Oil update: Price stability, with climate change uncertainties

From the January-February 2025 edition of Supply Chain Management Review.

January-February 2025

As much discussion and deployment of artificial intelligence took place in 2024, 2025 is shaping up to be an even bigger year. This year will likely see the acceleration of AI, and specifically Generative AI, into…

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This is my annual update on oil that began with my first Insights column: “Is your supply chain addicted to oil?” (January/February 2007). Since, I’ve focused on the price of oil because freight costs are a sizable (and controllable) portion of supply chain costs. Also, because it appeared that oil prices would rise over time, it was obvious that supply chains would have to be more energy-efficient and much less dependent on oil. Initially, the tagline was “supply chains needed to slow down” because highly responsive chains were energy inefficient. Furthermore, once there were climate concerns, oil got a “dirty name”—as a polluting CO2 fuel—that became another important reason to squeeze oil out of supply chains.

As the title of this column suggests, things appear to be the same for quite a while in the oil/energy markets, while climate change remediation is uncertain. The titles of my last five updates tell most of the story of the recent past.

• “Oil Update: Fracking challenged with cheaper oil” (January/February 2020).
• “Oil Update: Still need fracking?” (January/February 2021).
• “Oil update: Where’s the global energy plan?” (January/February 2022).
• “Oil update: We need security plans from policymakers” (March/April 2023).
• “Oil update: The same, for now” (January/February 2024).

Fracking made a more perfect oil market

Over the past several decades, shale fracking in the U.S. has played a major role in moving the oil markets away from the too-often political whims of OPEC and other major oil exporting countries—including the rogue state of Russia. Fracking became a stabilizing factor in moving the oil market closer to a free market, largely based on supply versus demand principles. While pricing did not grow as fast as expected, it was more volatile and reacted to major economic crashes, wars, and the COVID-19 pandemic. These events caused either demand or supply to significantly change, and with that oil prices, as well.        

Climate uncertainties lurk in the background

The U.S. signed the “Paris Climate Accords treaty in 2016, which covers climate change mitigation, adaptation, and finance. It was negotiated by 196 parties at the 2015 United Nations Climate Change Conference and entered into force in November 2016. There appeared to be a mutual global strategy to move away from fossil fuels and replace them with renewables and other CO2 non-polluting energy sources in the long term. Goals were established to reach net zero by the middle of the 21st century and keep the rise in global surface temperature to no more than 1.5 degrees C above pre-industrial levels. Also, emissions needed to be cut by roughly 50% by 2030. These turned out to be unrealistic goals for a variety of reasons.    

For one, developed countries dropped the ball on the opportunities to develop safer, non-polluting nuclear energy. Germany’s gambit to replace its nuclear power plants with natural gas from Russia was shown to be a bad strategy when Russia attacked Ukraine. Meanwhile, progressive climate activists were pushing against the use and development of all fossil fuels. Including fighting against pipeline construction for natural gas, meant as a “bridge fuel’ that produces less emissions. Meanwhile, China and India continue to increase their use of coal as a cheap energy source. Over these past two decades, the world’s population has increased from about 6 billion to the current 8 billion, on a possible path to nearly 10 billion by 2050 according to the United Nations. That growth will likely require some use of fossil fuels into the foreseeable future.

I believe that no country’s energy plans were well-thought out. At recent climate conferences, the U.N. has stated that countries were woefully behind in meeting their goals. Apparently, everyday ailments of human life are getting in the way. Countries now recognize that they will need to develop energy plans that explicitly consider a balance among three types of securities: 1) energy, 2) economic, and 3) climate change.

A brief history of oil pricing

In each oil update I’ve shown Figure 1, an updated historical chart depicting real quarterly imported crude oil prices since 1974. The chart shows various pricing levels through time. After the era of cheap oil ended with rising prices, the first signs of cheaper oil appeared as a precipitous drop, the result of the Great Recession of 2008, which drastically depressed worldwide economies and the demand for oil. This was followed by a three-plus year period, termed the “$100+ plateau” before receding to cheaper oil. The $100+ plateau ominously looms in the rearview mirror as a reminder of what could happen if worldwide economic and supply conditions reach the robust levels seen prior to the recession.

 

Over the period of higher oil prices, U.S. oil fracking operations came online because the prices were high enough to economically justify them. U.S. frackers used the opportunity to innovate to reach a point where operations were flexible enough to easily turn on and off as oil prices went up and down. The fracking industry made the United States the world’s top oil supplier and a net exporter. In addition, fracking output caused a worldwide oversupply of oil that brought back the era of cheap oil. However, as discussed in my 2021 update, oil prices dropped to cheap oil levels when the pandemic began—prices not seen since around 2004. I questioned whether fracking was still economically justified. As seen from Figure 1, the Russian invasion triggered a spike in prices. However, it was short-lived, peaking to over the $100+ plateau for only one quarter and back down to cheaper oil—hovering around $80/barrel.

The past year in the news

 During 2024, I identified several news articles I thought were newsworthy to mention in this update. Two were published in the Wall Street Journal (WSJ) as opinion articles by renowned global-oil expert Daniel Yergin. “All Is Quiet in Oil Markets–for Now” (Nov. 15, 2023) reinforced the view that fracking had rebalanced the oil market toward more U.S. dominance as a stabilizing force, as demonstrated by the lack of price increases from the wars in the Middle East and, as Yergin noted, “Iran and China have a stake in keeping prices contained.” In “America Can’t Do Without Fracking” (Oct. 31, 2024), he states that “Shale is crucial to the U.S. economy and allows Washington to buttress our allies across the globe.”

The “Power Hungry” article in Bloomberg Businessweek (Jan. 29, 2024) was subtitled: “AI and new factories need so much electricity that old coal plants are sticking around.” With the recent hype in AI, many tech companies plan to build huge cloud data centers powered by electricity. Some are looking to locate near non-polluting hydro-electric dams—and others, such as “Amazon.com, Google, and Microsoft” (WSJ Oct. 23, 2024) are looking toward nuclear to power their centers. With regard to nuclear energy, a stumbling block has been the dearth of reactors built during recent decades. The view was that they are too costly to build, experience cost overruns, and are highly regulated for safety issues. In “Shortfall in Engineers Pressures Nuclear Industry’s Renaissance” (WSJ, Sept. 24, 2024), the article states that: “Demand for nuclear energy is rising fast. Whether there are enough new recruits [i.e., new college graduates] to keep the industry humming is another question.”       

While renewable energy sources (such as wind and solar) are making great strides in moving toward non-polluting sources, demand for fossil fuels growth has overshadowed their growth. For example, the use of coal in 2022 reached an all-time high. In “Wind Power Stumbles As Problems Mount” (WSJ Aug. 8, 2023), it was reported that “developers and would-be buyers of wind power are scrapping contracts, putting off projects and postponing investment decisions.” Citing “rising prices and logistical hiccups” as the reasons.

In my Insights column, “100% uptime for renewable energy sources” (May/June 2023),
I advised that it is paramount when developing wind and solar energy products to make them easy to maintain and readily repaired to get the full benefits of their non-polluting nature. The goal ought to be 100% uptime when the wind is “blowing and the sun is shining.” Apparently, GE Vernova and Vineyard Wind—that are developing a skyscraper-sized wind-turbine farm south of Martha’s Vinyeard—are not consistent with my advice. The Boston Globe (Oct. 24, 2024) reported that “Progress on Vineyard Wind was halted in July when one of the blades fell apart, sending fiberglass debris into the ocean and onto nearby beaches.” As of the October article, “It remains unclear when electricity generation or blade installation will resume at the farm. This is a reminder that much of the innovation for climate change is yet unknown.       

Recommendations

My advice generally stays the same as the past few years. It will always be prudent to reduce the use of carbon-based energy sources by making your supply chains as energy efficient as possible.

Policymakers are having difficulties weaning their citizens away from fossil fuels. The reality has been that renewable energy, while growing rapidly, has not kept up with the still-growing thirst for fossil fuels. The business world needs less uncertainty and more clarity. We can only get that when policymakers focus on three coordinated and balanced plans for energy security, economic security, and climate security. These will likely be developed later, rather than sooner. Thus far, life getting in the way is too-often putting climate change policy on the back burner. Generally, humans behave in the short term when they vote for policymakers. And 2050 is too far over the horizon to matter much to them.

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MR