The Fall of Oil and Gas

The price of a barrel of crude oil is something that more and more people are aware of ever since it first reached $100 in 2008. The perception that the price of crude oil directly impacts the cost of gas at the pumps is one of the main drivers on why so many people pay attention to this commodity. Of course, there is an indirect correlation between the barrel and the pump, but other factors such as refining capacity and seasonal demand can see the pump price rise as the barrel falls.

Crude oil is dropping and as of June 14^th, it was in the mid $80 USD range. Signs of a slowing economy, such as weak retail sales, as reported by being attributed to the drop in price (see an article from Business Week­).  Long term, oil prices may remain in further jeopardy as OPEC decides whether to cut production to maintain a price point. The reason of course is a mix of demand due to the overall cost and a cultural switch in some parts of the world.

Natural Gas is becoming a more readily available and cheaper source of fuel. The capturing from shale formations has created a large supply for an already low cost fuel. This has caused many people in Northern climates to switch their household energy needs from oil to natural gas, reducing the overall demand for items such as heating oil. This lower cost fuel has led to Honda offering the Natural Gas Civic, the first mass marketed LNG automobile.

“Green Energy Technologies” such as geothermal, biomass, wind and solar are becoming more predominate energy sources. While one may argue that this is a direct cause of a “cultural shift”, the electric hybrid and electric automobile sales are tied to oil prices.

I am not discussing the doom and gloom of the oil sector as a fuel. Our technology at this time does not allow us to completely stop using this oil. If oil is to remain a predominate fuel source for the next 20 years, then the price will need to remain competitive.  The days of forcing $100+ barrels will hurt the industry overall. If oil nations and traders continue to force high prices then what looks likely is a further development and usage of new technologies for alternative fuel sources. These developments can be directly related to the cost of the barrel and the cost at the pump. Oil companies such as Shell are very aware of this issue, and are seeking energy diversification as illustrated in this Wells Fargo report.

So the OPEC Secretary General is targeting $110 a barrel and believes this is not a threat to the world economy. This is probably true for the world economy, but it makes us question if it will become a long term threat to the oil industry.

Cheers,

Lorne