March 2016

From the Chair - Surviving a 73% Price Decrease

The rapid decline of oil prices has been the topic of many news stories of late.  In June of 2014 a barrel of oil was trading at roughly $115, today that number is closer to $30, a price decrease of 73.21%!  I don't know of many industries that can absorb this kind of wild price fluctuation.  I just read a tweet this week that claimed the cost of the materials for the oil drum is about $90!  That's 3x the cost of the oil that goes in it!!!  What does this have to do with us at SME other than we can enjoy cheap gasoline? 

Conventional wisdom would tell us that if the oil companies have experienced this level of price shock they will not spend on anything.  While it is true that a company that experiences rapid drops in revenue will look to decrease costs, this is only one side of the equation. 

Costs can only be cut so much before they hit rock bottom.  However, technology and innovation can lead to more production for the same or at a lower cost.  Colorado manufacturing companies that directly interface with the oil and gas industry have an opportunity in this downturn. There is a willingness by decision makers to explore new ideas, processes and even new equipment.  Engineers may find that their ideas have sympathetic ears in contrast to the days of the boom mantra "just get it done." Salespeople can listen to the customer for pain points and relay that information to management creating a "pull" for new products.

In other words, the oil and gas industry will open their checkbooks BUT only for innovation and technology that will ultimately increase the bottom line.  Is there any way that your company can help them? More bluntly, can you take advantage of this?

Make no mistake, I'm not suggesting that $30 oil is a great thing for the industry, it isn't. But this is the hand we are dealt; Colorado is a slave to the commodity pricing of the world market.  The best we can do is to help our friends in oil and gas get through this.

The oil and gas industry needs their suppliers to help innovate and introduce new technologies.  A collapse of the industry in our state, while extremely impactful on the finances of many of us in Colorado, would have a larger impact on world markets.  Over time prices would rise again changing the world power structure, away from the USA. Colorado's current production absolutely tilts the power balance in favor of the United States. Let's hope that oil and gas producers in Colorado can pull through this and if there is any way you can contribute, you will be able to.

Disclaimer:  I'm pro-renewable energy; all the way.  However, I see the value of traditional fuel sources so don't think I'm abandoning the renewable energy ship!

Sources: 

http://www.infomine.com/investment/metal-prices/crude-oil/5-year/

http://www.bizjournals.com/denver/blog/earth_to_power/2015/03/oil-production-in-colorado-and-north-america-is-ch.html?page=all

https://twitter.com/gasbuddyguy/status/687650514612260864


Mike Sickenger
Chapter Chairman
SME Chapter 354