Impact of Supply and Demand on Oilfield Services

Steve

by Steve Leeds

The Leeds Group
Vice President

I'm certain we all understand the basic rules of supply and demand: if I'm the only one in town with a certain widget and everyone wants it, I can charge whatever I want. Low supply: high demand.  It's also called, 'what the market will bear'. And in our business, any business for that matter, it's great to have what your customers want.  Especially if your competition doesn't have what you have or can't do what you do.  Sometimes we call that 'fifteen minutes of fame', but again, a story for another day. That is, the rapid growth in technology.

What happens if everyone has what you have and the demand is high; as in $120 oil? Then there's enough money to go around and mostly everyone does well.  It also spawns more competition and newer start-ups and financing for technology growth. Thus, generating prosperity for all and the incentive to continue the technological development. Suddenly, through what Adam Smith penned as separation of labor, we develop smaller and smaller technical niches in the industry that specialize in smaller and smaller segments of technology. And they become the experts, not the large multi-component labs (Commodity Labs). These large companies, relatively speaking, go to the commercial equipment and hardware market to purchase their technology to resell to their customers, the operating companies.  Or they acquire these small technology companies and bring their products and services into a proprietary environment searching for that elusive differentiator. Meanwhile, the new equipment development companies are also providing the individual services thus establishing yet more competition aka more supply, still much reduced demand.

Now what happens when everyone has the technology (or its available to all that want to purchase the technology) and demand is low, as in $26 or even $45 oil?  Prices 'equilibrate' to the levels necessary to balance the demand.  And many companies go bankrupt while attempting to ratchet down their price structures from $120/bbl to $40/bbl.  And newer companies building up from nothing to $45/bbl start to thrive, and they are introducing newer technologies and, most importantly, introducing new applications and understandings based upon newer technologies. So that provides a differentiator, and an associated higher price. Do to rising demand for your product or service.

The exact same thing supply-demand did to the price of oil is potentially setting up in the core analysis niche. Too many labs, not enough demand for additional measured results as there is SO much data that has been measured over the past 12 years and we are still trying to capture the value.  Bringing about imbalance in the supply-demand curve and low prices for years.  Good for the buyer; bad for the seller, and good for the new groups that are providing the analytics and 'data processing' (I know that's an antiquated term, but it's all I could come up with at the moment).  Again, lots and lots of data to figure out!

So, what to do?  It all ties back to your belief of what the oil prices are going to do. I personally believe there are many supporting arguments and facts that point to the $40-60 range for the foreseeable future (3-5 years).  So, if you're 'playing the hole backwards', $60 becomes the three-year goal.  Now start backing up to the tee box and figure out what to do today.   Do it and figure out what to do next.

I'll talk about the effect of technology growth and the effect of the 'crew change' on the service industry more specifically the upstream reservoir evaluation niche of the industry. It's all the same but how we all fit in is the only variable. For example, technology growth affects every aspect of our industry from capital funding to reservoir engineering services to production facilities. And we're only one industry among thousands!

If you're interested in some of the newer technologies, please visit www.Leeds.Group.

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Lilia Robberts
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This article was very fascinating to me to see how the demand of oil effects the economy. It’s true, the more it is needed the more competition it creates and thus there is advances in technology to supply oil better and faster than other suppliers. I am need of a mass quantity of oil at the moment, and I need to make sure I find a good oilfield supplier.