May 18, 2020

What Collapse of Oil Prices Means for Texas’ Future

Reporting Texas

David DeCarlo. Courtesy David DeCarlo.

It’s been a rough few months for the global oil industry. First, a price war between Saudi Arabia and Russia sent crude oil prices tumbling. A COVID-19-driven collapse in demand also helped propel U.S. oil futures to their lowest point in decades. In a bid to shore up prices, state regulators in hard-hit Texas considered requiring oil companies to cut production by 20% before shelving the plan for lack of support. To understand the trouble in the oil patch and its effect on the industry’s future, Reporting Texas spoke by phone with David DiCarlo. a professor in the Department of Petroleum and Geosystems Engineering at The University of Texas at Austin. Herewith excerpts:


To what extent has the price war and COVID-19 damaged the industry?
There are definitely companies that are hurting because the revenue is down significantly … I think they can handle it for a little while because they’ve already sold the oil they’re going to produce for a [higher] price. Now, a lot of them are going to face some serious issues. What happens is a lot of people get laid off, which is really kind of a real sad outcome.

Texas has experienced oil crises before. Could this be one of the worst?
The oil industry is always boom and bust. People know that going in, but it doesn’t make the bust any easier to handle. You think you’re prepared but you never are. The demand destruction has been huge worldwide, and prices are going to remain low for a while. So yes, this is going to be a bigger shock. But I don’t know if it’s going to be bigger than the one in the ‘80s.

Did you anticipate things going on this long?
At the beginning, the Saudis were basically flexing their muscles trying to scare everybody … They bought up all the tankers and they sent a bunch of tankers to the U.S., full of oil. That’s what caused the oil price to [go] to really low numbers … The main thing is that people are using a lot less petroleum than they were two months ago, three months ago [because of COVID-19].

How will the crisis affect the future of the industry?
I have no idea how this is all going to shake out. Low oil prices are kind of good for most of us because we aren’t consuming more than they’re producing. [But in] general, it’s bad for Texas. Nobody really has any idea of what’s going to happen because they’ve never seen it before.

Texas regulators decided to dismiss a proposal to cut production. Was that the right choice?
Personally, I don’t think that would really help out prices. I don’t know certain things about economics, but I do know that they are producing so much oil in West Texas and associated gas that they end up either venting or burning the gas they’re producing because they can’t bring [it] to market.

Did you anticipate coronavirus having this much impact?
Oh, yes, but now that the production-consumption is slowly coming back, the prices will come back. If I could tell you what the oil prices were going to be [and when], I wouldn’t be talking to you right now. I mean, I’d be a really rich man.

Do you foresee COVID-19 changing the oil industry?
It’s going to basically accelerate some trends and stop some other trends. Energy trends are going to be driven by the adoption of electric vehicles … There will always be oil needed for jet transportation, heavy truck transportation and train transportation. However, there’s a big future for small automobiles. We are unsure if they will be powered by electricity or petroleum, but that’s a trend [to watch].

What is your biggest worry about the job market for graduates in petroleum engineering?
[It’s] going to be very tricky … in the near future … What are they going to do in the fall now that companies have rescinded offers or at least deferred offers? [The industry is] also dealing with people being laid off … So my concern is whether people can have a nice life for themselves and for their children going forward.