The second half of 2008 was one for the record books. Near US $150 bbl oil fell to around $45 bbl by mid-December. A high flying economy sputtered, plummeted, and crashed to the ground, with the Dow Jones falling from near 12,000 to about 8,500. At the time of this writing it looks as though the US Federal Reserve will set prime rates (the rates at which banks can borrow money for relending) at 0.5%, and there is some talk of a 0.25% or even a 0.0% prime rate.
Nevermind the causes of this crisis — unfettered, unregulated greed driven on the financial sector’s sole focus on quarter over quarter increases in profits at the expense of any sound, long-term business planning — the question on everyone’s mind is how this will play out in 2009. Being, in equal parts, dumb enough to make predictions, stupid enough to put them in print, and confident enough to think someone might read them, below are some thoughts about the tenor of 2009.
Oil Prices — I have heard many folks speculate on the floor price for oil. The numbers range from $25 bbl to $80 bbl. I think a reasonable floor is currently in the range of $50, barring further, large deterioration in demand. However, I think the target price next year will be $70 and that oil prices in 2009 will hover around that number due to production cuts by the big NOCs and development slowdowns worldwide. At those prices, business should be sustainable in most areas, but everyone will still be nervous, at least for most of next year, resulting in the following.
Despite promises to the contrary, the “Great Crew Change” will be put on hold. Hiring freezes — many already in place — will be ramped. There may be layoffs, but probably not to a large extent as the industry is pretty much “bare bones” when it comes to workloads versus personnel. The problem will be coming out of the current downturn.
Activity levels will fall. They already have. Barring unforeseen events, they should level off about mid-year 2009. With the fall in activity levels and softer economics, operators will continue to lean on the service and supply industry to reduce prices. Profit levels will fall from all-time highs.
If this sounds like a daunting scenario, it is. However, I believe that this scenario does not have to play out. For years, we prayed for $40 bbl oil. At $50 to $70 bbl oil we can carry on quite nicely in most areas if we can abandon the short-term, “chicken little” mentality and manage this industry for the long term. That is a daunting scenario also, especially since we have never managed to do it before. Hopefully the meltdown of the financial markets, managed for the maximum financial score in the short term, has taught us something. Hopefully, we can find it within ourselves to manage the industry for the long term, settling for lower profits whilst taking advantage of lower costs to build the personnel, technology, and asset base that we will need in the upturn. All it takes is a few brave folks like Rex Tillerson and his group at ExxonMobil, who have announced increases in spending next year and for several years afterward, to get the ball rolling. You can see Tillerson’s refreshing comments at www.exxonmobil.com/corporate/ news_speeches_20081211_rwt.aspx. If we can get past managing for continually increasing quarterly profits, it can be done. It really can be done. The bottom line is next year will be the year that we make it, nothing else.
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