Moved by growing concerns of global climate change and cheap natural gas, the coal industry has faltered over the last decade. Though moving away from coal is a positive development for the environment, the economic impacts are negative for the regions that produce coal. A consequence of progress, the transition from coal to cleaner electricity generation resources will eventually extinguish coal-dependent economies. Like the coal industry, the crude oil economy is beginning to witness negative economic impacts stemming from global climate change concerns and competing cheap and clean alternatives.
Oil has many uses outside of fueling engines; however, a vast majority of global crude oil production is indeed used for this purpose, with light duty vehicles (LDVs) being crude oil’s largest consumer. Every year, the fuel economy of the average LDV in use improves due to fuel efficiency regulations that govern over 80% of the global LDV market and general consumer interest in fuel cost savings. In addition, electricity has now cemented a foundation where all other alternative fuels have failed and is growing more attractive each year. Currently, electricity fuels a mere fraction of a percentage of the total miles driven by LDVs globally but its continued growth is a near certainty. Both fuel efficiency improvements and electricity stand to blunt demand for oil moving forward despite stable, low oil prices.
Beginning in the middle of 2014, the oil price dive has sustained through 2015 and is unlikely to abate in 2016 (and perhaps beyond). The once-historic high prices of oil have given way to technological innovation that has made extraction from oil shale competitive with conventional resources, opening up vast reservoirs in North America and potentially the world. The tapping of North America’s resources alone—alongside little to no growth in global oil demand—has created an oil glut and the resulting low price.
The outcome is a gradual retreat from oil, with dependent economies suffering the most. OPEC members are running deficits and Russia is now considered the worst performing midize economy in the world. In North America, economic indicators in Alaska, Canada, and North Dakota are not positive. Preliminary data from the Bureau of Labor Statistics (BLS) shows that in the United States, employment in oil & gas extraction has fallen 8% since October 2014, the largest drop since employment in the sector fell over 7% from the end of 2008 to the end of 2009.
A New Normal
However, unlike the end of 2009, growth is not ahead; the new normal is real. While OPEC members continue to produce without limits in efforts to price out North American drillers, these drillers are more resilient than anticipated and have prepared wells for when prices rise. The fact that North American drillers can easily turn production on when prices rise is likely to marginalize gains in oil prices for quite some time unless a severe shortage in global oil supply emerges or demand skyrockets. The former is much more likely than the latter.
Unfortunately for the oil industry, the amount of oil consumed has not fluctuated with its price. First, the price of oil is expected to have marginal impacts on the price of gasoline depending on where the final product is consumed due to distribution costs as well as local, state, and national taxes. Second, consumers don’t simply want to fill up on gasoline because it’s cheap; they fill up because they have to. Consumers are unlikely to increase the number of miles they drive and will continue to find ways to further minimize or end consumption regardless of how cheap gasoline may be.