Been there, done that, got the t-shirt

January 1, 2015

As oil prices continue to drop, the industry forecasters add warnings of further price declines and catastrophic results for both upstream and downstream operations.  In my 47-year career, I've seen prices fluctuate from $3/B to $106/B. Somehow, both the industry and I have survived. Here are a few thoughts to consider on the latest price drop.

1. Petroleum is a scarce (depleting) resource and in the long term prices should continue to grow with demand and inflation.  The balancing factor in this equation is improvements in technology that will permit us to find more petroleum at lower costs and/or tap into previous uneconomical sources.

2. Low prices encourage development of new technologies and improve efficiency.

3. Low prices eliminate organizations who are not committed to the industry.

4. Low prices encourage high-grading (developing resources with the highest returns).

5. Low prices foster hiring freezes and staff reductions.  This is probably the worse move that companies can make.  The oil and gas industry is a capital not labor intensive industry. Consistent hiring and development programs will continue to supply the necessary talent to meet the need for human capital. Hiring freezes and layoffs provide a short-term solution at the expense of creating long-term problems.

6. The sky is not falling.  Industry observers should be cautious about consensus (herd mentality) forecasts of falling or rising prices.

Allen Mesch

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