The 40-year cycle of the oil industry, and where we’re at now

Just hang on:  We don’t have much more than nine years to go in the current period of history that is turning the oil world upside down.

Peter Tertzakian, a managing director and chief energy economist of Calgary’s ARC Financial, sees economic upheaval as going through four distinct cycles. There’s a relatively stable period that he calls “growth and dependence.” But various changes occur that result in a “pressure build” that has to give at some point. That’s what he calls the “break point.” The fourth cycle is known as “rebalancing” or “transition” and it is often injected with “magic bullets” that provide a new equilibrium … or in other words, new growth and dependence.

Tertzakian spoke at a lunch presentation at this year’s Benposium meeting in Houston, sponsored by Bentek Energy, a division of Platts. He romped through a 100-year history of lighting, as the world went from candles to gas lighting to kerosene to the electric filament bulb and onto today’s developments in LEDs. As he reviewed each shift, he dryly and repeatedly noted that the proprietors of the entrenched and challenged technology “were concerned.”

So the man who wrote back-to-back books about rapid oil demand growth that the Peak Oil movement loved and another about how oil consumption was waning, laid out how the current cycle is playing out. (And you can see how the two books play into his vision of the arc of history.)

Blog entry continues below…


Benposium: Storify benposium
Gas Daily Going into its 6th year, Bentek Energy’s Benposium conference empowers attendees with comprehensive and forward-looking energy market fundamental analysis. The event attracts high-level attendees from the E&P, midstream, refining and petrochemical sectors from June 2-4 in Houston, Texas. Over the course of three days, speakers and attendees discuss a wide range of topics, centering on natural gas, and branching out to crude oil, NGL, LNG and petrochemical markets. Read more on the Platts Benposium Storify.

Tertzakian sees the growth and dependence period in recent oil history as having begun in 1985 and ended in 1999. He didn’t spell out what happened during that period, but anybody who was in the market then remembers it: the crash of late 1985, reduced investment, mostly relatively low oil prices, but for a brief price spike during Iraq’s invasion of Kuwait, a years-long price slide after that, culminating in the Asian financial crisis that saw oil prices hit their lowest-ever real price by early 1999.

Then we get to the “pressure builds” part. Tertzakian said this lasted from 1999 until 2008. “The pressure buildup is reflected in the price,” he said, and prices did rise almost continuously during the period. But he said there were other pressures as well — “environmental, geopolitical, policy, social, business.”

Then comes the break point. No surprise, Tertzakian sees that as occurring in 2008, when the price of oil topped $145/b. A break point in a market, he said, “occurs only once every few generations.”

But even as the break point was reached, “transition” forces started to kick in. For example, Tertzakian noted that in 2008, for the first time in recent history, demand began to moderate. And whenever a break point is reached, “miraculously, there are always magic bullets going to get us through.”

That magic bullet this time, obviously, was unconventional oil production, as well as the slowdown in demand (or as he noted in the title of his second book, an end to “energy obesity”).  And as had happened earlier when coal was able to replace wood and petroleum replaced whale oil, the fracking revolution rescued a conventional oil industry that appeared unable to produce more crude.

When candles were under attack, Tertzakian said, the industry made better candles:  less soot, a better “drip” and automated production. It found a niche and it survived.

So Tertzakian sees an oil world that reacted to pressures through a number of steps: it started drilling multiple wells from the same pad, implemented automotive efficiency standards that combined with further innovation led to a more efficient internal combustion engine, and so on. How far along are these changes? According to Tertzakian, “We’re in the second inning.”

(It apparently is an unwritten  law that drawing a time line on the unconventional revolution requires a baseball analogy. Continental Resources’ Harold Hamm, at the Platts Crude Oil Summit in London a few weeks ago, said we were in the first inning. Maybe one of those new video replays is needed to find out precisely what inning it is.)

But whatever the inning, Tertzakian gave it an end date of 2023. Why? Because that would mark a 15-year run since the break point of 2008. But he hedged a bit and said the end date may not come until 2025.

He said one other thing has happened: the US and Canada have effectively become one energy nation. Producers in those countries have embraced new technology, and for the upstream sector now, it’s all just North America now, north of the Rio Grande.

And with oil companies facing the reality of sanctions (Russia, Iran), the expropriation of assets (Venezuela) and corruption (pick your country), “it’s an integrated oil and gas region that will be progressively more attractive for investment relative to the rest of the world,” he said.

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Comments

  1. Dana Holgate at June 23, 2014 2:47 pm

    Phillip, environmental regulators operate at the whim of the people. They may be on a winning streak, but at the point they go too far, the people will reel them in when they start protesting and electing people that will moderate their impact on the economy and people’s ability to prosper

     
  2. Ewa Lewandowska at June 10, 2014 10:00 am

    Interesting, these days the public in the UK is constantly commenting on daily price changes, and it’s all a part of a much bigger process.

     
  3. Chris Cook at June 7, 2014 7:51 am

    Ignores financial participation in and manipulation of the oil price via the Brent /BFOE complex which has been captured by intermediaries since 2001.

     
  4. Steven Kopits at June 5, 2014 4:19 pm

    The “magic bullet” would be more convincing if Bernstein hadn’t come out this morning putting the marginal cost of US shale oil production at $111/barrel.

    As for the IOCs, Statoil is reportedly thinking of reduced capex by 25%, according to Upstream Online.

     
  5. Philip Verleger at June 5, 2014 11:43 am

    Interesting point of view.

    Has anyone bothered to look at the changes occurring on the demand side. Tertzakian never has. Were he to do so he would discover that environmental regulators intend to reduce oil use by up to 20 percent form 1990 levels by 2025.

    California’s low carbon regulations will almost guarantee California meets the goal. Others will follow.

    In case you missed it, environmental regulators are a real winning streak. Further, the oil industry’s approval rate with the public is terrible according to the Harris Survey. Oil and tobacco tie for the reward as the most distrusted industry on the planet. Putin is more popular in western Ukraine than are oil companies any place in the world. Investors understand this even if those in Houston do not.

    Investors understand the idea of “stranded Assets” and “stranded resources.”

    This industry will be seen as a generator of dividends and cash flow until it expires.

     
    • Augustus at June 12, 2014 9:42 pm

      The difference, the ENORMOUS difference between tobacco and oil, is that tobacco is completely and entirely voluntary. Opting out of oil is virtually impossible in North America.

       

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