To the extent that stock prices reflect expectations of future value, investors don’t like the prospects for oil, and oil’s demise signals muted prospects for economic growth.

Exxon-Mobil (XOM) was removed from the Dow Jones Industrial Average this past August, ending a run that began when the Dow expanded to 30 stocks in 1928. This leaves Chevron as the sole oil company in the index. For most of those 92 years, there were three oil majors in the Index (Standard of NJ/Exxon, Texaco, and Standard of CA/Chevron) – now there is one. Should you care?

In one sense, no. The Dow is an actively-managed index, and 11 of the current 30 firms have replaced other names since 2000. (Exxon-Mobil was replaced by Salesforce.) The financial media treats changes in the Dow as measures of overall market levels, but little money is actually invested in DJIA-linked products. There’s an interesting article in all that, but it’s not this one.

On the other hand, the Dow committee likes to include industries and companies that are growing and successful. Removing XOM is a measure of the decline of the economic status of “big oil.” Over the last two months, both XOM and BP have approached their lows from this past March, which were in turn the lowest prices for those stocks since 1994 (BP) or 1997 (XOM). The S&P 500 has grown by a factor of four since 1997.

The WTI price of oil is (as of October 2020) around $40 per barrel, which is the lowest since 2003 on an inflation-adjusted basis except for a brief period at the start of 2016 and a few weeks this spring. This reflects the abundance of oil supplies after the COVID-induced demand collapse, but it also is a price below what’s necessary to operate much of the industry profitably. The number of bankruptcies in the U.S. oil industry, especially among firms involved in fracking, has reached record levels this year – 44 in the third quarter of 2020 alone.

Oil has been described as the “master resource,” the most important commodity in the world economy. We still live in a material world, and almost everything that moves more than a few miles does so powered by oil in one of its forms – aviation fuel for planes, diesel for trucks and trains, gasoline for cars, and bunker fuel for ships. Some railroads are electrified, and perhaps 1% of the cars and light trucks in the world are now electric vehicles, but those are the exceptions. Oil (and related natural gas liquids) is also the main ingredient in plastics and chemicals that make our food supply possible. When the physical economy declines, the demand for oil does as well.

The world’s oil production (extraction) reached a level in November 2018 that it hasn’t matched since. Further, when U.S. production is excluded, world production peaked in 2016, four years ago. (See figure 1) Current extraction levels are more than 5% below those of a year ago.


If demand for oil stays low, it will be an indication that the economy overall has not recovered. Conversely, if the supply of oil is not adequate, the economy will have a hard time growing. If oil use recovers fully and resumes its growth, that will make cutting CO2 emissions and limiting climate change almost impossible. That creates an important question – have we reached peak oil demand or peak oil supply? Maybe it is both.