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The Biggest Risks Oil Companies Face
January 27, 2023
Oil is one of the most lucrative industries in the country — and in the world — but these profits come with plenty of risks. Indeed, oil companies are commonly faced with litigation, backlash, and government intervention. All these factors can impede revenue and thwart operations. The best defense against these risks is awareness, though. Insurers who understand the most significant risks oil companies face can better equip their clients to avoid these liabilities. Learn more about the most common risks for oil and energy companies in the U.S.
Energy Companies Face Political Risk
Political risk is one of the most pressing issues affecting oil and energy companies. According to a report from PBS, at least 20 cities and states are pursuing lawsuits against major oil companies, alleging that the companies are contributing to climate change. Although environmental accountability has long been a challenge for the oil industry, the political nature of this litigation is undeniable. Many politicians campaign on platforms promising that they will fight big oil companies. The risk of politicized action is thus a constant threat to oil and energy companies.
Companies May Face Geological Risks
In addition to political risk, oil companies need to be aware of the geological risk they may face. When drillers first discovered oil in the mid-1800s, it was often plentiful and easily accessible. It is no longer the case. Many drilling sites pose unique geological challenges that increase oil companies’ risk. For example, one oceanic oil platform caught fire in Mexico, leading to exorbitant expenses and severe damage. Luckily, there were no injuries, but incidents like this illustrate the gravity of geological risks.
Pricing Poses a Risk to Oil Companies
Oil companies must also account for the risk that fluctuating prices can impose on operations. As oil becomes increasingly difficult to extract, the cost of production will increase. It will either raise prices for consumers or decrease profits for oil companies. As new technology emerges are more people seek to limit their reliance on oil, some forms of oil extraction may eventually become unprofitable. It will result in the risk of loss if an oil company has already invested in materials, construction, and labor.
Energy Companies Need to Plan for Supply and Demand Risks
Finally, the risk of fluctuating supply and demand is a severe risk to oil and energy companies. Oil extraction demands enormous capital, and if demand suddenly drops off, this may turn into a sunk cost. This risk may increase as political pressure to reduce gas consumption continues to emerge in the U.S. Oil companies should plan for this possibility and limit risky investments and high-cost extraction efforts. ◼
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