Oil Rush, Gold Rush… What’s Next? — The Clean Energy Boom

In 1859 Edwin Drake aka Crazy Drake had an ingenious idea.

At the time he was working for Seneca Oil drilling for oil in Titusville, Pennsylvania.

Oil wasn’t widely used back then, there were no cars. But Samuel Kier had found a way to refine it into kerosene for use in oil lamps, which turned out to be much cheaper than what they used back then — whale oil.

Drake wasn’t an engineer or an experienced driller, but a retired railroad conductor that had a free rail pass to travel, something the company thought would save them money.

Once Drake had arrived at Titusville, he had leased a small piece of land and started drilling. But he wasn’t having much success.

It wasn’t like there was no oil around…in fact, there was plenty.

People in the area often saw it seeping from the ground but found it a nuisance, particularly farmers. The problem was that it was very hard to extract in large quantities. And even though Drake went through failure after failure, Drake was on a crusade to extract oil. The locals thought he was crazy, hence the nickname.

You see, the main problem he had was that it was hard to keep a bore hole from collapsing with all the debris falling into it.

But then he had this great idea. He lined the bore hole with pipes every few feet to keep it from caving in until he hit the bedrock.

In 1859 he finally struck oil at 21 metres below ground.

And once people heard about his find, they started flocking in. Drake’s discovery caused the Pennsylvania oil rush, something akin to the California Gold Rush.

Oil wells started popping up.

But it wasn’t just oil wells. People were raking in money from producing oil, but also in related industries. There were refineries, transport, hotels, casinos, and even iron works to supply people with drilling tools.

It transformed the small town of Titusville into a thriving city.

The first Titusville millionaire from the oil boom was Jonathan Watson, the owner of the land where Drake had drilled his well.

But soon there were millionaires galore, with some reckoning that at one point Titusville had the most millionaires per 1,000 people in the world.

Sadly, Drake wasn’t one of them.

He hadn’t bought much land in the area, and then he also failed to patent his method. He ended his days in poverty.

But Drake’s discovery made some early oil investors very rich.

The Pennsylvania oil rush was the birth of what would grow into a massive oil industry. A revolution that would bring about Standard oil.

Those were great times for oil.

The Future of Oil and What Comes Next

But things are turning, and much like how oil brought an end to whale oil use, we may have very well already reached peak oil demand.

It’s been brutal for the oil industry during the pandemic. Too much oil around and a collapse in demand brought an oil crash in April.

In fact, the pandemic has driven record bankruptcies already in the US shale industry this year.

This week too, Exxon Mobil — who’s been one of the main champions for oil’s future — made an unprecedented move. They’ve written their assets down to the tune of US$20 billion.

They are also looking at getting rid of assets and decreasing their annual capital investment to around US$20–25 billion a year, about US$10 billion less than what they had forecasted before the pandemic.

As Bloomberg points out:

That still sounds like a pretty substantial number — but when considered in the context of the wells Exxon Mobil is already operating, it looks markedly smaller. Depreciation, depletion and amortization is already running in the region of $20 billion every year. Subtract that amount, and you’re left with a growth capex figure of $5 billion a year at best, or zero at worst.

Earlier this year Exxon Mobil lost their spot in the Dow Jones Industrial Average after being there for the last 100 years. They also said they will be laying off 15% of their workforce by 2022.

The oil sector has been plagued by write-downs this year. At the same time, renewables are disrupting the scene. The International Energy Agency estimates renewables will make up almost 90% of total power capacity worldwide this year.

Renewables are becoming cheaper and technology is improving.

We could be on the cusp of the most important energy disruption in over a century.

But as my colleagues Ryan Dinse and Lachlann Tierney say, every system change comes with ‘second-order effects’. Much like in Titusville, where the advent of the oil industry also trickled down into other industries, the shift to renewables will not only benefit wind, solar, and batteries, but it will go much further.

It’s something my colleagues Ryan and Lachlann have been looking into.

To read his full research report, click here.

Best,

Selva Freigedo,
For Money Morning

PS: Invest in the Renewable Energy Boom — Discover three ways you can invest to capitalise on the $95 trillion switchover from fossil fuels to renewables. Click here to learn more. 


Selva Freigedo is an analyst at Money Morning. She has a background in financial economics, but what makes Selva´s experiences different to many are the places she has lived and worked. Born in Argentina, she has also lived in Brazil, the US, Spain, and now Australia. She has seen up close many of the economic phenomena that worry Fat Tail Investment Research readers, like hyperinflation, bank bail-ins and governments burdened with so much debt it cannot possibly be repaid.

Every week, she goes through each article, research note and recommendation produced by our experts around the world to give you information on how to build and protect your wealth. Selva packages the week’s best ideas into one easy to read report: Port Phillip Insider Extra.


Money Morning Australia