2020 offers little promise for oil and gas
A new year often brings new hope, but not for the oil and natural gas industry in 2020.
The same supply and demand dynamics that crushed so many companies in 2019 show no signs of evolving, which is terrible news for the Texas economy. Professional analysts vary widely in their predictions for the energy industry, but few see any evidence for higher profits.
“Crude oil prices will be lower on average in 2020 than in 2019 because of forecast rising global oil inventories, particularly in the first half of next year,” the U.S. Energy Department said last month.
Politicians and industry boosters love to brag about how Texas ingenuity led to horizontal drilling and the hydraulic fracturing of shale rock to release valuable energy molecules. Today, Texas produces more oil and gas than ever. But the world does not need them.
Texas pumped an average of 3.3 million barrels a day of crude oil in September, according to the latest data available from the Texas Railroad Commission, which regulates the state’s oil and gas industry. Other non-OPEC sources could add another 1 million barrels a day in the first half of 2020, according to the International Energy Agency.
To keep oil prices around $60 for West Texas Intermediate, OPEC and its Russian allies are holding back 2.1 million barrels a day. If OPEC opened its taps, as they did in 2014, crude prices would likely drop more than $10 a barrel.
Surplus inventory would usually signal it is time for producers to cut back. But months or years can pass between an oil company deciding to drill and the day that oil reaches the market.
Too many companies are also paying bonuses for producing more energy rather than making a profit. CEOs are rewarded for selling a million barrels of $70 oil into a market that will pay only $60, even if it may bankrupt the firm.
Investors and banks are getting fed up. Oil company stocks are among the market’s worst performers, and boards of directors are demanding profits. Banks are reducing lines of credit until companies generate enough free cash flow from operations.
Producing less oil, though, will not necessarily lead to higher
profits. Remember, the world’s lowest-cost producers in the Middle East are holding back 2 percent of the world’s oil supply. They will release those barrels when prices inch up to expand market share.
Industry optimists argue that growing demand will soak up the current surplus. They have been wrong for the past five years and are still wrong.
Crude rallied in December with news of a breakthrough in U.S.-China trade talks. A deal would allow regular trade to resume and consume a lot of petroleum.
Considerable gains in energy efficiency and nonpetroleum alternatives have decoupled economic growth from fossil fuel consumption. Motor vehicles ranging from cars to Super-Panamax cargo ships are getting more miles or nautical miles to the gallon every day.
Consumers are also purchasing more electric vehicles and driving fewer miles. The average American is traveling 2 percent less than they did in 2004, according to the federal Department of Transportation and reporting by the Wall Street Journal.
Any significant rise in fuel prices would encourage Americans to drive less or purchase vehicles with lower operating costs. Gasoline and diesel are no longer the only two choices in transportation fuel.
Next year crude oil supplies are expected to grow by 2 million barrels, but demand will increase by only 1.2 million, the IEA said. In the longer term, most of the world recognizes we need to cut fossil fuel use to fight climate change.
Smart energy executives should not bank on tightening supply or growing demand to bring them profits. Many are already lowering production costs to survive a low-price future.
The oil and gas rig count dropped 20 percent in 2019, according to Houston oil field service company Baker Hughes, and energy firms slashed 5,000 jobs, according to the Texas Workforce Commission. Texas job growth has dropped below the national average
Texans must finally accept that the oil and gas industry was responsible for the so-called Texas economic miracle, and we can no longer depend on it. The impact of lower energy revenues will have ripple effects in every corner of the state.
Lost jobs in the oil patch mean people will buy fewer new pickups. Lower profits mean less spending on construction. Firms will contract for fewer engineering, legal and logistical services. State and local governments will see lower revenues from sales and severance taxes.
The best the energy industry should plan for in 2020 is a mini-oil bust. If there is a recession, even that will have seemed optimistic.