Pity the poor oil companies. A daily news alert from the Wall Street Journal, while providing teasers to three not particularly interesting articles on the international news business, did let slip an interesting observation. Third quarter profits for Big Oil are still looking good, but after that, “it’s clear they are now being squeezed between falling crude prices and rising oil-field costs, raising doubts about the continuation of the big run-up in profits at companies like Exxon Mobil Corp., Royal Dutch Shell PLC and BP PLC.”
That falling oil prices should lead to smaller profits for oil companies isn’t noteworthy. But the acknowledgment of rising oil-field costs is. The Journal has been a leader in fueling the backlash against peak oil theory that has taken strength from the falling price of crude over the past several months. But the moment-to-moment fluctuations of the price of a barrel of oil mean little as far as the validity of peak oil is concerned. Rising oil-field costs, on the other hand, mean a big deal.
Rising oil-field costs might refer to the energy-intensive process of extracting oil from Canada’s tar sands. Or drilling in unprecedentedly deep waters in the Gulf of Mexico. Or employing new technologies to extract the last bit of black goodness from nearly exhausted fields. Or, more prosaically, security costs in Nigeria, or Russian-style government-sponsored extortion. Whatever — it all points to the same thing. The era of cheap oil is over.
Michael Connolly, author of the news alert, writes that “With prospects of finding more easy-to-tap oil dwindling and many governments demanding a higher share of proceeds in exchange for access to oil fields, oil companies might find it more lucrative to launch into a period of acquisitions.”
There’s a well-established cycle in the oil business. When oil prices fall, it’s cheaper to buy other companies than to explore and develop new oil fields. But it seems like this cycle has a little bit of an extra twist to it. Oil prices are still relatively high. But the price of finding new oil is even higher.