Chris Nedler stated, “Shale’s not a revolution it’s a retirement party.”

via Naked Capitalism

I confess I can't do the piece justice, and I really encourage you to read it. It will be interesting to see if the oil companies simply fade away, as the railroads did in the face of competition from gasoline powered vehicles, or whether it will legislate its way into long term relevance. That is, will we the taxpayer be forced by a bought Congress to continue relying on fossil fuels as the price ratchets ever upwards. Or, put another way, will our politicians stay bought and more faithful to their purchasers than their predecessors who were owned by the railroads?

Anyway, this is a mixed blessing for the rest of us. The oil companies will whither away into insignificance, one way or another. The only question is whether we'll survive their extinction.