Now, might seem like an insane time to invest in the energy industry, recent prices have been as low as they have been in years and more and more companies are cutting back on production and exploration. The truth is, we’ve been here before and this is not the first time the price of oil has plummeted, nor is it the first time oil companies have tightened their belts either.
The Late 90’s
Back in the late 90’s the price of oil had fallen more than 40% to a low of $15 a barrel from the high of near $30 in 1997. Oil industries used to joke that water was worth more and it was time to trade in the rigs for divining rods. Again with the low prices oil companies had cut back on exploration and production. Just like today investments in new sources had stopped. If oil costs more to develop than it is worth, no one invests in oil production. Here is what inevitably happens when exploration stops.
- Production at existing wells starts to dwindle, oil is not a finite resource
- Demand does not stop, on the contrary, demand expands as it has for years
Eventually the day came where supply couldn’t meet the demand, and there were no new resources to tap because everyone has ceased new exploration. You know what happened after that…an epic run on oil prices that went on from 1999 until 2008.
The world is right back in that position yet again.
What About Future Production?
Over the past few years oil slid from over $100 per barrel to below $30 a barrel, that was over a 75% drop in just two years. Once again exploration budgets are cut to the tune of $250 billion with more cuts expected. That means once again the world will be in a place where production is less than demand.
Despite the rise in greener energies the demand for oil has not decreased in fact quite the opposite is true. Each year British Petroleum puts out a report on the industry with all kinds of statistics on the oil industry including the total world consumption of oil, on average it has grown by 1.6% per year. Even in North America consumption has been increasing since 2009.
This puts the world right back into the same situation as we saw back in the latest, with demand far exceeding the capacity to produce oil because there has been no exploration in because of the cutbacks. Prices once again will soar and this is why now is a good time to invest in oil services. Here is a video showing the predictions for the rest of 2016 and into 2017.