Several decades ago, most pundits saw a world steadily running out of oil.
A decade ago, coal was still king.
Today, the world is saturated with oil as rapidly changing technologies have made it easier to produce "black gold" in areas previously too hard to drill, and America's vast reserves of natural gas have surpassed coal as the nation's primary generator of power.
As the energy industry continues to change, here are the five trends that P&C carriers need to know about:
Nationwide gross oil refinery inputs rose above 17 million barrels a day by the end of 2017, according to Energy Aspects, despite interruptions caused by Hurricane Harvey in the third quarter. (Photo: Luke Sharrett/Bloomberg)
No. 5: The rising price of oil
Almost everything in the oil industry depends upon its price. If oil prices are too high, it's a detriment to the global economy and not good for the industry. If oil prices are too low, it's a sign of a market oversaturated with oil and leads producers to stop drilling. Over the past few years, oil prices cratered. But the price of West Texas Intermediate — the type of crude oil that serves as the benchmark price for what Americans pay for oil — has recently eclipsed the $60 per barrel mark. We're already seeing a ramp-up of oil production as a result. This means there will be more activity in the sector, which means more liabilities for energy companies and a need for insurance expertise in this field.
Snow covers the ground near the Trans Alaska Pipeline System (TAPS) near Copperville, Alaska. (Photo: Daniel Acker/Bloomberg)
No. 4: Infrastructure challenges
Oil is not just drilled out of the earth and put to use. It must somehow make it to refineries which transform the substance into gasoline, diesel, jet fuel and other products. However, refineries are often located thousands of miles away from where oil is dug from the ground.
The most efficient way to ship oil is via pipeline, which is also known as the mid-stream sector. But the areas bursting with oil production, such as North Dakota, the Rockies and western Texas, do not currently have oil pipelines. Much of the infrastructure that does exist is also old. The Colonial Pipeline, which runs from the Gulf of Mexico to the American northeast, has been shut for lengthy amounts of time over the years due to storm damage or maintenance issues, leading to gasoline price spikes in the nation's most populated areas.
However, the Trump Administration has already approved the controversial Keystone XL pipeline, a major signal that we can expect more pipeline construction in the years to come. The current administration has also talked at length about an increase in infrastructure spending, which could lead to more pipeline construction. This also equates to a demand for risk management and insurance protections in a mid-stream sector that could soon boom.
Chinese and Pakistani engineers work in a control room at the Sahiwal coal power plant, owned by China's state-owned Huaneng Shandong Rui Group, in Sahiwal, Punjab, Pakistan. (Photo: Asad Zaidi/Bloomberg)
No. 3: Job shortages
One may be surprised to learn that, despite rising oil prices and the optimism for new and improved energy infrastructure, the energy industry faces a near critical job shortage. A job shortage of this manner means that companies will hire a lot of new, inexperienced people to work in an industry focused around hazardous materials. There is a dramatic increase in liability as a result.
One major area of concern is a lack of drivers with a commercial driver's license, which is needed to transport oil, especially in areas with no direct access to pipelines. For example, the Permian Basin in West Texas is booming in oil production, but moving oil from this area requires trained truck drivers who can safely handle the small, winding roads in the West Texas region. In this region alone, there is a need for another 3,000 CDL truck drivers. It is going to be a real effort to get anywhere close to the numbers of trained CDL drivers the industry needs. There is a lot of exposure to automobile damage as well as workers' compensation claims because of this dynamic.
Technicians work on a circuit breaker at the Sterlite Power Transmission Ltd. Gas Insulated Substation (GIS), which is under construction, in Amargarh, Jammu and Kashmir, India. (Photo: Dhiraj Singh/Bloomberg)
No. 2: The rise of natural gas
At the start of this century, coal was responsible for over half of America's electricity production. Today, natural gas has eclipsed coal as the leading source of electricity generation in America, and continues to rapidly grow. The price of natural gas has dropped steeply as technology not available 20 years ago has allowed the industry to take advantage of the incredible supply in areas like the Marcellus Shale in Pennsylvania and the Barnett Shale in Texas.
Of course, natural gas also burns cleaner than coal, too. Power companies are constantly retooling their plants to generate electricity via natural gas. In addition, liquefied natural gas (LNG) terminals now allow for shipment around the globe. The rapid rise of "King Gas" has revolutionized the American energy industry, but this comes with a number of risks and exposures unimaginable to the industry just one decade ago.
The Ocean Warwick oil platform, owned by Diamond Offshore Drilling Inc., is pictured off the shores of Dauphin Island, Alabama. The platform was ripped from its moorings and blown over 60 miles by Hurricane Katrina before it came to rest here. (Photo: Kari Goodnough/Bloomberg News)
No. 1: The prospects of offshore drilling
The Trump Administration recently made headlines when it announced a plan to widely expand drilling in U.S. offshore waters. This brings to memory the 2010 incident in the Gulf Mexico when a drilling rig named the Deepwater Horizon exploded, killing 11 workers and creating a tragic oil spill. This spill had a giant impact on the energy insurance agency, which paid out hundreds of millions in liability costs.
Many assume that, in a short amount of time, we will see oil rigs dot the shorelines around the Pacific and Atlantic coastlines. But this is not true at all. Rig activity in the Gulf of Mexico, which has gone on for decades, dropped quickly when oil prices catered. Only now, with oil around $60 per barrel, are we seeing activity pick up once again in the region. It takes a lot of capital for an oil company to embark on new offshore drilling activities, especially in a region new to oil exploration and production.
Quite simply, the only companies capable of doing such activities are the world's biggest. They're still recovering from the low price of oil, and still have access to onshore oil sources that are far from hitting peak production. It will be quite some time until we see oil drilling along the Atlantic and Pacific shores.
Mark A. Stoltz is a regional president, and the National Energy Practice Leader, for CBIZ Insurance Services, Inc. He can be reached by sending email to mastoltz@cbizstoltz.com.
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