A Forecasting Session with Dr. Bernard L. Weinstein
The oil and gas industry in Texas still anchors our great state’s economy, despite the setbacks of a wild year. In 2020, our energy sector faced the one-two punch of a spiraling price war and a global pandemic, resulting in depressed prices and thousands of job losses.
Where does the industry stand now, and what does its future hold? To gain some insight, Texas CEO Magazine recently hosted a forecasting session with Dr. Bernard Weinstein, associate director of the Maguire Energy Institute at Southern Methodist University’s Cox School of Business, where he is also an adjunct professor of Business Economics. Dr. Weinstein focused on the outlook for the oil and gas industry in Texas, which, though recovering, still faces myriad uncertainties and challenges.
B.C.: “Before COVID” Highs
Since the US Shale Revolution began a decade ago, the United States has been catching up to other oil exporting companies—and doing so quickly. By the end of 2019, Dr. Weinstein noted, we had reached all-time-high oil production levels of 13 million barrels per day. Texas was and is “the big kahuna when it comes to oil production,” he said, “accounting for 42 percent of all US crude oil production.” We have surged from producing under 2 million barrels a day to contributing more than 5 million daily barrels. Thus, Texas has played a major role in making the United States the top oil-producing country in the world, overtaking Russia and Saudi Arabia from our third-place spot in 2016.
Paralleling the US oil boom is our growth in production of natural gas, both dry and liquified, which has doubled over the past decade. Once again, Texas is a key player, outranked only by Pennsylvania in volume of natural gas produced. All this adds up to what Dr. Weinstein described as an “incredible achievement” for the country: the fact that we have reached energy independence. We now export more energy than we import, with Texas being an undeniable driver behind reaching this milestone.
However, even before COVID, the industry faced several challenges, which Dr. Weinstein enumerated:
- Oversupply. “There’s too much oil and too much natural gas,” said Dr. Weinstein, noting the irony that we had once been worried about running out. “That’s helped keep prices low, but oversupply is not good in the long term.” For one, we’ve seen a shortage of space to store oil, and we’re also flaring natural gas in many cases rather than capturing it, especially in the Permian Basin.
- Pipeline wars: Litigation, protests, and delays have plagued the construction of pipelines. Whether it’s confrontations over the Dakota Access Pipeline, governors flat-out vetoing pipelines, or developers walking away because of the accruing cost of lawsuits and delays, these projects are not easy to finish—or even begin, in some cases.
- The growth of renewables: Lots of wind and solar is coming onto the power grids, “displacing both coal and, to a lesser degree, natural gas.”
- Dislike of the industry: Dr. Weinstein noted that the Trump presidency seems to have fueled environmentalists, who portray the petroleum industry as destroying the planet. Five states have banned or are in the process of banning fracking, including Vermont, Maryland, and New York.
The Post-Pandemic Reality for Oil and Gas
After the pandemic began, said Dr. Weinstein, “we went almost overnight from consuming about 100 million barrels per day globally to 75 to 80 million barrels per day.” That steep drop in demand had a depressing impact on prices: we saw oil go from $60 per barrel at the beginning of year to $40, “which seems to be the new normal.” He also pointed out that the number of active oil rigs has dropped from almost 1,100 in January of 2019 to fewer than 300 last October.
It’s been a “rough ride” for oil producers, said Dr. Weinstein. “Everybody’s losing money. There’s a lot of consolidation, mergers, acquisitions occurring in the oil and gas industry today . . . the focus is on preserving capital and showing a positive cash flow. Energy is now one of the smallest sectors in the S&P 500,” making up just 2.6 percent. He also noted that the only oil company now left in the Dow is Chevron. Since the lows of the pandemic, energy production has increased somewhat, but progress is slow. That includes the Permian Basin area, which continues to produce, albeit at lower levels; Weinstein described it as Texas’ Energizer Bunny.
Have we hit “peak oil”?
The question on many minds in the petroleum industry is whether demand and production will rebound, or whether we’ve already hit our peak. Dr. Weinstein “sticks with the consensus,” forecasting that 2030–2035 will likely mark maximum global oil demand. He points out that oil demand has probably already peaked for the wealthy, developed OECD nations, and will slowly fall between now and 2045. “But as the rest of the world industrializes, demand is going to continue to grow, and the growth in global oil demand is going to offset the decline in oil demand in the developed world.”
Texas: The King of Wind
With the new Biden administration, Dr. Weinstein doesn’t “think there’s any question that we’ll see an attempt to roll back some of Trump’s deregulatory actions on the energy front and a push for more so-called clean or green energy.” When it comes to one form of such energy—wind—Texas leads once again. We are currently the “king of wind,” with 29 gigawatts of installed wind capacity across the state. (Behind us are Iowa and California.)
“We’ve been subsidizing wind like crazy for 20 years,” said Weinstein, at both the state and local level in Texas, and at the federal level overall. “For $71 billion dollars in subsidies, we’re getting a whopping 3.6 percent of our energy from wind and solar.”
The future is natural gas
Though 2020 saw declines in production of natural gas, as with oil, Dr. Weinstein stated that this is forecast to pick up in the second half of 2021, with positive year-over-year numbers from there. “When it comes to fossil fuels, the future is natural gas. We may reach peak oil demand in 2030 to 2035, but the demand for natural gas is going to continue to grow , mainly because more and more natural gas is being used to generate electricity both here and around the world,” as well as to back up wind and solar, “when the wind’s not blowing and the sun’s not shining.” Texas is poised to be a big part of that natural gas future: “We’re number two in dry natural gas, but we’re number one in liquified natural gas. That’s some really good news for Texas.”
For Dr. Weinstein, hydrogen is another fuel to keep an eye on, with “tremendous potential, particularly for power generation and transportation.” And what about nuclear power? “I don’t think we’re going to see new investment in nuclear,” said Dr. Weinstein. “If we really want to have a clean and green energy future, nuclear has to be part of it, but it’s out of favor right now.”
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Dr. Weinstein ended on a sanguine note, stating that “we’re not looking at the end of oil. We may be looking at the end of peak consumption in the developed world, but that’s not going to be the case worldwide. I don’t think there’s any reason to be pessimistic about oil, particularly here in the state of Texas.”
This event was made possible by our generous sponsors: