The US rose over the last decade to become the world's largest oil producer. Does the pandemic spell the industry's decline?To get more
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Texas oilman Allan P Bloxsom III still remembers the taunts of
“college boy” that greeted him on the offshore drilling rig where his
father, desperate for his wayward son to shape up, sent him to work one
summer.
“Against my wishes I went and it changed my life,” says Mr Bloxsom,
now 63 years old and the president of Fort Apache Energy, a small
company that operates oil and gas wells in Texas and Louisiana. “I was
hooked.”
That was decades ago. Since then, his home state of Texas has more
than doubled its crude oil output, helping to turn the US into the
world's biggest oil producer.
But as oil prices tumble - briefly falling below zero in a first last
month - following a dramatic drop in energy demand because of the
Covid-19 pandemic, the industry is going into reverse.Giants such as
Exxon and Chevron and fracking firms such as Diamondback Energy have
shut in wells and slashed investment in recent weeks, helping drive down
US crude oil production by nearly one million barrels per day from
March to April - the third largest monthly decline in a century.
Mr Bloxsom cut his typical output of 800 barrels per day by more than half. Others have gone even further.
“Right now everything I have is shut down. Everything,” says Bill D
Graham, president of Midland, Texas-based Incline Energy, which has 80
wells that in more typical times would about 275 barrels per day.
The International Energy Agency expects global oil supply to fall to a
nine-year low this month, as producers around the world reduce output in
response to prices that dropped by more than two-thirds in April before
starting to stabilise.
But even before the coronavirus pandemic hit, the industry was
experiencing a supply glut - driven by the US boom - that had depressed
prices and prompted strains in oil-producing Texas and elsewhere. The
Wall Street money that helped power the fracking growth had grown harder
to come by, while big firms were promoting investments in renewable
energy.
Forecasters at IHS Markit say supply is unlikely to return to 2019
levels until at least 2023. There is a chance that 2019 will have been
the high point for global output, should the pandemic permanently reduce
energy demand - for example, by increasing telework and reducing
business travel.
“This is a transformational crisis for the world and what happens to
oil will be shaped by the broader forces of change that are coming out
of Covid-19,” says Jim Burkhard, the firm's head of oil market research.
“There's enough of these variables in play where you don't have to
have a doomsday view of the world to consider that oil demand could have
peaked in 2019. That's not our base case, but it is our alternative
scenario.”In the US, several large US companies have already filed for
bankruptcy, with more expected in a sector where debt levels were
already dangerously high. Services firms, desperate to survive the
crisis, have cut more than 66,000 jobs - almost 10% of total employment -
with more reductions likely, the Petroleum Equipment & Services
Association industry group estimates.
Image copyrightBill GrahamImage caption
Bill Graham says the crisis is likely to force out many small firms like his
As healthier businesses scoop up the assets of distressed rivals, the
industry is likely to emerge with fewer firms and fewer workers.
“The future for the small operator like me - I see it going away completely,” says Mr Graham.
Mr Graham, whose father started Incline Energy in 1966, says he
managed to keep his five staff after securing government coronavirus
rescue money. But if the price his oil fetches - which for now is lower
than figure traded on financial markets - does not bounce back above $25
by October, those jobs are at risk.
