As Oil Prices Predicted To Remain Low, Energy Firms Seek Ways To Adapt | KUOW News and Information

As Oil Prices Predicted To Remain Low, Energy Firms Seek Ways To Adapt

Jul 28, 2017
Originally published on July 31, 2017 2:24 pm

The CEO of Royal Dutch Shell this week said his company is making a striking shift in its thinking: It now expects oil prices to remain low forever. The global oil glut of recent years shows no sign of diminishing. Energy demand has leveled off. And if electric vehicles take off, oil prices could come under even more downward pressure.

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If you've been enjoying cheaper gas prices this summer, you might be happy to hear that the head of a major oil company says that probably will not change. NPR's Chris Arnold reports on how energy companies are adapting as car companies selling SUVs are celebrating.

CHRIS ARNOLD, BYLINE: Executives at oil companies have been using this term lower longer, as in oil prices will be lower longer with this glut of cheap oil. But this week, the CEO of Royal Dutch Shell basically said, you know what? Forget that. It's not lower longer. Oil could be cheap forever. And his company is adjusting.

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BEN VAN BEURDEN: By adopting what we call the lower-forever mindset.

ARNOLD: That is a cheap oil forever mindset. Without as big a gusher of cash coming into his company from pricey oil, CEO Ben van Beurden says Shell is trimming costs. They've also got some new liquid natural gas projects.

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VAN BEURDEN: We are transforming Shell so that we can become more competitive and resilient in the future.

ARNOLD: So, OK, but is oil really going to stay cheap forever? We reached out to an oil industry analyst, Tim Rezvan with Mizuho Securities.

TIM REZVAN: I think oil prices will continue to be cyclical and be subject to exogenous shocks from either economic changes or geopolitical events. But what I think the CEO is doing is appropriately preparing the business to operate under a worst-case scenario.

ARNOLD: So oil prices might go back up, but he says it's hard to see how that'll happen any time soon. Russia and OPEC keep pumping away. Actually, Rezvan says a couple of years ago, OPEC allowed oil prices to stay super low, hoping to force North American fracking operations to go out of business. But Rezvan says that backfired.

REZVAN: What that did is it forced efficiencies into the business. And efficiencies came through really stronger than anybody had been anticipating. The industry has gotten so much smarter and quicker and more efficient.

ARNOLD: Which means the cost of bringing oil and gas out of the ground through fracking keeps getting cheaper. And that's keeping oil prices low. While oil companies have been scrambling to adjust, Americans have been heading to auto dealerships. Stephanie Brinley is an automotive analyst with IHS Global Insight.

STEPHANIE BRINLEY: It's, you know, a really dynamic time for the auto industry right now. And what we're seeing with the lower fuel prices is that people are more comfortable choosing an SUV over a passenger car.

ARNOLD: Brinley says SUVs have gone from 10 percent of auto sales in 2000 to 29 percent of sales last year. But she says for people fearing an environmental calamity, it's not as bad as it sounds.

BRINLEY: Because they're not gas-guzzling SUVs as they were in 2000, because the dynamic has changed completely. Now we have - like I said, we have small entries like the Jeep Renegade, the Mazda CX-3, the Toyota C-HR.

ARNOLD: Brinley says many SUVs are getting smaller, getting better gas mileage - some above 30 miles per gallon on the highway. And longer term, regulators are forcing the industry to keep reducing emissions. France and England are planning to ban sales of new combustion engine cars by 2040.

BRINLEY: The pressure remains on the automakers.

ARNOLD: Brinley says while fully electric vehicles are still less than 1 percent of sales in the U.S., automakers are coming out with better and cheaper electric models, which should boost sales. For his part, the CEO of Shell says he's changing the car that he drives from a diesel to an electric. Chris Arnold, NPR News, Washington. Transcript provided by NPR, Copyright NPR.