Business

The Oil Roller Coaster

Can we understand what drives oil prices or do we just accept that our industry is cyclical? Uncertainty abounds, but it can be a period of opportunity as well.

roller coaster

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TWA friends: Fasten your seat belts. The Oil Roller Coaster is on!

For all of us with professions in the energy industry, and for all energy aficionados around the globe, nothing can be more fascinating than trying to understand what drives oil prices. There is no denying that oil is a strategic international commodity and that it plays a pivotal role in international affairs and economic development. And more importantly for us, energy prices are the lifeblood of the industry in which we have decided to build our professional careers. As we look ahead, as we plan ahead, as Young Professionals (YPs) in our industry, it is natural to muse over the potential twists and turns that we might encounter in the fascinating (roller coaster-like) way ahead of us. And wouldn’t that be what our TWA magazine is all about?

Short few months ago, we were on one of the most recent (and steepest) uphill runs of the oil roller coaster. Oil prices went higher and higher and seemed unstoppable. While trying to understand the situation, some of us might have tried to sneak a peek at the most-widely used economic crystal ball: the supply and demand balance concept. Throughout most of the 2000s, we were continuously told that worldwide energy demand was on the rise—largely driven by the fantastic growth of economies such as China and India. At the time, supply seemed not to be keeping up with demand. We witnessed how the cost of developing new fields increased significantly along with a shortage of equipment, drilling rigs, and people, with a commensurate effect on supply. Geopolitical reasons were also at play, with threats and real cuts from different oil players that took supply away from the markets from time to time. And, of course, there was also the steady drop in the value of the US dollar, the currency used by the financial markets to price a barrel of oil. As the dollar went down, oil went along for the ride but in the opposite direction. And to top it off, there was the widely broadcast interaction between financial and oil markets, the controversial role of market speculation and manipulation, and the potential all of this had on oil pricing.

So, during the first half of 2008, the uphill run appeared not to have a clearly defined ceiling. There seemed to exist a real check on the supply/demand equation and oil at more than USD 100/bbl appeared to be here to stay. Well, we know better now. Oil prices reached a peak at more than USD 140/bbl in July 2008, and since then, we have started to experience the frenetic, adrenaline-pumping downhill run of the roller coaster.

But… what happened?

Here is my hypothesis: in terms of pricing, things are just the way they have always been. Boom-and-bust cycles are all-too-familiar to our industry, as our experienced colleagues and mentors are quick to point out. Whenever we learn and read about the history of our industry (say, for example, Yergin’s The Prize—The Epic Quest for Oil, Money & Power, just to mention one well-known source of 1850s-to-1990s oil adventures), can we even count with our fingers the number of boom-and-bust cycles our industry has experienced? Ever since oil was struck at a rate of 25 B/D by Colonel Drake in Pennsylvania—setting the world’s first mad rush for oil—and going through the legendary tales of Spindletop and East Texas; the development of Venezuelan, Middle Eastern, and all major producers’ oil capabilities; two global wars; the oil shocks of the 1970s; the price dips and collapses of the 1980s and 90s, and wars and unrest since then, it is clear that our industry not only has a built-in roller coaster, but a built-in resilience and determination.

Today, as we sneak another peek at the supply/demand crystal ball to try to explain the heart-stopping downhill run of oil prices, we may be told where to point our accusatory finger—toward the current global financial crisis. With a deteriorated worldwide economic situation, energy demand is on a downward spiral, and available supply now floods a no-longer-so-hungry energy market. At the same time, the dollar starts to strengthen because of the deterioration of the global economy, further depressing oil prices. The interesting observation here is that lower oil prices eventually could encourage a new wave of demand for cheap energy, while we move into a possibly not-so-distant future in which abundant, cheap supply may no longer be there because the investment in sustaining supply was not made—and that due to the same reason for the growth in demand: low prices. But who knows? While we are at this, we could just become experts at knowing tomorrow why the things we predicted yesterday didn’t happen today—paraphrasing the widely popular forecasting quote.

The message couldn’t be louder: our industry is a cyclical industry, and our profession comes with a roller coaster installed. As YPs, this is a period of opportunity. The way I see it, this presents a most timely and terrific chance to gain a better understanding of how our industry works and how cycles are an integral part of all the challenges, and the fun, ahead for us.

At this time, as always, TWA is here for you. We have a great lineup of articles, and our authors would like to share loads of valuable experience—along with their viewpoints—with you, our readers. In these pages, you will encounter great interviews and articles from a widely diverse list of leading personalities in the industry. You will enjoy reading as they share their insights about current oil prices, the high prices just past, and what the change could mean to our careers: Leo Roodhart, our 2009 SPE President; David O’Reilly, Chairman and Chief Executive Officer, Chevron; David White, President, Schlumberger Water & Carbon Services; Neal Gillenwater, Senior Vice President, Human Resources, Weatherford; Larry Lake, Professor, University of Texas at Austin; and Rubén Caligari, Senior Adviser, Petrobras are among the contributors. Actually, you even could find yourself among them. The Forum team has prepared a thought-provoking analysis of YP responses to our oil price survey, and some of you, no doubt, responded to that survey. So, please don’t stop here. Go ahead, browse, and enjoy your magazine!

As you do, you will see TWA evolving. Change is in the air for our magazine as we continuously implement all the very useful feedback we receive from our friends and readers, and as new players come onboard or take on different responsibilities. In this issue, for example, you will witness how our former Student Link section has become our new Academia.EDU@TWA section. Starting with this issue, I will have the pleasure of working with you as the new Editor-in-Chief of TWA. This is a great honor and responsibility because this magazine is a unique, ground-breaking publication hosted by a unique Society. To the best of my knowledge, no other professional society embraced the concept of a magazine fully dedicated to its young members and that is designed and completely run by them. As we enter of 5th year, my hat goes off to our SPE and to our visionary YP predecessors, who have made the way for us to be what we are today.

We also have a completely new TWA Editorial Board—a family of more than 25 people working from all corners of the world—and you can meet them on our TWA Editorial Board page. More than half of the new board members are first-timers, and they already are bringing tremendous new energy and great ideas to TWA. If you want to be part of it, don’t wait and don’t miss out. Go ahead and please contact us!

Great times are ahead for TWA. Keep tuned and enjoy the ride!