From Scott Carlberg

Oil prices have gone off a cliff with the pandemic’s reduction in demand and the petroleum dispute between Russia and Saudi Arabia. ECC wanted to get more information about this and oil in general.

A Carolina-based petroleum expert took his time to answer some questions about the oil industry today. Larry Sullivan is a biofuels, biomass, and petroleum consultant with his firm Lawrence D. Sullivan & Company, Inc., and he serves as an Adjunct Professor at The Citadel.

He has a multi-national career in the petroleum industry. Larry grew up in California and Louisiana around oil as his father was a Conoco geologist and manager. He joined the industry in 1980 working in the Middle East, Africa, Europe with Dresser Industries, the British chemical giant Imperial Chemical Industries, and the Conoco unit of American Dupont in Europe. He worked on the drilling rigs at sea and on land as well as in the refining part of Conoco.

Larry moved from being a field engineer to a manager in his 15 years outside the USA. Later, Larry was the Chief Technology Officer of the publicly traded biotechnology company Kreido Biofuels, Inc. He advises leading second-generation companies in their path to commercial biofuel project development.

The views he expresses here are his own, not of any educational institution or business.

QUESTION: In your career, what have you learned about the oil industry that you feel consumers ought to understand better with today’s oil price slide?

Larry: What I saw was different that most US-based oil and gas executives. I was posted outside the US for most of my career where the national oil and gas companies developed their sovereign resources based upon different metrics than the private (publicly traded) oil and gas giants.

More than 90 percent of the world’s remaining oil is held by state (national) ownership. State (sovereign) organizations do not always act in typical economic and financial behaviors. North America is fundamentally different where private individuals, school districts or public traded companies can own oil and gas, mineral or subsurface resources.

Western-style oil and gas supermajors (Total, BP, Shell, ExxonMobil, ConocoPhillips) act in typical, modern capitalistic ways (P&L, Gross Margins, ROI) while state owned enterprises like Pemex (Mexico), PDVSA (Venezuela), NNPC (Nigeria), CNPC (China), etc., fund state objectives, not individual or institutional shareholders. State owned enterprises or SOE often behave with less transparency.

QUESTION: Over the past 20 years the world has seen wild changes in the price of oil. How do you see the price of oil over the next several years?

Crude prices in real dollars. Add inflation. EIA

Larry: Before the pandemic, supply and demand was about 100 million barrels-per-day (bpd) of supply, and demand at 98 million. The swing producers are Aramco (Saudi Arabia), USA, Russia. A swing producer is one that can change production to impact prices. One could not ask for a more diverse group than these three. Each expresses the geopolitical objectives of their respective societies.

Each swing producer has a different agenda and is able to make more than 10 million bpd swing. I say that 10 percent because producers can easily swing prices in a 1 percent growth market.

Today, the black swan occurred when two producers increased volumes into a well-supplied market which then crashed due to the virus. This event will be studied by many economists and professors of world geography.

I see that 2020 will see some stability in the $50 to $60 range into 2022. Demand growth will be less than 1 percent due to the virus. We are at a real low spot in demand now. A lot of future demand depends on how we all recover in the economy.

QUESTION: A dollar today is not what a dollar was in the past, though, right?

Larry: I like to look at it “inflation adjusted,” which shows there were peaks in the 70’s and 00’s periods with returns to that $50-60 range. Long term, there are many drivers, and China, India, etc., are the key as folks move from bicycles, scooters to cars. You can see three bands of prices with the average since 1946 at almost $45 per barrel.

Inflation, consumer prices. St. Louis Fed

Adjusted for inflation $40-50 is the average oil price for a barrel over the last 60 years. Some economists call this “regression to the mean.” So, a 20-year wild swing market must be examined on a 60 or more year market with an eye towards stability. The French say, “The more things change, the more they remain the same.” In a sense average oil prices have changed little over the years.

QUESTION: Can you relate energy costs to families?

Larry: The question of oil and gas for consumers is simple. In the 1970’s about 3-4 percent of the household budget was gasoline and today (2012 in the chart) it appears that it is now about 4 percent.

If you look at what a household spends on overall energy – electricity and natural gas for HVAC, gasoline – then it appears to be steady somewhere below 5-6 percent which for a family budget is not a major item. This chart below is gasoline only and not total energy (electricity, natural gas for heating, hot water, cooking, etc.)

Consumers of electricity, natural gas and gasoline are buying energy for heating, cooling and transportation. In North America, compared to the other regions of the world, we consume 20-25 percent of all the world’s energy but represent about 5 percent of the world’s population. We heat a lot of space in deep winters, we cool a lot of space in hot summers, and we drive a lot of vehicles (cars, trucks, boats, planes).

We ought to see how our family uses of energy relate to the big world. As the world’s regions like Southern Asia, SE Asia and East Asia (China) develop more like the US and Canada then energy demands will be significant on the large scale.

It appears the demand will be in the developing world, those places that are increasing their quality of life. Significant demand destruction will occur in the EU and North America while the remaining world will increase.

So, my message is this: The developed world will slow down per capita energy use while the developing world will move up the scale.