Much of the oil and gas industry has survived an especially tough few years with weak demand and low prices. It has been difficult to make strategic decisions and plan for the future. The character of Chuck Noland, played by Tom Hanks, says near the end of the film Cast Away, “…because tomorrow the sun will rise. Who knows what the tide could bring?” He makes this observation after having survived on a desert island for four years before being rescued and returned to civilization. If you’re a top executive in an oil and gas company, more than likely you’re feeling the same way right about now — optimistic but extremely cautious.
The oil price collapse, which began in June 2014, triggered a wave of cost reduction among upstream businesses. Global oil and gas companies slashed capital expenditures by about 40 percent between 2014 and 2016. According to Barclays’s latest E&P Spending Survey, oil and gas industry capital expenditures are expected to increase by as much as 7 percent in 2017. In addition, global rig counts, particularly in the U.S., have been on the rise since the middle of 2016, according to Baker Hughes.
The Oil Industry And Its Effect On Global Politics
So what makes oil so highly valuable that individuals, companies and sovereign states would actually be willing to go to war, if necessary, in order to defend or fight to win their “beloved?”
There is no surprise just how much international, geo-political concern and conflict arise regarding oil and the companies that supply it around the globe.
On the other side of the coin, higher oil prices have also served to bring greater political stability and prosperity to several regions around the planet. Some of these locations, including Mexico, Columbia, Venezuela, China, India, several of the Persian Gulf States, Russia, as well as many former Soviet Central Asian Republics and portions of the continent of Africa, particularly Nigeria are just getting their first tastes of “the good life” and are quickly developing a strong liking to the flavor.
For some countries, higher oil prices mean finally having the money needed to invest in outdated infrastructure, technology, etc. The old axiom has never been more true “As flows the oil, so flows prosperity.” Everything from a countries economy and currency exchange rate to their population’s over-all sense of security and political stability seem to hinge precariously on what has come to be known as “Black Liquid Gold!”one thing is absolutely for certain. For the next 50 to 100 years, oil will continue to play a major role in determining the geopolitical make-up of this planet.
Do Oil Prices Affect The Auto Industry?
Within the auto industry, vehicles and petroleum are considered complimentary goods whereas gas-guzzling trucks and SUVs are similar enough to their smaller more fuel-efficient counterparts to be considered reasonable substitutes. With the significant decline in the price of oil over the past year, this distinction is essential in understanding how the auto industry has and will be affected.
American auto industry is exhibiting expected effects from the recent plunge in the price of oil. Lower fuel prices make driving cheaper, consequently making automobile ownership more appealing. The reduced cost of driving also means the difference between the gas-guzzlers and the smaller fuel-economy substitutes less significant, creating a shift in consumer preferences towards bigger and more powerful vehicles. While American automakers are enjoying the significantly higher profits from this trend, they would be wise to invest these increased earnings in strategies that improve the fuel-efficiency of their vehicles in order to comply with greener standards.
Electric vehicles will deflate oil demand
From an oil industry perspective, the positive news in our Alternative Energy Outlook is that EVs will have no meaningful impact on crude oil demand in the short term, irrespective of the assumptions used.
For the evaluation of the medium term impact of EVs it is important to remember that the recent crash of the oil price was caused by a supply – demand imbalance estimated to be around 2 mmbd. The low case of the AEO would already remove a similar quantity from crude oil demand, meaning that EVs should be expected to have a substantial impact on crude oil demand, and hence the crude oil price, in the medium term.
In the longer term the impact of the trends currently underway in the auto industry could well be devastating for the crude oil industry. The sooner the industry realizes this, the bigger the chances it will find new opportunities for growth in the future that the auto industry intends to create.
We are acutely aware that oil and gas executives have their hands full during this upheaval, and that there may be more pain to come. But the industry has proven time and again its ability to innovate and to reinvent itself. Despite a tough two years, the sector has successfully brought costs down in order to operate in an environment of radically lower oil prices. With the right actions, a more flexible and robust sector can emerge, one that is prepared to get the most value out of existing and yet-to-be-discovered fossil fuel reserves while making an orderly transition to a lower-carbon world. In other words, the industry’s future lies on the optimistic side of Cast Away’s mixed message.
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