Is there anything as controversial as the oil price?
I have recently been wary of investing in oil companies such as BP (LSE: BP) and, to a lesser extent, Royal Dutch Shell (LSE: RDSB). From my point of view, we live in a world where oil is increasingly difficult to find and to extract. And most of the remainingreserves in the worldare owned by state oil companies, rather than the majors.
The oil price is tumbling
This means that the oil companies are having to spend much more money extracting oil, whether it befrom the depths of the ocean, the Arctic or the Athabasca oil sands. However, one positive for thesefirmshas been the oil price. The historically high pricelevels has meant that oil has, nonetheless,still been a highly profitable industry. Until now.
Since June 2014 the oil price has fallen from $115 to $85 thats quite a fall. Andit could still fall further. In recent months commodities across the board have been falling. The mining companies have been suffering as the iron ore price has tumbled. I think that this may bepartof a broadercyclical downtrendin commoditiesas wemovefrom commodities bull market to bear market. Now the oil companies are suffering, too.
This may be uncomfortable reading
I know that investors wont like to hear this, but an oil price fall of this magnitude, if sustained, will have a massive impact on BP and Shells profits. It may mean that consensus has overestimated profitability, and thatthese businesses are not as cheap as they seem.
Whats more, a lower oil price may have a longer-term effect on the oil industry. Suddenly, projects thatthe oil companies are investing in will no longer be viable. It may mean that these businesses will need to scale back their exploration and production spend. This will also have an impact on services companies such as Petrofac and Schlumberger.Is theoil industry beginning to embark on a smaller-scale future?
There used to be a lot of discussion about peak oil. In terms of consumption, we mayhave already passed peak oil. We no longer use oil to heat our homes. Cars are becoming increasingly fuel efficient, and a growing proportion are hybrid or electric. Renewable energyis juston the cusp of taking off. The energy industry is in transition.
The Stone Age didnt end because we ran out of stones. The oil age could end long before we run out of oil.
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Prabhat Sakya has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.