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Understanding the Petroleum Industry |
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Price Overview | Demand |
Supply | Trade and
Imports | Refining | Stocks
IntroductionThis report reviews the oil market from 1973 to 1998, an historically turbulent period. Its scope is broad, covering the major developments in supply, demand, imports and trade, stocks, and refining. For each of the topics, the discussion covers the global picture, a U.S. overview, and a review of the regional pattern in the United States. The report also provides additional narrative on "What's Hot," those developments that are critical to understanding the current market and possible future trends. Some are transient, but many are overarching, crossing between industry segments, and continuing into the future. Examples of these "What's Hot" topics include supply technology, the role of Asia, the rejuvenation of the Gulf of Mexico as an exploration province, the "tug-of-war" between gasoline and distillate, the market fragmentation that has resulted from regulatory mandates, the role of alliances and joint ventures in market structure. The narrative on these core topics is accessible from each of the chapters or by clicking on the "What's Hot" links at the left. The Challenge of Low Prices The low prices in 1998 have presented states, regions and nations with a new set of challenges: how to cope with low oil prices. It is a fact of geology that not all areas are created equal in oil. There are nations that enjoy a vast resource of oil, like the Middle East, and regions here in the United States that have prospered or suffered along with the oil industry for decades. For much of the period since the 1973 Arab Oil Embargo, there has been a concern among a minority of industry analysts and observers that oil was scarce and soaring prices just around the corner. Even during the 1998 price descent, some -- again, a minority -- have predicted that the old model would soon be the right one again: scarce supply unable to meet soaring demand and hence catapulting prices. These concerns, however, ignore the lessons that we learned since 1973 in supply, demand, and managing risk. The market we see now is more responsive than it was in 1973, responding quickly to changes in the balance between supply and demand. Price information from markets around the world is readily available to the oil industry and its observers alike, rapidly transmitting the message of the market's condition. Technology has revolutionized oil exploration and production, making it possible to find and produce supplies at costs that were unthinkably optimistic two decades ago. The constant addition of new supplies has been the decisive factor in the market's condition during all of the 1990's. The technology that has made it possible will not go away. In the current low price environment, supplies will get shut-in. Producing governments have already shut-in some supplies, trying the stanch the price decline that carries with it their lifeblood revenue. These volumes will resume production as soon as the market has re-balanced itself, perhaps some years in the future. Some -- even many -- private producers have kept their wells in production even at the precipice of financial disaster, hoping to wait out the low price storm. Some of these volumes, such as production from the low flow wells unique to the U.S. (stripper wells), will never return to production once shut-in. Furthermore, the current low price environment will take an increasing toll on new projects and spending for exploration and production. Thus, there are significant challenges ahead for all of those companies, regions and governments that rely on oil industry activity to support their economies. And the market finally will support a price higher than the current rock-bottom level (struggling to reach $14 per barrel). Given the lessons we've learned, however, the market can and will re-balance at a lower price than the doom-sayers predict. < back to top > |
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