A. de Vries and Dr. S. Ghour: The next oil
price spike may cripple the industry
Contrary to general perception, the current price of oil is not very low.
The Next Oil Price Spike May Cripple The Industry
Two diametrically opposed views dominate the current debate about where the oil price is heading. On the one hand, there is the view that the price of oil will be " lower for longer ", or even " lower forever ", as the electrification of transport will eat away at oil demand more and more while, at the same time, technological innovation ( shale in particular ) will greatly increase economically recoverable resources. On the other hand, however, there is the view that the price of oil is set to explode, primarily due to underinvestment in the upkeep of brownfields , development of greenfields , and exploration for new resources .
Our view is that most likely, both will happen. How it is possible for the price of oil to go both up and not up, and what would that mean for the oil industry? We will explain.
Why the price of oil actually isn't that low
Contrary to general perception, the current price of oil is not very low. In fact, at a little over $50 per barrel, oil is trading slightly higher than its historic, inflation adjusted average of $47 per barrel , which in and off itself calls into the question the "spike" view: If the period 2001 – 2014 was a clear historic abnormality, why should one expect the price to return those levels?
Furthermore, we agree with the people in the lower for longer / forever camp that electric vehicles (EVs) will eventually offer better overall value to consumers than internal combustion engine vehicles (ICEVs) can, and that this will have a big impact on oil demand. (In fact, we have been highlighting this threat to the energy industry in articles since 2015, for example here , here , here and here .) However, two important things need to be considered in this regard.
The first is that at present EVs do not yet outperform ICEVs comprehensively. While they offer a smoother ride, more passenger and storage space per square foot, and less noise and environmental pollution at a lower "cost of operation" (fuel and maintenance), in terms of "cost of ownership" EVs can yet compete with ICEVs. Excluding subsidies the difference is said to be about $16,000 in the US, $18,500 in Germany and $13,200 in France, despite Tesla and GM reportedly selling their main EV models at a loss .
The second is that under the best of circumstances it will take the EV industry close to another decade to close this cost of ownership gap . (Why it is not a given that this will be achieved we explained here .)
Based on this, our assessment is that the electrification of transport will only slow down oil demand growth during the 2020s. It is after that, during the 2030s and 2040s, that the oil industry should expect to experience the really painful impacts.
Why the price of oil could spike before that
That leaves the period until the end of the 2020s, during which we believe overall oil demand will continue to grow (albeit slower than before).
Supply forecasts developed on this basis hold that more 20 million barrels per day of new production will need to be brought on stream until 2026 for natural production declines and demand growth to be properly addressed. According to WoodMackenzie , only half that quantity can be delivered by projects that are currently underway.
The other half will need to come from still-to-be-launched projects (Pre-FID). But, WoodMackenzie says, many of these still-to-be-launched projects are uneconomical at oil prices in the $50s per barrel, meaning that they should not be expected to get the all-clear anytime soon. Since (non-U.S. shale) oilfield development projects can easily require 5 to 8 years to be completed, all this means that the seeds for a supply crunch in the period 2020 – 2022 are currently being sowed.
Of course, a number of things could happen that would prevent such an oil supply crunch, and thus an oil price spike. For example, oil demand growth could turn out to be less than expected at present, as energy demand growth already disappointed in 2014, 2015 and 2016 and could well disappoint again in 2017 . On the supply side, BP and Statoil have also proven that project re-engineering can slash substantial amounts of off greenfield development costs, as a consequence of which more projects could end up receiving the go-ahead than presently is held possible.
But again, other "risks" such as the U.S. shale "growth over profits" mindset coming to an end , support the oil price spike theory, which leads us to conclude that in all, a tightening of the global oil market is indeed the most realistic expectation for the near future.
Why an oil price spike would be bad for the industry
If indeed the price of oil were to break through $60 per barrel again during 2018, and spike in the years thereafter ($80 per barrel? $100 perhaps?), the "cost of operation" benefit of EVs would be strengthened further, closing (at least part of) the ICEV advantage in "cost of ownership". In other words, an oil price spike would speed up the electrification of transportation, in particular in the Passenger Vehicle segment, as a consequence of which oil demand would peak earlier – not towards the end of the 2020s but perhaps during the middle of the 2020s already.
Those with an interest in a long term future for the oil industry, such as the nations that own most of the oil still in the ground , therefore have an interest in preventing the oil price from going up too much. (Which in a way is ironic, since many of them are the ones working the hardest to push up the price.)
For a future oil price spike would not indicate a sign of recovery of the oil industry. It would more of a "last gasp" by the industry, establishing not much more than a last opportunity for those who do not own the lowest cost resources to offload their oil related assets for a favorable price.
Dr Salman Ghouri is an Oil & Gas advisor with expertise in global / regional long-term forecasting, macroeconomic analysis and market assessments. Andreas de Vries is a Strategy Consultant in the Oil & Gas industry, supporting companies to not only develop strategies for success but also execute them. Petroleumworld does not necessarily share these views.
Petroleumworld reprint this article in the interest of our readers and does not necessarily reflect the opinion of Bloomberg LP and its owners. All comments posted and published on Petroleumworld, do not reflect either for or against the opinion expressed in the comment as an endorsement of Petroleumworld.
All comments expressed are private comments and do not necessary reflect the view of this website. All comments are posted and published without liability to Petroleumworld.
Use Notice:This site contains copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available in our efforts to advance understanding of issues of environmental and humanitarian significance. We believe this constitutes a 'fair use' of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107. For more information go to: http://www.law.cornell.edu/uscode/17/107.shtml.
All works published by Petroleumworld are in accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.Petroleumworld has no affiliation whatsoever with the originator of this article nor is Petroleumworld endorsed or sponsored by theoriginator.Petroleumworld encourages persons to reproduce, reprint, or broadcast Petroleumworld articles provided that any such reproduction identify the original source, http://www.petroleumworld.com or else and it is done within the fair use as provided for in section 107 of the US Copyright Law.
If you wish to use copyrighted material from this site for purposes of your own that go beyond 'fair use', you must obtain permission from the copyright owner. Internet web links to http://www.petroleumworld.com are appreciated.
Copyright© 1999-2017 Petroleumworld or respective author or news agency. All rights reserved.
We welcome the use of Petroleumworld™ stories by anyone provided it mentions Petroleumworld.com as the source.
Other stories you have to get authorization by its authors.Internet web links to http://www.petroleumworld.com are appreciated.
Petroleumworld welcomes your feedback and comments, share your thoughts on this article, your feedback is important to us!
Petroleumworld News 08/14/2017
We invite all our readers to share with us
their views and comments about this article.
Send this story to a friend
Write to firstname.lastname@example.org
By using this link, you agree to allow PW
to publish your comments on our letters page.
Any question or suggestions,
please write to: email@example.com
Best Viewed with IE 5.01+ Windows NT 4.0, '95,
'98,ME,XP, Vista, Windows 7,8 +/ 800x600 pixels