Or put more simply—do you feel lucky in 2016?
We measure the economy based largely on how it affects us. If our jobs are secure and things are going in the right direction the psychological boost that gives us tends to play out in our decisions. The reverse is also true.
In the energy industry we live in a boom and bust world. We use prices as a ways of gauging the balance of that supply and demand. Higher prices suggest a tightening of supply that encourages producers to produce more. Lower prices for oil and gas products mean too much of a good thing sending us price signals to back off to restore equilibrium.
Except energy market equilibrium is something we strive for—not something we always find. The energy industry is driven as much—some might say more—by politics than market economics. The politics of OPEC leads it to over supply weakening global demand because Saudi Arabia and some OPEC members do not want to lose market share by cutting production when they know others—including other OPEC members—will cheat and keep producing. The politics of political correctness leads others to demonize fossil fuels even as they exploit them. Environmental political correctness puts climate change as a top global priority even in the face of a mass migration of Syrian refugees fleeing the conflict that drives them from their homeland as the world wrings its hands.
As we enter 2016 we have more dis-equilibrium than we do balance in global energy markets. But there is reason for optimism. The cure for low prices in any market is low prices. It forces action. It demands attention. It imposes consequences.
The oil and gas industry cut upstream investment by $250 billion in 2015, and another $70 billion could be cut in 2016 not including the impairments in existing reserves weighing on the market. So the Saudi’s are forced to risk social unrest by cutting subsidies. US shale producers cut E&P investment in new rigs and wells to extract the lowest cost production from the most productive plays.
The energy industry saw low prices as a transitory thing when they began falling in mid-2014. Now it worries that low energy prices are a structural feature of the market longer term.
The most common mistake of market analytics and forecasting is to take today’s prices and project them forward. Stuff happens. Market volatility reminds us that what goes down can rapidly be replaced by a supply shortage if too much CAPEX is cancelled or delayed, if too many experienced workers retire or find more secure jobs in other industries, or if technology finds new applications to change our approach to E&P once again just as it did for George Mitchell to start the Shale Revolution.