- The Energy Mix - https://www.theenergymix.com -

Oil and Gas Business Model Trips Up on Falling Demand

For all the factors that have contributed to the dramatic drop in the price of oil, analyst Michael T. Klare says the most important could be the “complete collapse” of a business model that calls for immediate, all-out exploitation of every available source of fossil fuel.

For the decade before the price crash, Big Oil operated “according to a business model that assumed an ever-increasing demand for its products, however costly they might be to produce and refine,” Klare writes. “This meant that no fossil fuel reserves, no potential source of supply—no matter how remote or hard to reach, how far offshore or deeply buried, how encased in rock—was deemed untouchable in the mad scramble to increase output and profits.”

The strategy worked for a time, racking up record profits or companies like ExxonMobil and Chevron. But now, “with demand stagnant and excess production the story of the moment, the very strategy that had generated record-breaking profits has suddenly become hopelessly dysfunctional.”

Klare traces the origins of the strategy to a landmark speech in which Chevron Chairman and CEO David O’Reilly declared the end of the era of easy access to energy.

“For top industry officials like O’Reilly, it seemed evident that Big Oil had no choice in the matter,” he writes. “It would have to invest those needed trillions in tough-oil projects or lose ground to other sources of energy, drying up its stream of profits. True, the cost of extracting unconventional oil would be much greater than from easier-to-reach conventional reserves (not to mention more environmentally hazardous), but that would be the world’s problem, not theirs.”

But then, oil prices began running off a cliff. “The production-maximizing strategy crafted by O’Reilly and his fellow CEOs rested on three fundamental assumptions,” Klare writes: “That, year after year, demand would keep climbing; that such rising demand would ensure prices high enough to justify costly investments in unconventional oil; and that concern over climate change would in no significant way alter the equation.

“Today, none of these assumptions holds true,” not least because “climate change can no longer be discounted in any future energy business model.”