Industry Outlook

Industry Outlook

Many investors are concerned that the oil and gas industry faces insurmountable competition and policy changes in the coming years.

We at Cimarex would like to share how we think about the future of the oil and gas industry, and why we believe that—if we look carefully at the benefits of oil and gas and the potential concerns—our industry will play an important role in helping humanity flourish in the decades ahead.

The outlook summarized

The demand for abundant, affordable and reliable energy will almost inevitably increase in the coming decades—especially from the 3 billion people who lack it most. The oil and gas industry has an essential and irreplaceable role in meeting this growing demand.

But our industry does face challenges—above all, the possibility of excessive policy restrictions on oil and gas. However, we believe these policies are likely to be moderated by the economic realities of the world’s need for energy and the underrated ability of humanity to adapt to climate changes.

Figure 1 – 1.2 Billion People Without Access to Electricity

  • Access to Electricity
  • Africa
  • Asia
  • Latin America
  • Middle East
  • Other
Source: IEA Energy Access Database 2017:
Notes: 2016 data, millions of people, rounded

Figure 2 – World Population Without Access to Electricity

Source: World Bank DataBank World Development Indicators
Notes: For data consistency purposes, these numbers are all derived from one source. The percentages are expressed in X%*100 in the original data source and have to be divided by 100 for calculation purposes.

Figure 3 – Billions More People Will Soon Join the Middle Class

Notes: Absolute numbers in millions, 2000 numbers not available

Figure 4 – Access to Energy Will Continue to Increase

Sources: IEA Energy Access Outlook 2017 Table 2.1 p.49

The industry’s prospects – the full context

The demand for abundant, affordable and reliable energy will almost inevitably increase in the coming decades—especially from the 3 billion people who lack it most.

Abundant, affordable and reliable energy improves every aspect of life – increased food production, shelter, transportation, medicine, and leisure activities. In agriculture, for example, 90% of the world’s population was once devoted to food production. Thanks to machines, the work of 2% of the population can now feed billions.

Unfortunately, there is a large and unmet global need for energy: according to the IEA, over 1 billion people do not have access to electricity (Figure 1) and 2.8 billion do not have access to clean cooking facilities, with 2.5 billion relying on biomass.1

The good news is that energy poverty is decreasing (Figure 2). Thanks mainly to hydrocarbons, nearly 1.2 billion people have gained access to electricity since 2000, a trend that is expected to continue over the next decade as billions more people join the middle class (Figures 3 and 4).2

Figure 5 – World Energy Consumption Is Expected to Rise Over the Next Two Decades

Sources: EIA International Energy Outlook 2017 Table A1
Notes: Data before 2015 not available

Figure 6 – Oil and Gas Continue to Be the World’s Fuels of Choice

Sources: BP Statistical Review of World Energy 2018
BP Energy Outlook 2018
Notes: Historical data discrepancies from data revision in the data set

Overall, the demand for affordable and reliable energy is increasing worldwide. The EIA projects in its reference case that world energy consumption will rise by 28% between 2015 and 2040 (Figure 5).3

The oil and gas industry has an essential and irreplaceable role in meeting the world’s growing need for abundant, affordable and reliable energy.

Oil and gas currently supplies 57% of the world’s energy consumption—and will almost certainly supply much of the world’s energy for the foreseeable future (Figure 6).4

The world relies on oil and gas because of the nearly unrivaled affordability, reliability, and, in the case of oil, portability. For example, the shale revolution has made gas power plants increasingly competitive over the last decade as a source of reliable electricity—and gas is often the best solution for peak load electricity.5 A study by Mercator Energy found that by reducing natural gas prices by more than 60% from the early 2000s, the natural gas industry helped saved U.S. families $32.5 billion on their electricity and heating costs in 2012 alone, with the poorest Americans benefiting the most.6

Some are concerned that competition from electric vehicles (EVs) and renewable energy will make oil and gas obsolete. Such worries are exaggerated.

Figure 7 – Demand for Oil Is Expected to Increase Through 2040

Sources: BP Energy Outlook 2018
Notes: Unit is million barrels per day

Figure 8 – Despite Subsidies, Solar and Wind Supply Little of the World’s Energy

Sources: BP Statistical Review of World Energy 2018
Notes: "Other" consists predominantly of minor renewables, including wind and solar, and was calculated as the difference between primary energy consumption and all major sources listed. This is a conservative way of estimating solar, wind, biomass, geothermal consumption.

Figure 9 – As Germany Has Increased Its Reliance on Solar and Wind, It Has Seen It's Residential Electricity Rates Skyrocket

BDEW-German Association of Energy and Water Industries - Strompreisanalyse May 2018
Notes: Unit is Euro per kWh for a household consuming 3500 kWh annually.

EV manufacturers continue to struggle with profitably, delivering a competitively priced product that consumers want, and are heavily dependent on government subsidies and mandates. Today, EVs make up about 0.3% of the global fleet and just over 1% of annual sales.7 That could certainly change, but it is important to keep in mind that only 27% of oil demand comes from passenger vehicles.8 Even if the EV market were to grow from 4 million automobiles to 400 million in the next 20 years, oil demand is still likely to increase due to rising demand from sectors where oil is truly irreplaceable, such as aviation, petrochemicals, and shipping (Figure 7).9

As for renewables, because the process required to transform intermittent sources of energy into usable energy is difficult and expensive, solar and wind supply less than 3% of the world’s energy (Figure 8)—and are almost always backed up by hydrocarbons.10

Developed countries that have most aggressively attempted to increase their reliance on intermittent renewables have hit barriers of feasibility given the challenges involved in harnessing intermittent energy, causing their electricity costs to rise by as much as 100%, as in the case of Germany, with the average German household paying 3-4 times as much for electricity as Americans pay (Figure 9).11

Barring unforeseen technological breakthroughs in storage technology, intermittent renewables will continue to supplement natural gas but will not replace it on any significant scale over the next decade and possibly much longer.

Nuclear and hydroelectric power provide affordable, reliable power, but regulation and (in the case of hydro) scalability challenges will likely limit them to modest global growth over the next 30 years.

Figure 10 – Energy-Limited Policies Increase the Cost of Electricity


7.00 to 9.00Cents per kilowatt hour

9.01 to 10.00Cents per kilowatt hour

10.01 to 12.00Cents per kilowatt hour

12.01 to 15.00Cents per kilowatt hour

15.01 and HigherCents per kilowatt hour

National Average: 10.54
Cents per kilowatt hour

Source: U.S. Energy Information Administration; Electric Power Monthly: February 2018

Will the oil and gas industry be able to meet the growing demand for our product? Absolutely. Thanks to ever-evolving technology that turns unusable hydrocarbon into usable hydrocarbon, abundant and affordable hydrocarbons will be available for generations to come.

According to BP, between 1980 and 2017 proved oil reserves increased by almost 150% and proved natural gas reserves increased by 170% with a reserves-to-production ratio of over 50 years. Even under unrealistically low assumptions about technological advancements and unrealistically high assumptions about increasing demand for hydrocarbons, oil and gas will be available and economical for decades.12

However, the future of oil and gas will depend in part on energy policy. Energy policy matters. It influences our home electricity bills and the prices we pay at the pump. In the U.S. alone, energy policy contributes to dramatic differences between states in the price of energy (Figure 10).13 Cimarex believes that energy freedom is the policy which made today's leading energy sources possible while paving the way for new and improved resources tomorrow. Energy freedom allows the production and consumption of energy resources we judge best, so long as we follow sound laws against pollution and endangerment.

Proposed excessive policy restrictions on oil and gas are likely to be moderated by the economic realities of the world’s need for energy and the underrated ability of humanity to adapt to climate changes.

Investors are concerned that under a 2°/450 climate scenario, the target set by the Paris Climate Agreement, our industry will face severe restrictions on our ability to produce oil and gas.

Recent analysis has been clear that meeting these targets will require significant shifts in government policy, market preferences, and consumer behavior. Many policy proposals put forward, although well intended, would achieve little in the way of atmospheric CO2 reduction. These include the elimination of diesel vehicles, widespread adoption of electric cars, and renewable power generation, which is significantly backstopped by fossil fuel power generation. Widespread adoption of nuclear power generation is the most effective power generation alternative to achieve atmospheric CO2 goals, but environmental fears have blocked the growth of nuclear power generation. As recent civil unrest in France has shown, many developed countries remain unwilling to adopt policies that, although potentially resulting in lower CO2 emissions, would result in significantly higher electricity and fuel costs. Meeting the Paris climate targets will require policies and restrictions that, thus far, have been met with reluctance. Furthermore, any proposed policies and solutions must be globally adopted (including developing countries) or they will be largely ineffective.

Thanks to technology powered by abundant and affordable energy, especially oil and gas, we enjoy the safest climate in the history of humanity. Climate-related deaths have decreased by 98% over the last century, according to analysis based on data from the Emergency Events Database, EM-DAT (Figure 11).14 Regardless of the energy source, our top priority should be to expand the benefits of energy to the billions who currently lack it.

Figure 11 – As CO2 Emissions Have Increased, Climate Deaths Have Plummeted: We Are Safer from Climate Than Ever

Sources: Carbon dioxide Information analysis Center Fossil-Fuel CO2 Emissions Global Annual Time Series (CITE AS: Boden, T.A., G. Marland, and R.J. Andres. 2017. Global, Regional, and National Fossil-Fuel CO2 Emissions. Carbon Dioxide Information Analysis Center, Oak Ridge National Laboratory, U.S. Department of Energy, Oak Ridge, Tenn., U.S.A. doi 10.3334/CDIAC/00001_V2017)
Scripps Institution of Oceanography merged ice core data
EM-DAT: The Emergency Events Database - Université catholique de Louvain (UCL) - CRED, D. Guha-Sapir -, Brussels, Belgium.
Notes: Climate-related deaths are defined as deaths from hydrological, meteorological, and climatological events as shown by the database (such as storms, wildfires, floods, droughts, etc.). These are absolute deaths, not adjusted for population growth over time.

Figure 12 – Oil Remains the Fuel of Choice, Even at Prices Far Higher Than Those Proposed by Carbon Tax Advocates

Sources: EIA
World Bank Data
Notes: Unit is $ per gallon. The World Bank data had to be recalculated to show a comparable price per gallon, the $ denominations might be slightly different because of deflator choices but the discrepancies are minor.

Another proposal that is rapidly gaining traction is a carbon tax. Many proponents of a carbon tax argue that it is a preferred alternative to additional regulation because it would allow free markets to adjust to low carbon energy production as a means to minimize the tax. The Carbon Pricing Leadership Coalition, CPLC, estimates that “the explicit carbon-price level consistent with achieving the Paris temperature target is at least US$40–80/tCO2 by 2020 and US$50–100/tCO2 by 2030, provided a supportive policy environment is in place”. Less conservative estimates are much higher.15

A carbon tax in the range of $50-$100/tCO2 would shift power generation away from coal in favor of renewables, but leave the role of hydrocarbons in transportation and petrochemicals virtually untouched. A $100/tCO2 tax would raise the price of a gallon of gasoline by less than a dollar, which would inflict a significant burden on consumers but still not overcome the competitive advantages of hydrocarbons as a transportation fuel, as price differences between countries and over time show (Figure 12).16

It is unlikely that many countries will be willing to enact the more severe restrictions necessary to stop people from choosing oil and gas to meet their energy needs. The most rapidly expanding energy markets, including China and India, continue to increase their use of fossil fuels.17

Even countries with relatively high levels of support for restricting CO2 emissions have placed only moderate restrictions on hydrocarbon emissions. According to the World Bank, “about three quarters of covered emissions remain priced at less than US$10/tCO2,” with countries such as France, Denmark, and the UK all falling well below the minimum $40/tCO2 tax advocated by the CPLC.18 A recent report from the Organisation for Economic Co-operation and Development concluded that the “carbon pricing gap”—the gap between existing limits on CO2 and a modest $35/tCO2 tax benchmarkis 76.5%.19

We are watching these policy proposals and the resultant politics around them with keen interest. Recently, many have suggested that the US adopt a “Green New Deal”, although specifics behind this proposal have been lacking. Recent events have demonstrated that Western democracies will demand affordable energy solutions that do not place undue burdens upon the middle class and the poor. With these criteria, oil and natural gas will continue to have a significant role in transportation, petrochemicals, heating, and power generation. Although we may see modest disruption associated with policies designed to address climate change, oil and natural gas have firmly established themselves as a fundamental part of the world’s energy future. We believe we can develop these resources without compromising our commitment to the environment, the communities in which we operate or our commitment to our shareholders and to our employees. 

1 IEA, Energy Access Outlook 2017
 IEA, Energy Access Outlook 2017 Brookings Institution,The Unprecedented Expansion
 EIA, International Energy Outlook 2017 (p. 9)
BP, Statistical Review of World Energy (p. 9)
EIA, Electricity Annual (Table 8.4)
6 Wall Street JournalFracking and the Poor
7 OICA, 
World Vehicles In Use – All Vehicles
Cumulitive Global EV Sales Hit 4 Million EV Volumes, Global Plug-In Sales for Q1-2018
8 Columbia University's Center on Global Energy Policy,
Electric Vehicles and Their Impact on Oil Demand
World Energy Outlook 2017
BP, Energy Outlook
10 IBP, Statistical Review of World Energy

11 BDEW, Strompreisanalyse (May 2018) EIA, U.S. state retail prices for electricity
Energy Economics, The Market Value of Variable Renewables
12 BP, 
Statistical Review of World Energy
(see "all data, 1965-2017" .xlsx file) IEA,
International Energy Outlook 2018  (High Economic Growth Cases)
13 Global Energy Institute, Average Electricity Retail Prices

14 Global Energy Institute, EM-DAT: The Emergency Events Database -Université catholique de Louvain (UCL) -
CRED, D. Guha-Sapir, Brussels, Belgium
Indur M. Goklany, Wealth and Safety:
The Amazing Decline in Deaths from Extreme Weather in an Era of Global Warming, 1900–2010
 (p. 3)
15 Carbon Pricing Leadership Commission, 2017 Report of the High-Level Commission on Carbon Prices (p. 3)
16 EIA, Today in Energy (May 25, 2018
17 IEA, CO2 Emissions from Fuel Combustion
18 World Bank Group, ECOFYS, 
Carbon Pricing Watch 2017
 (p. 4)

19 OECD, Effective Carbon Rates 2018 (p. 8)