Oil companies have endured a tough year in 2018. Not only is the price of oil lower than at this time last year, but recent legislative changes have made drilling for oil even harder. Earlier this week, the price of oil plummeted. However, oil prices recovered and were up over nine percent yesterday. Some investors believe that the recent rally is a trap. There are still numerous challenges facing the entire industry.
The vast majority of oil companies are deeply in debt. Starting an oil company requires a tremendous amount of capital. Any downturn in the price of oil can signal a significant problem for the industry. Oil drilling companies usually have much higher debt levels than oil refiners. Once the price of oil drops below a certain threshold, oil drilling is no longer profitable in the United States.
There are deep oilfields in the United States that contain billions of barrels of oil. However, the method to extract the oil causes environmental damage. In the past, many of these oil fields were exploited to produce more oil. Recent legal changes have made drilling more difficult in these areas. Some people believe that these oil drilling methods cause significant issues to the water that people drink. Others think that underground drilling can lead to more earthquakes. More scientific research is needed before companies can drill using these new methods.
Another headwind facing the oil industry is the rising popularity of electric cars. Although electric vehicles are still more expensive than traditional vehicles, there is a growing demand for these vehicles as prices decline. Tesla is one of the largest car companies in the world, and the CEO of the company has stated he wants to eliminate the need for fossil fuels in the future. If electric cars become less expensive than traditional vehicles, it could signal a significant problem for the oil industry.