Crisis? What crisis?
This year of 2020 is unlikely to be remembered as one that provided the world with perfect vision, as many might have anticipated, given what those numbers often represent. In fact, it is much more likely that 2020 will come to be seen as the antithesis of clarity and as one of the most disruptive, confusing, and difficult years in recent history. The most significant pandemic since the 1918 Spanish flu, the most destructive and disheartening urban rioting since the 1960s, and the most extreme economic crash since the Great Depression of the 1930s all came together to remind any who might have forgotten that, not only can we not anticipate what will happen tomorrow, but we are even more woefully without the ability to stop it from happening.
The abrupt, pervasive and persisting economic shutdown has, in turn, caused an abrupt, pervasive, and persistent—and steep—decline in demand for energy, especially oil and natural gas. Planes aren’t flying, so no demand for jet fuel; people aren’t driving, so no demand for gasoline; businesses are closed, so no demand for electricity; daily commerce is suspended, so no demand for products, including those made from petroleum. In April alone, U.S. petroleum demand was down 26.7% compared to March. That was the lowest demand for April since 1970—that is fifty years ago when the U.S. population and economic levels were significantly lower.
Such an extreme drop in demand, including the first-ever recorded negative market price for crude oil (West Texas Intermediate reached negative $40.32/bbl on April 20), has resulted in thousands of producing wells being shut in, frac jobs being suspended, plans to drill new wells being suspended, exploration budgets being slashed, employees being laid off, companies going bankrupt—and a lot of self-reflection and speculation about whether this might be a critical pivot point for energy policy, marking the beginning of the end for the oil and gas industry. That 2020 is also a presidential-election year only adds to the drama and uncertainty.
Is this the beginning of the end for oil and gas?
So, what will the pundits be saying this time next year? Will oil and gas still have not recovered, creating even more speculation that perhaps it never will? Will a different political party be occupying the White House and in charge of the House and Senate, implementing policies that are intended to further diminish oil and gas and increase renewables? Will we still be in an economic depression?
If the past is prologue, then it is hard to imagine that even all of the chaos of 2020 will somehow change, in any significant way, the longstanding reality that the U.S. and the world get 80% of their energy from fossil fuels (oil, natural gas, and coal). First, for the domestic and global economies to recover, they will certainly need every bit of that 80%. Second, no other energy source, or combination of energy sources, can even come close to replacing everything that fossil fuels provide.
Looking to the past for direction only makes sense, given that the past represents reality and can be analyzed as something that actually happened. However, as all of us that consume information 24/7 know all too well, the media are replete with so-called pundits, telling us exactly what will happen tomorrow, next week and next year. As we also know all too well, the shelf life of any of their forecasts usually lasts no longer than until the next commercial break. Predicting crude oil prices a week from now is a lost cause, let alone stating with any authority what prices will be next year. There are trends, and there are reasonable assumptions—but then developments like pandemics, economic shutdowns, hurricanes, etc. show up on our doorstep unannounced.
Notwithstanding the ever-present unpredictability of life and the occasional trauma caused by these gut punches to the oil and gas market, the unrelenting and inarguable reality is that crude oil and natural gas continue to be the reigning economic preferences for our energy sources. In other words, when the decision is left to the marketplace, oil and gas continue to dominate in terms of abundance, affordability, and density (power bang for the buck). When consumers are allowed to make their energy decisions based on economic considerations, no other energy source comes close.
However, it is never a given that such decisions will be permitted to be made solely on economic grounds. Government, even in America, has been known to try to swim against the economic current, in order to accomplish a particular objective. Here, it is clear that certain elected officials and the constituencies they represent place a higher premium on addressing fears relating to climate change and other environmental issues and are, therefore, quite willing to mandate economically irrational practices, which would have the effect of diminishing oil and gas in the energy mix. Regardless of one’s view on the desirability of one energy source over another, it should not be debatable that rejecting oil and gas makes no economic sense.
Of course, even under the force of government mandate, if something does not make economic sense, the marketplace will respond, one way or another. In other words, swimming against the economic current cannot last very long, before exhaustion takes over, and reality reappears. Nevertheless, during the interim of searching for a government-mandated utopia, significant damage can be done.
S o, the real question is—will the current combination of factors (pandemic, excess supply, and reduced demand) create an opportunity for economically-irrational policies to be implemented that will significantly suppress and diminish the use of crude oil and natural gas in the overall economy? Is this the beginning of the end for oil and gas? In fact, this is really the same question that is repeatedly posed in our national political debate. It just seems like a new, different, more urgent question now because of the unusual factors that have presented themselves in 2020. Those opposed to oil and gas continue to search for different ways to argue their case, but the unavoidable answer is always the same—no energy source makes more economic sense than oil and gas.
But, of course, the answer is even more than that. Not only are oil and gas more economical than any other energy source, but other energy sources cannot even do what oil and gas can do. No other energy source can provide the fuel required for planes, trains, ships, and long-haul trucks. No other energy source can provide the feedstock for fertilizers, plastics, and the endless list of manufactured products that we all use every day—and do not even realize it.
Is this the beginning of the end for oil and gas? We had better hope not.
About the author: Bill Keffer is a contributing columnist to SHALE Oil & Gas Business Magazine. He teaches at the Texas Tech University School of Law and continues to consult. He also served in the Texas Legislature from 2003 to 2007.