Pretty soon, we may need more oil than we can produce
Opinion by Dan K. Eberhart for CNN Business Perspectives
Updated 8:15 AM ET, Mon December 21, 2020
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Pump jacks draw crude oil from the Long Beach Oil Field near homes in Signal Hill, California, on March 9, 2020. - Global stocks and oil prices rebounded on March 10, 2020 on hopes of US economic stimulus efforts as the coronavirus rages, one day after suffering their biggest losses in more than a decade. Trading is exceptionally volatile as investors attempt to get a grip on a rapidly changing news flow, with positive reports of progress in China on the virus clashing with a Saudi decision to increase oil output in an already over-supplied market. (Photo by David McNew/AFP/Getty Images)
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The sun sets behind an idle pump jack near Karnes City, Texas, Wednesday, April 8, 2020. Demand for oil continues to fall due to the new coronavirus outbreak. (AP Photo/Eric Gay)
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378796 09: A pipeline carries oil September 20, 2000 at the Federal Strategic Petroleum Reserve facility known as Big Hill near Beaumont, Texas. It is one of four crude oil storage sites run by the U.S. government that could be tapped to ease the oil crisis. The Big Hill facility has 14 underground solution-mined storage caverns that have a combined storage capacity of 160 million barrels. The site has demonstrated the capability to deliver crude at 930,000 barrels per day. The Big Hill site is connected via a 25-mile, 36-inch pipeline to the Sun Marine Terminal and the Unocal Marine Terminal at Nederland, Texas. The pipeline also interconnects with the Texaco 20-inch pipeline system in Port Arthur, Texas. The reserve, created in 1975 after the Arab oil embargo, is intended to provide a stopgap in case of disruptions in oil imports. It has been used only once, during the Gulf War in 1991. (Photo by Joe Raedle/Newsmakers)
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An oil tanker is on fire in the sea of Oman, Thursday, June 13, 2019. Two oil tankers near the strategic Strait of Hormuz were reportedly attacked on Thursday, an assault that left one ablaze and adrift as sailors were evacuated from both vessels and the U.S. Navy rushed to assist amid heightened tensions between Washington and Tehran. (AP Photo/ISNA)
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HUAINAN, CHINA - JUNE 15: A Chinese farmer works his field next to a state owned coal fired power plant near the site of a large floating solar farm project under construction by the Sungrow Power Supply Company on a lake caused by a collapsed and flooded coal mine on June 15, 2017 in Huainan, Anhui province, China. The floating solar field, billed as the largest in the world, is built on a part of the collapsed Panji No.1 coal mine that flooded over a decade ago due to over-mining, a common occurence in deep-well mining in China's coal heartland. When finished, the solar farm will be made up of more than 166,000 solar panels which convert sunlight to energy, and the site could potentially produce enough energy to power a city in Anhui province, regarded as one of the country's coal centers. Local officials say they are planning more projects like it, marking a significant shift in an area where long-term intensive coal mining has led to large areas of subsidence and environmental degradation. However, the energy transition has its challenges, primarily competitive pressure from the deeply-established coal industry that has at times led to delays in connecting solar projects to the state grid. China's government says it will spend over US $360 billion on clean energy projects by 2020 to help shift the country away from a dependence on fossil fuels, and earlier this year, Beijing canceled plans to build more than 100 coal-fired plants in a bid to ease overcapacity and limit carbon emissions. Already, China is the leading producer of solar energy, but it also remains the planet's top emitter of greenhouse gases and accounts for about half of the world's total coal consumption. (Photo by Kevin Frayer/Getty Images)
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Pump jacks draw crude oil from the Long Beach Oil Field near homes in Signal Hill, California, on March 9, 2020. - Global stocks and oil prices rebounded on March 10, 2020 on hopes of US economic stimulus efforts as the coronavirus rages, one day after suffering their biggest losses in more than a decade. Trading is exceptionally volatile as investors attempt to get a grip on a rapidly changing news flow, with positive reports of progress in China on the virus clashing with a Saudi decision to increase oil output in an already over-supplied market. (Photo by David McNew/AFP/Getty Images)
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The sun sets behind an idle pump jack near Karnes City, Texas, Wednesday, April 8, 2020. Demand for oil continues to fall due to the new coronavirus outbreak. (AP Photo/Eric Gay)
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378796 09: A pipeline carries oil September 20, 2000 at the Federal Strategic Petroleum Reserve facility known as Big Hill near Beaumont, Texas. It is one of four crude oil storage sites run by the U.S. government that could be tapped to ease the oil crisis. The Big Hill facility has 14 underground solution-mined storage caverns that have a combined storage capacity of 160 million barrels. The site has demonstrated the capability to deliver crude at 930,000 barrels per day. The Big Hill site is connected via a 25-mile, 36-inch pipeline to the Sun Marine Terminal and the Unocal Marine Terminal at Nederland, Texas. The pipeline also interconnects with the Texaco 20-inch pipeline system in Port Arthur, Texas. The reserve, created in 1975 after the Arab oil embargo, is intended to provide a stopgap in case of disruptions in oil imports. It has been used only once, during the Gulf War in 1991. (Photo by Joe Raedle/Newsmakers)
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An oil tanker is on fire in the sea of Oman, Thursday, June 13, 2019. Two oil tankers near the strategic Strait of Hormuz were reportedly attacked on Thursday, an assault that left one ablaze and adrift as sailors were evacuated from both vessels and the U.S. Navy rushed to assist amid heightened tensions between Washington and Tehran. (AP Photo/ISNA)
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Flames are seen at the production facility of Saudi Aramco's Shaybah oilfield in the Empty Quarter, Saudi Arabian on May 22, 2018.
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HUAINAN, CHINA - JUNE 15: A Chinese farmer works his field next to a state owned coal fired power plant near the site of a large floating solar farm project under construction by the Sungrow Power Supply Company on a lake caused by a collapsed and flooded coal mine on June 15, 2017 in Huainan, Anhui province, China. The floating solar field, billed as the largest in the world, is built on a part of the collapsed Panji No.1 coal mine that flooded over a decade ago due to over-mining, a common occurence in deep-well mining in China's coal heartland. When finished, the solar farm will be made up of more than 166,000 solar panels which convert sunlight to energy, and the site could potentially produce enough energy to power a city in Anhui province, regarded as one of the country's coal centers. Local officials say they are planning more projects like it, marking a significant shift in an area where long-term intensive coal mining has led to large areas of subsidence and environmental degradation. However, the energy transition has its challenges, primarily competitive pressure from the deeply-established coal industry that has at times led to delays in connecting solar projects to the state grid. China's government says it will spend over US $360 billion on clean energy projects by 2020 to help shift the country away from a dependence on fossil fuels, and earlier this year, Beijing canceled plans to build more than 100 coal-fired plants in a bid to ease overcapacity and limit carbon emissions. Already, China is the leading producer of solar energy, but it also remains the planet's top emitter of greenhouse gases and accounts for about half of the world's total coal consumption. (Photo by Kevin Frayer/Getty Images)
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DETROIT, MI - SEPTEMBER 18: Billionaire investor Warren Buffett speaks at a "Detroit Homecoming" event September 18, 2014 in Detroit, Michigan. The purpose of the invitation-only event of Detroit expatriats is to give the group a chance to reconnect, reinvest and reinvent with their hometown. The topic of Buffet's conversation was, "Why I'm Bullish on Detroit." (Photo by Bill Pugliano/Getty Images)
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Pump jacks draw crude oil from the Long Beach Oil Field near homes in Signal Hill, California, on March 9, 2020. - Global stocks and oil prices rebounded on March 10, 2020 on hopes of US economic stimulus efforts as the coronavirus rages, one day after suffering their biggest losses in more than a decade. Trading is exceptionally volatile as investors attempt to get a grip on a rapidly changing news flow, with positive reports of progress in China on the virus clashing with a Saudi decision to increase oil output in an already over-supplied market. (Photo by David McNew/AFP/Getty Images)
US oil prices fall below zero for the first time ever
Dan K. Eberhart is CEO of Canary, an independent oilfield services company in the United States. He has served as a consultant to the energy industry in North America, Asia and Africa. The opinion expressed in this commentary are his own.
Perspectives dan k eberhart
The oil industry has always been a boom-and-bust business, and 2020 will go down as the biggest bust in the industry's history thanks to the double whammy of the coronavirus pandemic and the spring price war between Saudi Arabia and Russia.
Months of supply cuts and underinvestment are about to smack headlong into resurgent demand as the arrival of a vaccine buoys hopes for a rapid return to normalcy. That's a perfect prescription for turning what's currently an oil glut into a market of scarcity capable of pushing prices high enough -- above $65 a barrel -- for exploration and production companies to start drilling again.
After 10 months of layoffs and forced consolidations sparked by pandemic-related shutdowns, higher prices would be welcome news for producers and the oilfield services companies and refiners that depend on them -- not to mention the largely rural communities across Texas, Louisiana, Oklahoma and Pennsylvania that produce much of America's traditional fossil fuels.
But a full comeback won't happen overnight, despite the unbridled enthusiasm of traders. US benchmark West Texas Intermediate (WTI) closed in on $50 a barrel lat week for the first time since February as vials of Pfizer's new vaccine began arriving at hospitals.
For now, oil consumption still remains depressed as governments impose new travel restrictions to slow the spread of the virus during the holidays -- a season that in any other year would be associated with greater demand for petroleum products. Gas prices are under $2 a gallon across much of the country.
There is also a sea of oil in storage waiting for market conditions to improve. Global oil inventories are at near an all-time high at almost 3 billion barrels, and the expanded OPEC alliance led by Saudi Arabia and Russia has huge production capacity.
Forcing those bears back into hibernation will take time -- as will inoculating the entire country against coronavirus. But the potential for oil consumption to snap back to traditional levels before supply is ready to meet it is a looming threat or opportunity, depending on your perspective.
The oil industry has drastically cut investment in exploration and drilling since 2015 in response to tightening capital markets and investor demands for higher returns.
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Globally, oil and gas investment totaled about $880 billion in 2014. This year investment is expected to be $383 billion, the lowest level in 15 years and a whopping 20% below 2019 investment, according to the energy consultancy Rystad Energy.
Exploration and production executives have been reluctant to make major investments after being twice bitten by price downturns in the past five years. That boardroom skittishness won't disappear immediately.
But the market clearly expects the industry to bounce back in the near term. Exploration and production companies have seen a flood of investment in the past six weeks that has pushed up stock values by 50%.
The International Energy Agency (IEA) expects demand for oil to return to pre-pandemic levels of 100 million barrels a day within 12 to 18 months. However, analysts at the IEA warn that if current low investment levels persist through 2025, some 9 million barrels a day of supply capacity will not materialize. That's roughly the amount of excess oil on the market now due to pandemic-related shutdowns.
The chief operating officer of ConocoPhillips, Matt Fox, recently told shareholders that as much as 4 million barrels a day of supply could be lost in coming years for the same reason. The shale sector -- which saw output fall by more than a million barrels a day to less than 7 million barrels this year -- will be hard-pressed to fill the gap on its own if tight capital markets don't reopen and allow oil companies to invest.
All of this adds up to a supply-demand picture that's bullish for US producers in 2021 and 2022. These factors will merely determine the magnitude of the supply shortfall. But avoiding one altogether looks impossible.
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