Oil People Bubble

Karel Beckman has published an article at RenewEconomy about the strategy of oil companies under the title “Why the strategy of oil companies is doomed to failure”. It is built mostly around an interview with Adriaan Kamp, who has spent some time as a manager at Shell and is now running an energy consulting firm.

I was interested in one thing Kamp said:

Oil people still “live in a bubble”, says Kamp. “They lead a very good life. They operate in a very strange environment: the less they do, the more the price of their product goes up, and the more money they will make. That’s a very perverse incentive.”

This confirms my Phaseout Profit Theory, in the words of an insider who knows much more about the oil industry than I ever will.

Of course the oil companies will make more money by doing less. Invest less in new projects and supply goes down. Do less production from existing wells and supply goes down.

Obviously, less supply means higher prices, which means higher profits per unit, as well as higher valuations for your reserves.

I fail to see what is “perverse” about this incentive. This is exactly the kind of incentive we need. If it is true that oil companies make more money by doing less, they get an incentive to leave more oil in the ground.

I hear there is this “global warming” problem that requires doing exactly that.

Published by kflenz

Professor at Aoyama Gakuin University, Tokyo. Author of Lenz Blog (since 2003, lenzblog.com).

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