Oil and gas investors are in an ongoing, long-time low point for oil prices. First quarter earnings are dismal. Europe’s largest oil company, Royal Dutch Shell, reported an 89 percent decrease when compared to the same period in 2015. ExxonMobil Corp. followed suit with $1.8 billion in earnings for the first quarter, a steep decline compared to the $4.9 billion reported just a year earlier. BP, Chevron, and ConocoPhillips have also experienced major downswings.
What’s Happening With Oil Prices?
The upset in the oil and gas industry is a product of an unbalanced supply and demand model. Simply put, drilling and refining are outpacing sales. Oil prices have plummeted as the demand for natural oil and gas resources decline. This ripple effect has cost everyone from field workers to investors to lose their jobs and profits.
The logical solution is to cut back on oil production so the commodity can gain a higher resale value. Saudi Arabia, one of the world’s top oil producers and Organization of the Petroleum Exporting Countries (OPEC) members, considered slowing oil production to help ease the global oil price decline. But now Saudi Arabia’s newly appointed oil minister Khalid Al-Falih is rejecting the idea of cutting back on oil output. OPEC leaders will meet on June 2. Oil and gas investors are anxiously awaiting their recommendations and plans for the future.
So, when will the prices come back up? Industry experts continually make predictions based on past ebbs and flows in the market, but nobody knows for sure. What we do know, is that the oil and gas industry won’t see an overnight miracle. Escalating oil prices happen slowly, over time.
Chairman and CEO Paal Kibsgaard for Schlumberger, the world’s largest oilfield services company, says to expect continued deterioration in the industry. Crude oil needs to reach approximately $70 per barrel in 2018 to make a positive impact. That’s a tough number to reach when prices are slipping daily into the low $40s.
A Look at the 1990’s Oil Crisis
Crude oil prices have historically waxed and waned. From the 1950s to the 1970s, prices hovered between $20 and $30 per barrel. In the 1980s, prices skyrocketed over $100 a barrel. The last major low point was in November 1998 when $16.44 was the going price. For a short stretch, crude oil bottomed out to below $10 per barrel.
In the late 1990s, analysts were also confused by the sudden price decline. Although the Asian economy was initially expanding, OPEC production had fallen from 10 million barrels a day to a modest 6.5 million. Then the Asian financial crisis hit, and since Japan accounted for 80 percent of the global oil demand, unsold inventory started to build up, and prices plunged due to the overproduction and lack of Asian sales. Much like today, businesses have expanded too rapidly and exceeded the demand for crude oil.
The discovery (and drilling) of new oil supplies in the United States, including the Royal Dutch Shell project in the deepwater Gulf of Mexico, was too much too soon. The operation had to pull back when oil prices dipped below $13 a barrel, the minimum needed to offset the cost of the project.
In the 1990s, we also saw an increase in company buyouts and consolidations. BP bought Amoco; Exxon bought Mobil, and Chevron bought Texaco, according to Forbes. Desperate times also led to technological advances, including horizontal drilling and fracking, to minimize production costs and keep profits elevated.
Are Alternative Energy Options Hurting Oil Sales?
Some may question whether or not awareness and adoption of alternative renewable energy sources, such as solar and wind power, are somewhat responsible for the sinking oil and gas industry. The Business Council for Sustainable Energy and Bloomberg New Energy Finance reports that the opposite is true.
Since gas prices at the pumps are declining, it’s cheaper for consumers to purchase gas-guzzling automobiles over alternative powered vehicles. Algae and corn-based fuels are simply more expensive to put into the gas tank than fossil fuels.
For now, however, the clean energy sector is continuing to enjoy growth and progress. Large-scale wind, geothermal, hydropower and solar production outputs are estimated to increase in 2016.
Should I Sell My Producing Oil & Gas Property?
Oil and gas investors and mineral rights owners need to decide how long they can ride out the current declining oil prices. For companies and individuals with multiple investments across several industries, the downswing is simply part of business. But for those who rely solely on income from minerals, it might be time for a change.
If you’re considering selling your oil and gas properties, work with an investment professional to crunch the numbers and see where your profits and loss stand. If you decide it’s best to walk away from the industry, it’s the right time to sell.
If you’d like to learn more about selling or buying oil and gas properties, BWAB can help. Contact us today to learn more!