Yet there is also an assumption in the energy industry - or maybe it's more a hope - that the future holds a last blowout for the oil price before it sinks beneath the western horizon in a desert scene where the nodding donkeys nod no more and the roughnecks follow cowboys into the sunset. Blowout theory rests on the logic that exploration for new oil reserves has been so limited in recent years that, not too far down the line, the oil industry will struggle to maintain global output at its current 93m barrels a day.
It may not be that simple. True, exploration expenditure has dropped off in recent years, but from especially high levels in the years 2008-2013. Besides, between the oil price and the industry's capital spending, it's not clear which is the leader and which is the follower.
The chart below examines this question. Using data for the 26 years 1990 to 2015, it juxtaposes the oil price - proxied by year-end values for North Sea Brent crude - against oil-industry capital spending. The 'capex' line needs some explanation. It takes 'excess' capital spending by four of the western world's major oil companies, ExxonMobil (US:XOM), which is comfortably the biggest, Royal Dutch Shell (RDSB), Chevron (US:CVX) and BP (BP.). 'Excess' is that capital spending over and above each year's charge for writing off existing equipment (in the jargon, depreciation and amortisation). As such, it indicates the extent to which these four were expanding their operations. True, not all excess spending would be devoted to exploration but, in one way or another, most of it would be aimed at producing more oil and gas.
Capital spending and the oil price
The line in the chart shows excess spending as a percentage of total capital spending. This ratio peaked at 51 per cent in 2012 during a four-year spell when it never dropped below 40 per cent. It sank to its lowest level - 14 per cent - in 2000, although that didn't indicate that the oil price was set to rise. It would be 2004 before the price began a prolonged upward surge. This was temporarily reversed by 2008's financial crisis, but eventually the price got clear of $100.
The Big Four made a sustained response, but only after a couple of years of rising oil prices. Possibly they have been quicker to turn off the spending spigot in response to the sharp decline in prices that started in 2014. Excess capex dropped by two-thirds to 16 per cent of total capex in the two years to 2015 and is set to fall to its lowest level in the whole 26 years. In the 12 months to end-September 2016, the excess ratio was just 7 per cent, while two companies - Exxon and BP - spent less on their capital account than they charged for writing off old equipment.
However, the observation that there is no clear lagging relationship between the oil price and capital spending - or even vice versa - means it's a brave call to say that the current decline in exploration and development spending presages the final blowout in oil prices. Besides, we have already had a useful surge. Brent crude's current price - about $54 - compares with a low of $29 just a year ago and it is well above its 26-year average of $46, based on year-end prices.
So perhaps what's unusual is the resilience of the oil price rather than its state of funk. Yet this is not what has been driving the share price performance of the major oil companies these past 12 months. From really depressed levels last January, Shell's price has rebounded by 76 per cent and even BP's by 65 per cent as investors warmed to blowout theory. Naturally, this means that the dividend yield offered by shares in these two has moderated from levels that, a year ago, looked unreal. Even so, on likely payouts for 2016 both shares still yield over 5 per cent, putting them firmly in the high-yield category.
In an investment environment where income is elusive yet, paradoxically, many high-yield stocks have been left behind in the stock market's recovery rally, should I be tempted by these two? Probably not. The chart offers little sign of a link between capital spending and the oil price, which might have fostered optimism. Meanwhile, blowout theory seems more to do with wishful thinking than the realities of a world getting used to the idea of living with less oil.
