So we have lived through the last OPEC meeting in Vienna holding our breath what the oil producers might be doing in order to stop the oil price from falling even lower.
The oil price is still not really low right now, let’s not forget this. But it is too low for some who cannot justify doing whatever they are doing at the moment anymore and with this level. But I got that covered.
There is another point, though, I have not touched. It is the real reason for the oil market to do what it does right now, and what it did yesterday, and what it might be doing tomorrow.
This is going to be a long one so you better grab something to snack on.
Besides, we are going to dip headlong into the thorny predicting business because as strange as this may sound from me (remember I have said countless times that most predictions are rubbish) it’s still a good thing to speculate while keeping in mind that this all is not real. It is of course just as impossible to really predict what will happen tomorrow but common sense gives us a pretty accurate early warning system.
The core problem is temporal mismatch coupled with overblown expectations.
Let’s tackle the time problem first.
Anything anyone does in the energy world takes ages to produce an effect and this simple truth is forgotten all too often. Today’s managers live by the beat of the quarterly report as their company is subjected to the whims of nanosecond stockholders and their wannabes.
It’s a world where stock valuations are more important than any sound strategy. Anything that does not put meat on the very short termish accomplishment sheet of a manager is ignored completely.
3 months ahead is as far as a manager can think today. One year is long-term and anything beyond 3 years is the domain of pure time gibberish.
In energy, it takes 5 years to appraise a field and 5 more to develop it in order to get new oil and gas onto the market. This means, that if you have a short-term problem that cannot be solved by anything ready and operational now, no fancy project idea will contribute anything to soothe your immediate or upcoming pain.
In energy, a problem that is still one year out to produce effects is immediate pain. A problem that you can evaluate using market price mechanisms is something that no real energy long-term project will solve. It’s just too far away.
If you think that you don’t have enough oil next year, there is no need to send prospectors out for greenfield acreage. Whatever they can do, will be ready in 10 years at best, or 5 years if you buy an appraised field.
This is the nature of energy long-term investment. I negotiate contracts today that will still produce full effect when my little first-grader kiddies will go to college.
Two worlds clash here. The one of the nanosecond manager and, of course, the same nanosecond analysts that cannot even imagine years, let alone decadal developments anymore.
Fundamental shifts in the market do not care about anything that can be done in a minute or decided in one big meeting. Well planned strategic endeavors bear the scars of countless failed attempts, setbacks and frustrations on them and if you don’t see those scars, beware. It might well be that the project has been prettied up by those expecting short term benefits from something that can only build its thunder over the very long-term.
How then can this reliably be dealt with?
The hard truth is that much of what we rely on today is a mountain of lies designed to make this life seemingly predictable. Managers like a predictable world as this is the only thing they know.
A manager is a person that takes a known process and implements it always having an eye on optimization. They need known metrics in order to deal with a certain world. In this sense, they are a bit autistic without the great mental faculties that some of those extraordinary people have. Managers see the world through a narrow prism and cannot even think one millimeter beyond it. The very fabric of strategy is only something that they employ to further their careers.
Besides, their allegiance is not for the company they work for but only for their own forthcomings. If an employer has fulfilled its purpose or suddenly is not seen as a good fit for his personal objectives anymore, they jump. Going through pain is not something they are prepared to do. And as long as they are employed in this sense, they will produce good results.
But managers tend to see themselves as the pinnacle of human evolution and not as simple automatons that implement given metrics. They want to be planners and strategists; they want to be leaders and visionaries when in fact they mindlessly follow their learned patterns.
They cannot do otherwise as this is what they have learned and challenging the toolset they are mentally equipped with would rattle the foundations their entire world is built on. This is not something they are prepared to accept.
Who then will fill in the void? Easy – the roughneck entrepreneur and real businessman who will go out and cut his name into the world come what may. The one who will venture out and take no matter what amount of pain in order to reach his goal. The one who believes in what he does and not in a company or a career or even a given product or process. The investor who bets his money on a new long-term development. He will challenge everything in order to get his way.
Shale oil and gas has been made possible by such types and look where it has gotten us. OPEC lies in shambles and they very likely will never be back to hold sway over the world as they once did. Even if oil prices go back up again which one day they might, they have gotten a glimpse of hell and have felt its flames licking their corpses.
It’s a bit like a race car driver who cannot go to be as reckless as he once was after a real serious and very painful brush with death. Oil producers will suffer more from supposedly low prices and their view of the world goes down in shambles.
Back to topic.
However, you better consider this. The oil price is too low for many of them and the energy world is squealing right now. Is USD 30 possible? Is USD 10 possible? Yes, it absolutely is just as the price might bounce back to USD 140 and way above that.
Shale was a domain of entrepreneurs but now it’s manager’s turf and managers will doubtless do what managers do best. Implement a known thing and optimize the hell out of it.
This means that if shale still needs USD 55 in order to be profitable today, some of them will no doubt develop processes and techniques that allow them to stay afloat at 45 or even 35 or who knows how low it can go.
It will probably go so low that the transport price differential between the different worlds regions will become a factor just as it is in Natural Gas today.
Shale makes oil a regional business again as often it will not be worth it to ship around the world.
Lastly, producers are hurt by lower prices so as their governments accrue a deficit, they need more money desperately which makes them put more oil on the market which in turn pushes the price lower. Real markets ate always buyers markets.
What is the best long-term strategy for sellers then? I have hinted at it in an article more than two years ago (when prices were still stratospheric). Build lasting relationships with small upstart markets and the new breed of energy entrepreneurs that goes in not for trading margins but in order to cater to physical markets. There are a number of such developing regional markets for oil products today and the one that sticks out like a sore thumb is the Southern African cone.
But I covered this one too.