The Oil Price and the ‘Age of Gas’

By: Jon Mainwaring

 For the past four years, the oil and gas industry has enjoyed a period during which the price of oil has been relatively high. Oil trading at $100 per barrel and above has benefited not just those companies who operate established fields, boosting their profit margins, but also firms who are involved in more ambitious projects that demand a high oil price in order for those projects to be commercial.

A high oil price has also benefited the supply chain. As more companies drill for oil, there is more demand for rigs and the personnel needed to operate them.

However, the last few months has seen the price of oil decline along with the stock of publicly-listed companies that are involved in the sector.

During the first week of October, Brent crude fell to $88 a barrel – its lowest price since December 2010 – while West Texas Intermediate dropped to a 17-month low. Meanwhile, the FTSE350 Oil & Gas index – a basket of mid-sized and larger oil and gas companies whose shares are listed in London – has fallen approximately 10 percent over the past three months; this index is also 6.1 percent down on the start of the year.

The question for those of us involved in the oil and gas industry is whether this is a temporary blip or something more permanent about worldwide energy demand and the mix of fuels used to meet this demand.

Currently, there are several factors that seem likely to be having an effect on the price of oil. There is continuing uncertainty about economic growth in the West and the East. There is the conflict involving the so-called Islamic State in the Middle East (although production stoppages there should be providing some upward pressure on prices). And the threat of the Ebola virus could end up disrupting the travel industry, particularly as Ebola appears to be no longer confined to just a few West African countries.

These are all (hopefully) temporary problems that will sooner or later be resolved. And, of course, there is the chance that OPEC will choose to collectively cut oil production at its next meeting in November.

But there is also the question of whether oil as a fuel may have had its day.

Last December I spoke to Michael Farina, Fuels Market Intelligence Leader at GE, who had been involving in writing a report that made a strong case that the start of an “Age of Gas” was just a decade or so away.

Gas production has been on the increase with, for example, Royal Dutch Shell plc becoming a “gas company” rather than an “oil company” in 2012 as its gas assets overtook its oil assets. The shale gas boom in the United States is playing its part but also there has been an increase in mega-gas projects, leading to rapid growth in liquefied natural gas exports. On the demand side, GE anticipates global gas consumption by 2025 increasing by one-third over 2013 levels.

This is because as pipelines and other infrastructure designed to support gas increase it will find its way into all sorts of applications. Natural gas-fuelled cars, for example, may supplant petrol and diesel-driven vehicles – particularly in developing economies such as China.

Amid a collapsing oil price this is all food for thought. OPEC could well decide at its meeting next month to slash oil production in order to boost prices, but doesn’t that play into the hands of the gas enthusiasts?

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