Like all industries, the petroleum and energy industries go up and down, but there are technological advancements that are shining light on the future of these industries. This historical piece offers some intriguing insight in the marketing at the end of the last century. Does it still have relevance?
The profitability of the petrochemical business has been largely built by upgrading refinery products that were formerly of little value, particularly in such big-volume items as plastics and synthetic fibers, which have been doubling every five years.
Indeed the petroleum industry is expected to struggle for many more years with the same old problems of surplus crude supplies, ample refining facilities, price wars and other forms of competition. All these adverse factors, however, appear to have been already discounted, if not over-discounted. With most of the leading oil stocks priced at a level, in terms of earnings multiples, not far different from that prevailing in the prewar period, they appear to have ample earnings support, with their present earnings providing a reasonable yardstick of their basic or even minimum earning power in times of adversity.
Also, the market tends to overlook positive factors when the gloom is the thickest.
What's behind the new surge of growth in the oil industry? Energy! Oilmen, for instance, hope to get a larger market share of the energy used in making iron and steel. As of now oil, natural gas and electricity, each are getting about 11 percent of the business. Coal still is the primary energy source for the steel industry. However, fuel oil has a prospect of getting more of this market, especially in underdeveloped countries planning their own steel industries, which have little or no coal.
Petrochemical researchers seek to perfect a device to get electricity directly out of oil without combustion. The fuel cell, which would create electricity directly out of oil could be applied to home appliances and industrial devices. Potential applications range from creation of synthetic protein from oil to help feed underdeveloped areas to quantity use of asphalt in upholstery.
Although there is a growing concern over the possible impact of a gas turbine auto engine on demand for gasoline, indications are that it would merely bring about a gradual shift in the type of petroleum products used rather than reduce the total demand.
Historically, the petroleum industry has demonstrated its ability to adapt its output to developing markets. This was evidenced by the transition from kerosene to gasoline and from aviation gasoline to jet fuel. Similarly, atomic power seems more likely to create new energy demand than to displace petroleum as a source of energy.
The annual energy consumption in the United States and Europe is the equivalent of around one-half billion barrels of fuel oil, with the expectation of reaching 700 million barrels in a few years. Basically, the global oil industry is still an industry with growth characteristics, with increased industrialization throughout the world.
During the postwar period, domestic oil demand increased about 5 percent per year whereas the growth in the foreign free world averaged about 10 percent per year with the greatest increase occurring in Europe. Most of the growth in demand in Europe has been for industrial fuel, although sales of gasoline and other products are showing large percentage gains.
The industry is also planning substantial expansion in the use of oil for residential heating. Since the population of Europe exceeds that of the United States, any appreciable percentage increase in such use would have a tremendous impact upon petroleum consumption. While the growth in such consumption is projected at the rate of three or four percent in the U.S. over the next decade, a doubling of that growth rate is expected in foreign countries outside the Iron Curtain, with European growth likely to equal American experience since 1940.
Historically, and to the present day, energy is a huge factor in any economy. With an understanding of past, investors can get a leg up on the future of this constantly evolving industry.