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My, How Things Have Changed

By Keith Reid

I first started reporting on the petroleum industry in 1999. At that time, the conventional wisdom was fairly well established. The United States would never again be a major oil producer. Demand for refined products, particularly gasoline, would continue an inexorable increase. Conventional oil throughout the world would become scarce. Prices would continue to rise upward. That conventional wisdom was equally held by people far more knowledgeable than me, who had been established in the industry for many decades.

Oil from shale deposits is nothing new. As a child in the 1970s, I actually remember news anchor Roger Mudd touching on shale oil during one of those news briefs they threw in with the commercials during the Saturday morning cartoons to appease parents. Shale oil, great stuff but just too impractical. As I began working in the industry, shale and other nontraditional sources of oil, such as coal-to-liquid, could have a future if conventional oil became too expensive (and not just in the futures market but more importantly at the well head).

But then, an interesting thing happened. American ingenuity set to work and we made the relatively difficult easy, efficient and generally inexpensive. For the heating oil industry, there were the negative ramifications of the abundant natural gas that was opened up. While that is not likely to go away in any significant manner, the oil side of the equation has finally caught up and OPEC’s stranglehold on the world oil market has likely been broken. Abundant supplies of oil and refined product are coming to the market from American resources. At the same time, stagnant demand in Europe and Asia is playing its role. And, what will likely go underreported is the impact this industry had on derivatives reform through its influence in the Dodd-Frank legislation.

The Saudi’s have been leading the way in trying to preserve market share while at the same time damage U.S. production by keeping its production up and enduring low prices. While the price of oil may drop even further than it is now, there will likely be upward corrections as we move down the road. New drilling will be curtailed, at least in the short term. However, it’s difficult to imagine upward corrections in the $100 per barrel range for any length of time. As production gets shut in from low prices, the price of oil will then increase and reach a point where production resumes—moderating the rise. We have seen this happen with natural gas.

What does this mean for heating oil dealers? While natural gas should remain relatively inexpensive, the same should hold true for oil. Your customers will have more money in their pockets, not just because of less expensive heating oil but from the money they are not putting into the tanks of their automobiles.

Collection concern should decrease, and at the same time there should be more money available for customers to upgrade to more efficient oil-burning appliances. On top of that, while they should have more disposable income, the costs associated with a gas conversion are not going to change. Your inventory costs and associated concerns should also be far more manageable.

Still, while things are looking up it’s hard not to be a bit uneasy. Perhaps it’s just my cynical nature, but I remember all too well the fallacies of conventional wisdom. l FON

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