Combating the Glut: How the Energy Industry Can Survive the Oversupply

The world’s oil supply continues to far outpace demand. While refineries are increasing their output of processed petroleum products, increased production has done little to curb the vast supplies of crude still in storage. Likewise, even consumption generated by the summer driving season has been insufficient to make a dent on supply.

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Moreover, uncertain events such as the recent loosening of economic sanctions for Iran could further contribute to the global supply of petroleum as Iranian crude supplies fully penetrate the market in the months to come.

If these trends continue, there might be significant repercussions to the economic viability of the energy industry. Oil prices could drop. Prices, however, may eventually rise again as demand picks up. In the meantime, the major and minor players in the oil industry must adapt to the changing conditions, sometimes having to make tough decisions in doing so.

One of these measures is to veer away from investing in high risk, low return projects when prices and production would not justify the costs. Another is to delve into the costs of individual operations to increase their efficiency, which may sufficiently lower expenses to continue production at least at break-even prices.

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Finally, the industry can continue to play the waiting game. The consumers are the primary winners of the glut and could hold the key to the industry’s salvation. Motivated by the drop in prices, they begin to slowly but surely create more demand for petroleum products.

Brian Alfaro is the founder and president of Primera Energy, LLC, which owns significant petroleum operations in the Eagle Ford Shale and Barnett Shale in Texas. Visit this website for more on the company and its commitment to investor returns.


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