I work in the oil industry. As such I get questions all the time about the industry and economic effects of current trends. Lately the most I get asked is how does the falling price of oil affect my end of the oil business.
To better frame an answer, a few terms about the oil industry need defining. The petroleum industry is generally broken into three sectors: upstream, midstream and downstream.
Upstream is the exploration and recovery side of the oil industry. Once exploration is complete, it also involves estimating a potential find and determining whether or not it is worth drilling. After the initial evaluations are made, then the wells are drilled and the crude is moved to the refineries.
Midstream is a term I rarely hear used since I've been working in the oil industry. Midstream involves transporting, storing and wholesale marketing of petroleum and getting the crude to the refineries.
Downstream is the final step of refining the crude into various products. At the downstream section, the crude is turned into various products like gasoline, diesel, lubes, plastics and raw materials for other industrial uses.
So how exactly does the falling prices help and/or hurt the industry?
The upstream sector will take the brunt of the price fall. It is basic economics. There becomes a price point where looking for oil and drilling it out of the ground becomes unprofitable. As oil prices continue to drop, exploration companies are calling off exploration and recovery operations. Drilling operations that aren't complete will cease or slow down. These companies will then lay off employees. It then sets off a chain reaction of lay offs and shutdowns in support industries such as maintenance crews, drilling supplies, piping and other related crafts as well. Communities, especially ones where fracking took off, will also suffer as people leave to find jobs else where and the money poured in from the workers dries up.
Tax revenues where exploration and test wells are drilled also dries up.
In the midstream business, if no oil is flowing, there is no need for new pipelines to be built. Nor are truck drivers needed to get the crude to storage or market. As existing fields slow down and no new wells come online, those support industries wither up too.
Now is it all gloom and doom? Not at all.
Crude oil is a commodity and raw material for the downstream side.
Refining crude is a capital intense business. There are costs that vary some but do not affect operations drastically. Wages and maintenance costs are among the "fixed" costs. One of the costs that affect refining though is the price of energy. With falling prices oil, energy prices fall too and thereby one of the costs of operating a refinery falls.
Also the cheaper oil means refiners pay cheaper price for the main raw material. One of the misconceptions of the oil industry is that companies make a huge profit on gas. That simply is not true. The real money is made further downstream. Jet fuels, diesel and much further down the line on the chemical side is where the profits roll in.
While the price of the final product comes down, they won't fall as much as the price of oil except for gasoline. Notice that diesel hasn't fallen as much as gas prices. Fixed prices stay the same but operating costs go down and final product price falls but not far. Sounds like a good mixture for increased profits.
I'm not economist but that in a nutshell is why the oil industry will survive the latest down turn.
I hate that good hardworking people will lose jobs in the other sectors of the oil industry but they will survive and our economy will keep churning.
To better frame an answer, a few terms about the oil industry need defining. The petroleum industry is generally broken into three sectors: upstream, midstream and downstream.
Upstream is the exploration and recovery side of the oil industry. Once exploration is complete, it also involves estimating a potential find and determining whether or not it is worth drilling. After the initial evaluations are made, then the wells are drilled and the crude is moved to the refineries.
Midstream is a term I rarely hear used since I've been working in the oil industry. Midstream involves transporting, storing and wholesale marketing of petroleum and getting the crude to the refineries.
Downstream is the final step of refining the crude into various products. At the downstream section, the crude is turned into various products like gasoline, diesel, lubes, plastics and raw materials for other industrial uses.
So how exactly does the falling prices help and/or hurt the industry?
The upstream sector will take the brunt of the price fall. It is basic economics. There becomes a price point where looking for oil and drilling it out of the ground becomes unprofitable. As oil prices continue to drop, exploration companies are calling off exploration and recovery operations. Drilling operations that aren't complete will cease or slow down. These companies will then lay off employees. It then sets off a chain reaction of lay offs and shutdowns in support industries such as maintenance crews, drilling supplies, piping and other related crafts as well. Communities, especially ones where fracking took off, will also suffer as people leave to find jobs else where and the money poured in from the workers dries up.
Tax revenues where exploration and test wells are drilled also dries up.
In the midstream business, if no oil is flowing, there is no need for new pipelines to be built. Nor are truck drivers needed to get the crude to storage or market. As existing fields slow down and no new wells come online, those support industries wither up too.
Now is it all gloom and doom? Not at all.
Crude oil is a commodity and raw material for the downstream side.
Refining crude is a capital intense business. There are costs that vary some but do not affect operations drastically. Wages and maintenance costs are among the "fixed" costs. One of the costs that affect refining though is the price of energy. With falling prices oil, energy prices fall too and thereby one of the costs of operating a refinery falls.
Also the cheaper oil means refiners pay cheaper price for the main raw material. One of the misconceptions of the oil industry is that companies make a huge profit on gas. That simply is not true. The real money is made further downstream. Jet fuels, diesel and much further down the line on the chemical side is where the profits roll in.
While the price of the final product comes down, they won't fall as much as the price of oil except for gasoline. Notice that diesel hasn't fallen as much as gas prices. Fixed prices stay the same but operating costs go down and final product price falls but not far. Sounds like a good mixture for increased profits.
I'm not economist but that in a nutshell is why the oil industry will survive the latest down turn.
I hate that good hardworking people will lose jobs in the other sectors of the oil industry but they will survive and our economy will keep churning.
