Major Oil Companies’ Free Cash Flow

Source: Astenbeck Capital Management

Any shale-induced oil price drop will thus be accompanied by substantial weakness on the conventional side, at least from non-OPEC producers like Shell and Statoil. In global oil production, not all the arrows are pointing in the same direction. Some are decidedly pointing down.

If anything could help the majors, it is enhanced oil recovery. Much has been written at various times about its potential. Of course, such methods are routinely used around the world. The question is rather whether some technological innovation would lead to higher recovery rates in a short period of time for a large number of wells. It is hard to say, beyond noting that pressures in the industry will favor innovation, rather than capital intensity, from here on out. From 2003 to 2011, the oil companies could count on continually increasing oil prices to support incremental exploration and production activities. That strategy ran its course in 2011 when oil prices reached the global carrying capacity. From here on out, incremental oil will have to be recovered relying on brains, rather than money.

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Of course, oil prices depend on more than supply. Demand may matter even more.

Almost all the world’s economies, leaving aside the stable Gulf oil producers, have underperformed GDP projections made by the IMF in 2010. The causes are hotly debated. Until about a year ago, the theories of Harvard economists Carmen Reinhart and Kenneth Rogoff prevailed, suggesting that slow growth was related to deleveraging following financial crises. This theory has recently lost favor. The US has stopped deleveraging in the private sector and household debt service is near historical lows (since 1980) as a share of disposable income. Even the US federal budget deficit is expected to come in under 3% through 2017. Nevertheless, the US has not returned to trend growth, and the economics community is progressively trimming their expectations for potential GDP to meet observed data. Economists like Larry Summers, former US Treasury Secretary, worry about ‘secular stagnation’, in which the US sees chronically low growth of the sort experienced in recent years, with no return to traditional levels.