The global oil and gas industry

Case Report: The Global Oil and Gas Industry.
Global oil prices are influenced mainly by uncertain factors, including the weather,
inventories, global economic growth, speculation, investment, exchange rates, inflation,
geopolitical risks, spare production capacity, OPEC production decisions, and Non-OPEC supply
growth. (American Petroleum Institute, 2013) Although a number of other variables affect the
price of this strategic commodity, predominantly the changes in global demand and supply for
black gold shape the unpredictable future of the global oil and gas industry and ultimately
determine the actual price level. But what is the projected price level of crude oil, and what does
the future look like for the global oil industry?
To predict long-term price trends for crude oil is outside of the scope of this report, but it
attempts to anticipate the near-term price movements: the slowing demand in the developed
economies will be offset by the increasing but cooling demand in the emerging markets, which
indicates that oil prices will not climb higher indefinitely. Weakening global demand and
continuing supply are likely to keep crude prices from drastically rising above unseen levels.
In essence, the future of the oil and gas industry will hinge on its response to the
unprecedented challenges of a new era. “The combination of changes that the industry now faces
requires epic rather than incremental responses, for the industry to evolve and prosper.”
(Mitchell, 2012) Consequently, the oil and gas industry needs a new vision and clear strategy to
adapt to the reactions of related industries to permanently higher oil prices and government
policies designed to mitigate the effects of climate change, the shifts in the geopolitical and
global energy security landscape, the financial investors’ different expectations for the oil sector,
the new relationships between national oil companies and private-sector companies, and the
opportunities created by the technological advances in oil exploration and drilling.
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Climate change policies aimed at reducing greenhouse gas emissions and fossil fuel use
should drive business decisions, and the oil and gas industry cannot survive without adapting to
the new realities created by the international agreements and by the expectations of a new breed
of global consumers. The transportation sector, the largest market for fossil fuels, is undergoing a
massive transformation to minimize the use of oil, while the agricultural industry is emerging as
a new competitor. The auto, the ship, and the aircraft industries in the U.S. are scrambling to
change their business models to reduce their carbon footprint and comply with Environmental
Protection Agency regulations. Efficient vehicles (HEVs and PHEVs) manufactured by the auto
industry are limiting demand growth, while biofuels produced by the agricultural industry are
offering a viable substitute for oil as energy supply. Substituting oil with alternative energy
sources and technology undoubtedly has an enormous impact on the future of the oil and gas
industry, but the West-to-East transition of the global oil market will profoundly reshape it. “The
axis of the oil market is shifting from the trade between the Middle East exporters and US and
European importers to one that links Asian developing markets to the Middle East, which no
longer has sufficient oil to support these markets’ growing needs.” (Mitchell, 2012) This shift
will upset the current balance between the oil producing and consuming nations and will
establish new patterns of international trade. The role of OPEC and Russia as oil suppliers,
where the reserves are state controlled, has already been re-evaluated in the light of strategic
alliances between state- and private sector enterprises. NOCs are collaborating with private firms
to gain access to know-how and technology, and this relationship will prove to be essential to
future upstream reserve growth.
Oligopolistic competition characterizes both the upstream and downstream markets.
Interestingly, despite some common misconceptions about the price stickiness of gasoline, crude
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and gasoline prices usually move in the same direction. For example, there is a strong (0.81)
correlation between the New York Harbor Conventional Gasoline Regular Spot Price (FOB, US$
per gallon) and Crude Oil West Texas Intermediate Price (US Dollars per Barrel). (Indexmundi)
The Reserve Bank of Australia published industry data in the September 2012 Bulletin
about the physical and financial market size of major commodities, and it estimated the annual
(2011) production of oil at $3,250 billion and the annual turnover of exchange traded contracts at
$40,194 billion USD. (Holloway, 2012)
The recent oil reserve discoveries in Australia (Arckaringa Basin in South Australia),
Venezuela, and the United States should have significantly lowered the price level, but
apparently they did not. An article in The Globe and Mail highlights the upside of this domestic
trend: “Today’s North American oil boom, if sustainable, takes us back to the discovery
atmosphere of the 1950s and 60s.” (Tertzakian, 2013) But in spite of the recent discoveries of
new reserves and the technological advances in recovery methods, oil prices have not come
down substantially, because the supply side expansion has simply not kept pace with the
increasing demand for fossil fuels. With the revolutionary horizontal drilling and hydraulic
fracturing processes, new shale plays in the Bakken and Eagle formations, in the Western States
(Monterey Shale), and the Texas Midland Basin (Spraberry/Wolfcap) have become economically
viable; with the breakthrough deepwater drilling methods, the off-shore deepwater fields in the
North Sea, Gulf of Mexico, West Africa, and Brazil enormous amounts of hydrocarbons have
become accessible; and with the improved bitumen recovery techniques, the vast Canadian
Athabasca and Venezuelan Orinoco oil sands deposits can now be profitably extracted. To
quantify the exact amount of recoverable oil is nearly impossible, but the total estimated reserves
of the top seventeen countries of the world were 1,324 billion barrels of oil in 2012. (Wikipedia)
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The demand side of the global oil equation is just as difficult to express numerically, but the
“IEA forecasts the world will use 91 million barrels of oil per day in 2012, an increase of 1.5
million barrels per day.” (Holmes, 2011) Simply put, oil consumption is still growing at a faster
rate compared to that of oil supply, and it will last for only 40 years if the rate of demand is
assumed constant. But this is an unrealistic expectation says Holmes: “Oil industry analyst PIRA
estimates incremental demand will outpace supply by 1.1 million barrels per day on a year-over-
year basis during the third quarter of 2011.” This demand growth is driven by “rapidly
urbanizing populations and industrializing economies” in emerging markets. Rising incomes and
change in consumer behavior in these economies transform the dynamics of global trade. China
alone accounts for 41% of demand growth with a 7% annual demand growth rate. The World
Bank forecasts that a new global middle class of 1 billion consumers will drive this demand
growth by 2030.
In summary, demand for crude oil is bound to increase in the short-term, as the derived
demand for consumer products made from oil is anticipated to strengthen in the BRIC countries.
Moreover, the reuse, recycle, and reduction of materials in the production of the related
consumer goods will continue its proliferation in the developed countries; however, it will
probably not eradicate petrochemicals any time soon, nor will the use of alternative energy
sources as a substitute for oil in the block of developing nations replace hydrocarbons. Although
energy efficiency of automobiles and other production machinery is increasing, fossil fuel
consumption is expected to grow in the near term in those countries.
The ‘business as usual’ model is no longer sustainable for the oil and gas industry for the
reasons described above, and it must redefine its vision and execute a transformational strategy
to overcome the formidable challenges posed by the new global order.
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References:
American Petroleum Institute. (2013, May). What’s Up With Gasoline Prices? Retrieved June 28, 2013,
from Oil and Natural Gas Overview: http://www.api.org/oil-and-natural-gas-overview/fuels-and-
refining/gasoline/whats-up-with-gasoline-prices
Holloway, S. D. (2012, September). The Pricing of Crude Oil. Retrieved June 28, 2013, from Reserve Bank
of Australia: http://www.rba.gov.au/publications/bulletin/2012/sep/8.html#f
Holmes, F. (2011, August 7). Chinese Demand Remains The Driver Of World Oil Prices And That's Bullish.
Retrieved July 8, 2013, from Forbes:
http://www.forbes.com/sites/greatspeculations/2011/08/07/chinese-demand-remains-the-driver-of-
world-oil-and-thats-bullish/
Mitchell, J. (2012). What Next for the Oil and Gas Industry? London: Chatham House.
Tertzakian, P. (2013, April 16). Today’s oil discovery sizes not seen since 1960. Retrieved July 8, 2013,
from The Globe and Mail: http://www.theglobeandmail.com/report-on-business/industry-news/energy-
and-resources/todays-oil-discovery-sizes-not-seen-since-1960/article11233776/
Wikipedia. (n.d.). Wikipedia. Retrieved July 8, 2013, from Oil reserves:
https://en.wikipedia.org/wiki/Oil_reserves#cite_note-OPEC-2
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The global oil and gas industry

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