Updated: Apr 29, 2018

Back in June 2010 my article "Is the Price of Oil Too Low?" was published within the Natural Resouces sector.

My conclusion was "the world oil price is being subsidised by cheap oil from a few super-giant fields which will, sooner or later, run dry. I suggest the world needs an oil price which reflects true long-run replacement costs, not distorted by cheap oil from a handful of geological miracles in the Middle East". The responses indicated agreement with my suggestion.

During that year, the Brent oil price reached some $90 per barrel. Nobody anticipated what was to come - chaos in the sector, large numbers of oil and service companies all but ruined, government revenues badly affected, huge destruction of shareholder value and massive job losses.

When I wrote that article, world oil consumption was around 87.4 million barrels per day, a record high. It has subsequently shown a strong increase, currently being close to the major 100 million barrels per day milestone. There is certainly no lack of demand for oil. But as anyone with experience of buying and selling will be aware, if one keeps putting more product into a market than the buyers can handle, the price will potentially be savaged. Economists establish price/demand relationships which seek to quantify such issues.

So oil has been fed into the world market on a "must sell, any cash offer takes it away" basis. The consequences are obvious. Yet every cloud has a silver lining, so it is said. And there are certainly investors who hover like vultures over the rotting carcasses of oil companies. Acquire what is inside those carcasses for pennies on the dollar, and fortunes can potentially be made. Provided, of course, that one knows what one is doing. And provided that one believes oil has a future.

Which takes me directly to another point. Oil did not have a particularly good reputation back in 2010 when my article was published. But even Jack the Ripper probably enjoys a better public image today than the oil industry. It is now even being blamed for Global Warming. Even if Global Warming is real - and there has been so much dubious science that one sadly cannot take any scientific report at face value these days - there are numerous other factors asssociated with environmental changes. The oil sector has become a sort of Aunt Sally - "knock me down with half a housebrick, then I will get up and you can do it to me again". And its leaders simply do not appear to know how to respond.

Screaming Lord Sutch performing "Jack the Ripper"

Buckets of green paint are one attempted solution. Paint the oil rigs and the nodding donkeys green, find a nice shade of green for a revised company logo, and that will fix the problem. No it won't. And oil companies appear to be all over the place regarding their long-term vision. Some see oil demand not reaching a peak until somewhere around the middle of the century, if then. Others talk about electric cars and batteries. It's all a bit like Dr. Jeckyll and Mr. Hyde: one minute it's one thing, the next minute it's something else. And of course the recent scandals and revelations about diesel reveal the confused nature of strategic thinking - it seems like only yesterday that diesel was being promoted as the liquid fuel of the future. Now it is perceived as almost Satanic in character. So petrol was giving way to diesel, now it has swung back to petrol, or hydrogen, or batteries. Quite where all the electricity would come from to charge all those batteries, one can but wonder.

Maybe kites could be flown during thunderstorms, so that the electrical energy can be captured and fed into the grid? I'm not going to try it.

Benjamin Franklin presenting his investment proposition to an institutional investor?

A successful businessman said to me in the Nineties "nobody can run a successful business serving customers who don't have any money". Those are wise words indeed. Oil companies cannot be successful if their customers do not have the money to purchase their output. The absurdity is that their customers do in fact have the money. But oversupply is allowing them to obtain the output from the world's finest oil fields at rock-bottom prices because of continuing oversupply.

The expression during the First World War was "lions led by donkeys". It originates from Genghis Khan. I suggest that it is time for leadership and clear thinking in the oil industry.

Robert Waterhouse is an Advisor to the international Executive Search and Coaching firm Oxana Bristowe.

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