Life is a big challenge for everyone, including the big oil producers in the Organization of the Petroleum Exporting Countries (OPEC) who, despite their long-term views of the market, seem to be still battling with short-term trends.
One of the immediate challenges for OPEC is the production of “tight” or shale oil from North America. This challenge will remain for OPEC at least until 2020, as more recoverable resources of shale oil are discovered.
However, as Sadad Al-Husseini, a former Saudi Aramco senior executive, once said: “Technology can improve recovery and production but it can’t improve geology.” So, it seems that no matter how much the current US administration supports the development of more shale oil resources, the geology may not make that a long-term challenge for OPEC. Even many analysts and investors in shale oil believe that production will peak around 2020.
The US Energy Information Administration (EIA) said in its Annual Energy Outlook for 2017 that the country’s crude oil production may level off at around 10 to 11 million barrels per day (bpd), and that may happen sometime around 2025 as drilling is moving into less productive areas of the shale plays and as the productivity of wells decreases.
So, the first key challenge is easy to deal with if OPEC can get its act together. The second key challenge for OPEC — in the view of the market these days — is electric vehicles (EV).
There were many worrying announcements in the last few weeks on the future of liquid fuel after the UK and France expressed their intent to ban the sale of diesel and gasoline cars starting from 2040, to give a push for more EVs.
There is much debate over EVs and some analysts think that there are many challenges with the mass production of them, as there are still many issues related to the production and effectiveness of their batteries. Some commentators, like the oil academic and analyst, Anas Al-Hajji, even argue that these cars may not be truly environmentally friendly.
The challenge from EVs is not imminent; it is something for the long-term, and even then the demand for liquid fuel will continue. Last year, sales of EVs reached a record 2 million but they still made up only around 0.2 percent of the global car fleet, according to International Energy Agency (IEA) estimates. This number could go up to 40-70 million cars by 2025, the IEA said in June in a special report on EVs.
Bloomberg New Energy Finance (BNEF) has a more optimistic forecast on EVs as it argued in July that “adoption of emission-free vehicles will happen more quickly than previously estimated because the cost of building cars is falling so fast. The seismic shift will see cars with a plug account for a third of the global auto fleet by 2040 and displace about 8 million bpd of oil production — more than the 7 million barrels Saudi Arabia exports today.”
BNEF expects that in just eight years, EVs will be as cheap as gasoline vehicles, thus the global fleet of these vehicles will hit 530 million by 2040.
OPEC needs to gear up for the future and that requires its ministers to meet to discuss the long-term more often — but for this to happen, they need to be united on all fronts and more support must come from above.
Despite all the current hype over EVs, the IEA still thinks that the future of oil looks good. In Istanbul in July, the executive director of the IEA, Fatih Birol, said: “Some people think because of the participation of electric cars, we will see the end of oil soon. We do not agree with this. We believe oil demand will continue to grow. It will grow maybe a bit slower than the past but it will continue to grow.”
The question now is whether OPEC is aware of all these developments in EVs? Yes, it is, apparently. The group said in its Long-Term Strategy (LTS) report that was approved in November 2016, after almost two years of discussions, that EVs pose one of the long-term challenges for OPEC.
OPEC, however, does not seem to see EVs as a threat unless there is a technological breakthrough that can push the demand for them higher.
The LTS report states: “Electric hybridization is becoming attractive for cars mainly used in urban environments with high fuel prices. In addition, pure plug-in electric cars are increasingly gaining attention with strong incentives and technology push, though it would likely require time to gain a significant market share in the next decade due to technical and commercial challenges. However, the possibility of technological breakthrough cannot be excluded.”
The problem with OPEC is that it does not focus on the future and its members only meet to discuss short-term cyclicality and supply-demand balances. OPEC needs to gear up for the future and that requires its ministers to meet to discuss the long-term more often — but for this to happen, they need to be united on all fronts and more support must come from above. OPEC’s last Head of States meeting was in 2007 and much has happened since then. The other problem with the hype over EVs is that the message the West is sending to OPEC is negative — and with no security of demand, OPEC states will be hesitant to invest more in oil.
• Wael Mahdi is an energy reporter specializing on OPEC and co-author of “OPEC in a Shale Oil World: Where to Next?” He can be reached on Twitter @waelmahdi