Oil Update: Still need fracking?

From the January-February 2021 edition of Supply Chain Management Review.

January-February 2021

This morning, I turned on the television and watched the first stretch-wrapped pallets of the just-authorized vaccine being loaded onto a truck at a Pfizer plant in Michigan. From there, the pallets were headed to…

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When I began researching oil as part of the MIT Supply Chain 2020 Project in 2005, I espoused a reduction of oil consumption in global supply chains by slowing them down and developing cost- and energy-efficient networks, in contrast to cost- and asset-efficient ones. When oil prices were high, cost reductions also translated to CO2 emission reductions. However, the position was based on two major demand-supply assumptions. While oil would be readily available into the foreseeable future: 1) its price would rise in the long run as demand for it rose with robust global economic growth; and 2) oil extraction costs would continue to rise over time because it was getting harder to extract it from the earth.

Since we have already seen 2020, we now know that both assumptions were incorrect. Or to paraphrase the words of Lawrence “Yogi” Berra, the late great New York Yankees catcher: “the future ain’t what is used to be” and “it’s [not] déjà vu all over again.”

As discussed in last year’s Insights column, “Oil Update: Fracking challenged with cheaper oil” (SCMR, Jan/Feb 2020): 1) regarding the demand for oil, we were in the “era of cheaper oil,” as well as having suffered through the Great Recession of 2008 and experiencing today’s COVID-19 virus economic woes; and 2) regarding the supply of oil, fracking techniques have lowered the time, resources and expense needed to quickly turn on and turn off oil derived from shale. Therefore, on the demand side, reducing oil consumption because of higher prices was no longer a goal, and neither was co-related energy efficiency—therefore that goal became speed-up the supply chain to enhance customer service. Also, regarding supply, the world’s energy map has been altered. The Wall Street Journal’s (WSJ) review last September of “The New Map,” a book written by oil guru Daniel Yergin, postulates there is a new energy map. It states: “...[previously] all the action went to where the oil was. Thus, the desert wastelands of the Middle East were transformed into energy hubs and their chronic internecine conflicts consumed the attention.” The author states that: “The world’s energy map is no longer an accident of geology. It has been redrawn by technological, economic and political wherewithal.”

Brief history of oil pricing

Each annual oil update I’ve done has shown Figure 1, an updated historical chart depicting “real” quarterly imported crude oil prices since 1974. The chart shows the various pricing levels experienced. From the demand side, the first signs of “cheaper oil” appeared as a precipitous drop as a result of the Great Recession of 2008, which drastically depressed worldwide economies and the demand for oil. This was followed by a three-plus year period, termed the “$100+ plateau” before reaching cheaper oil. That plateau used to ominously loom in the rearview mirror as a reminder of what could happen if worldwide economic and supply conditions reached the robust levels seen prior to the recession.

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