Monday, June 25, 2012

Oil 101: Tough Predictions

Those of you who follow me on Twitter know I recently read Oil 101 by Morgan Downey. Downey is clearly an expert on all things oil, as he provides a detailed analysis for the reader on a wide range of oil-related topics from oil history to refining and drilling processes to transportation to storage to regulations. But to regular readers of this blog, it should come as no surprise that even an expert's predictions can be significantly off the mark.

The book was published in 2009 by an expert in the oil industry, a relatively mature, slow-changing industry that has been around since the early 1800s. But in just three years, a few things have changed that throw cold water on some of Downey's predictions. For example, consider the following quote from the book:

"If oil is expensive and scarce in the future then so will [be] natural gas..."

Of course, in the ensuing three years, a massive spread has emerged between the price of oil and that of natural gas. This has caused many companies to convert their truck fleets from diesel/gas to natural gas, reducing demand for oil.

In another example of how unforeseen changes can blindside forecasts, horizontal drilling and fracking are mentioned very briefly in the book. But of course, we now know that these have the potential to be game-changers in this industry. For example, they have helped increase production in the Bakken to 500,000 bpd (from 400,000 in 2011 and 300,000 in 2010). Such increases in supply have caused supply gluts at various points throughout North America's oil pipeline network, resulting in significantly different prices throughout the country.

With oil prices as high as they are, we may continue to see innovations that alter our perception of what is considered normal in this industry...just don't expect to be able to predict what they are!

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