Thursday, April 2, 2020

After the recession in 2008, oil and gas companies took a significant hit. Prices dropped rapidly as consumers affected by the financial crisis struggled to get back on their feet. Many oil and gas companies struggled under the pressures of competing in a world where supply was much higher than demand.

A few years later, the industry looked much different. Although it wasn’t up to the success it had before, the industry was booming, and oil and gas companies saw many opportunities for growth and success.

Economists today, however, believe that another supply glut (supply greater than demand) is in our near future as another possible recession is on the horizon. Changes in alternative energy sources are also challenging our oil and gas supply, and major companies are facing a number of financial risks.

  1. Political Measures

Although politics might not seem like a financial problem on the surface, it’s the root of many overhead costs and struggles for those in the oil business. Politicians looking to get a step up in their campaign often grab and environmental issue and gain public approval. As a result, oil companies must reform their operations to meet stringent legislative moves.

For example, the U.S. Environmental Protection Agency (EPA) enacts several restrictions on pollution to minimize harmful emissions. Of course, polluting the environment is not the aim of any oil company, but adhering to these rules can be damaging to the company’s bottom line.

One such regulation is nitrous oxide control. In order to reduce these emissions, power plants can use an SCR or SNCR system to minimize these emissions. These additions and many others like them present a significant financial risk for oil businesses.

  1. Alternative Energy Rises

In the past, alternative energy solutions were not a threat to oil tycoons. However, the landscape is changing, and alternative energy sources are making a dent in the oil business.

These movements are largely lead by a younger generation infused with a desire to improve the environment. They have put out petitions and captured the attention of politicians, driving greater government approval of alternative energy sources. As a result, oil companies have fewer contracts and are looking for other ways to boost their profits.

  1. Geological Issues

According to Investopedia, “the higher the geological barriers to easy extraction, the more price risk a given project faces.” In other words, vertical drilling is much less expensive than unconventional extraction. If a company is operating in a climate where vertical drilling is not possible, this can greatly impact the bottom line.

Additionally, the same people pushing alternative energy are pushing to stop drilling in certain geographical locations. Oftentimes, companies must take unconventional routes to access the oil in certain places, costing time, money, and public approval in the process, all of which hurt the company’s bottom line.

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