The CEO of Exxon Mobil defied the conventional wisdom within OPEC today when he made the case for “Big Oil’s” ability to rebound from the collapse in crude prices over the past two years. Speaking to the Saudi energy minister, Exxon’s Rex Tillerson acknowledged that while capital expenditures and exploration budgets were trimmed over the past two years, companies like his own would be able to ramp up output relatively quickly should prices stay where they are (or even increase, pending petrostate intervention).
Tillerson’s secret: shale (what else?). “I think because we have confirmed viability of very large resource base in North America…that serves as enormous spare capacity in the system,” he said, adding that “[shale] doesn’t take mega-project dollars and it can be brought on line much more quickly than a 3-4 year project.” Echoing a refrain familiar to regular TAI readers, Tillerman underscored the private oil’s industry position with a warning: “never bet against the creativity and tenacity of our industry.”
The New York Times backs up Tillerson’s outlook:
[I]f crude prices can stay above $40 a barrel, the dividends, and stock prices, of the big American oil companies should be secure. And if oil stays above $50, or even hits $60 in the coming months or years, Big Oil may well emerge from the recent lean years stronger than ever.
“Whoever survives this is going to win,” said Michael Rothman, a veteran oil analyst who is president of Cornerstone Analytics, a New Jersey-based research firm. “They’re going to come out smelling like roses.”
We’re heading towards a nightmarish scenario for OPEC and whichever non-member petrostates the cartel is able to talk into joining its potential production freeze at its semi-annual meeting next month. After choosing to merely endure bargain crude for more than two years, favoring market share over robust prices, OPEC is finally deciding the pain of inaction is too great, and so intends to try and erase the global glut of oil and induce a market rebound by cutting production. The problem, of course, are those pesky non-OPEC producers, and more specifically the American frackers, for whom a price rebound will look like an open invitation to once again crank up the output. As Ed Crooks writes for the FT, all that OPEC has accomplished with its non-intervention tactics has been to make the shale industry leaner and meaner:
[F]ar from collapsing, the US shale industry has ridden out the downturn in oil prices and over the summer has even started to expand again. The frackers have saved themselves partly thanks to their ability to evolve. Hardship has been a spur to innovation and production costs have dropped by about 40 per cent since 2014.
And so, should Saudi Arabia and the rest of OPEC decide to collude and scale back their oil supplies, they’ll only end up playing right into the hands of American companies that have been chomping at the bit for any sort of price relief. If we do see a price rebound, frackers will be the first to react, and they’ll do so by boosting output to levels that could end up making whatever cuts OPEC decides on completely irrelevant.
We’ve said it before, but it bears repeating: bet against American innovation at your own risk.