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I'm not sure about that. High oil prices spur investment in extracting oil. In the short term it might reduce demand slightly (oil demand is quite inelastic) bu

by eloff 5y ago

I'm not sure about that. High oil prices spur investment in extracting oil. In the short term it might reduce demand slightly (oil demand is quite inelastic) but long term it may have the opposite effect.

toomuchtodo 5y ago
Consistent high prices spur investment. Price volatility encourages demand destruction (temporary through a reduction in use, long term through selecting alternatives). Without consistency, returns are unpredictable and capital investments will be directed elsewhere.
- adventured 5y ago
  > Without consistency, returns are unpredictable and capital investments will be directed elsewhere. No, the oil companies will keep being oil companies. Chevron, Exxon, BP, Aramco, KPC, NIOC, Royal Dutch Shell, PetroChina/CNP, Total, Rosneft, Petrobras, Pemex They don't redirect their capital investments elsewhere just because oil went from $72 to $90 and then back to $72. They just keep being oil companies, it's what they do. Most of them focus on hedging prices as best they can to deal with price volatility.
  - toomuchtodo 5y ago
    https://www.fool.com/investing/2020/10/10/oil-investment-hits-a-multi-year-low-what-it-means/ https://www.fool.com/investing/2020/10/10/oil-investment-hit... https://www.reuters.com/business/energy/big-oil-keeps-brakes-spending-even-with-crude-rally-windfall-2021-07-12/ https://www.reuters.com/business/energy/big-oil-keeps-brakes... https://www.bcg.com/publications/2020/oil-and-gas-investment-during-the-covid-era https://www.bcg.com/publications/2020/oil-and-gas-investment... https://www.nsenergybusiness.com/features/oil-gas-spending-cuts/ https://www.nsenergybusiness.com/features/oil-gas-spending-c... https://www.ogj.com/general-interest/article/14201118/2021-capital-spending-to-be-mostly-conservative https://www.ogj.com/general-interest/article/14201118/2021-c...
    - adventured 5y ago
      You said capital investment will be redirected elsewhere (where?). Your links disagree with what you said. The oil majors may restrain spending, they may cancel projects. They don't direct capital spending elsewhere. If oil prices are so low that they pull back on capital spending, they stop spending and cut costs in their operations, they don't redirect their spending. Wall Street redirects industry capital investment in that climate, oil companies do not. You were talking about price volatility, which I referenced as oil going from $72 to $90 back to $72. What you're now suggesting wasn't mere price volatility, that was an extreme crash, caused by a brief global economic shut-down which sent prices to a multi-generational low. Which is why your links are so Covid era heavy in relation to that one-time event. That's like pretending WW2 is a common occurrence and projecting industrial behavior based on it. If oil crashes to $20, Exxon doesn't redirect their capital spending elsewhere. They aggressively stop spending. The oil majors all hedge price volatility. They're very used to dealing with price volatility. It's central to their business operations. What they don't do, is stop being oil companies, they don't redirect their capital investment to becoming farmers or car manufacturers or investing in tech companies just because the price of oil is lower by $20 or $30.
- danans 5y ago
  That is a good point, but I wonder how significant the effect really is. If you look at charts of oil prices for the last 20 years [1] vs US oil consumption the last 20 years [2], the only significant drops in either appear to be due to a) the 2008 financial crisis, and b) the COVID19 pandemic. Therefore, it seems like demand for oil has been fairly inelastic to oil price, but instead is tied to the underlying rate of economic activity - AKA people drive less when they don't have jobs. Now of course that was also because there was no significant alternative to oil as a transportation fuel. Today we have an alternative, so perhaps the volatility will manifest in a shift away from petroleum investment. Even on the consumption side, nearly everywhere in the US electricity is multiples less than the price of gasoline per vehicle mile driven, so it's a bit of an obvious change of fuel on an economic basis alone. 1. https://www.macrotrends.net/1369/crude-oil-price-history-chart https://www.macrotrends.net/1369/crude-oil-price-history-cha... 2. https://www.statista.com/statistics/264825/oil-consumption-in-the-united-states/ https://www.statista.com/statistics/264825/oil-consumption-i...

by eloff 5y ago

toomuchtodo 5y ago

Consistent high prices spur investment. Price volatility encourages demand destruction (temporary through a reduction in use, long term through selecting alternatives). Without consistency, returns are unpredictable and capital investments will be directed elsewhere.

adventured 5y ago
> Without consistency, returns are unpredictable and capital investments will be directed elsewhere. No, the oil companies will keep being oil companies. Chevron, Exxon, BP, Aramco, KPC, NIOC, Royal Dutch Shell, PetroChina/CNP, Total, Rosneft, Petrobras, Pemex They don't redirect their capital investments elsewhere just because oil went from $72 to $90 and then back to $72. They just keep being oil companies, it's what they do. Most of them focus on hedging prices as best they can to deal with price volatility.
- toomuchtodo 5y ago
  https://www.fool.com/investing/2020/10/10/oil-investment-hits-a-multi-year-low-what-it-means/ https://www.fool.com/investing/2020/10/10/oil-investment-hit... https://www.reuters.com/business/energy/big-oil-keeps-brakes-spending-even-with-crude-rally-windfall-2021-07-12/ https://www.reuters.com/business/energy/big-oil-keeps-brakes... https://www.bcg.com/publications/2020/oil-and-gas-investment-during-the-covid-era https://www.bcg.com/publications/2020/oil-and-gas-investment... https://www.nsenergybusiness.com/features/oil-gas-spending-cuts/ https://www.nsenergybusiness.com/features/oil-gas-spending-c... https://www.ogj.com/general-interest/article/14201118/2021-capital-spending-to-be-mostly-conservative https://www.ogj.com/general-interest/article/14201118/2021-c...
  - adventured 5y ago
    You said capital investment will be redirected elsewhere (where?). Your links disagree with what you said. The oil majors may restrain spending, they may cancel projects. They don't direct capital spending elsewhere. If oil prices are so low that they pull back on capital spending, they stop spending and cut costs in their operations, they don't redirect their spending. Wall Street redirects industry capital investment in that climate, oil companies do not. You were talking about price volatility, which I referenced as oil going from $72 to $90 back to $72. What you're now suggesting wasn't mere price volatility, that was an extreme crash, caused by a brief global economic shut-down which sent prices to a multi-generational low. Which is why your links are so Covid era heavy in relation to that one-time event. That's like pretending WW2 is a common occurrence and projecting industrial behavior based on it. If oil crashes to $20, Exxon doesn't redirect their capital spending elsewhere. They aggressively stop spending. The oil majors all hedge price volatility. They're very used to dealing with price volatility. It's central to their business operations. What they don't do, is stop being oil companies, they don't redirect their capital investment to becoming farmers or car manufacturers or investing in tech companies just because the price of oil is lower by $20 or $30.
danans 5y ago
That is a good point, but I wonder how significant the effect really is. If you look at charts of oil prices for the last 20 years [1] vs US oil consumption the last 20 years [2], the only significant drops in either appear to be due to a) the 2008 financial crisis, and b) the COVID19 pandemic. Therefore, it seems like demand for oil has been fairly inelastic to oil price, but instead is tied to the underlying rate of economic activity - AKA people drive less when they don't have jobs. Now of course that was also because there was no significant alternative to oil as a transportation fuel. Today we have an alternative, so perhaps the volatility will manifest in a shift away from petroleum investment. Even on the consumption side, nearly everywhere in the US electricity is multiples less than the price of gasoline per vehicle mile driven, so it's a bit of an obvious change of fuel on an economic basis alone. 1. https://www.macrotrends.net/1369/crude-oil-price-history-chart https://www.macrotrends.net/1369/crude-oil-price-history-cha... 2. https://www.statista.com/statistics/264825/oil-consumption-in-the-united-states/ https://www.statista.com/statistics/264825/oil-consumption-i...