Don’t believe the doubters, there is still a long term need for oil
Bearish outlooks are predicting slower demand for oil and a gloomy market outlook. For the third month in a row, August’s OPEC Monthly Oil Market Report (MOMR) expects lower oil demand and slower growth – about 20,000 barrels per day less than last month’s projections. Total oil demand is anticipated to reach 98.83 million barrels per day.
For 2019, world oil demand is forecasted to grow by 1.43 million barrels per day. The recent introduction of tariffs in US/China trade has cast uncertainty into the growth of both global GDP and oil demand. OPEC has created four scenarios which show possible impact. The first and most likely scenario shows little impact on global GDP and oil demand. There is, however, a worst case scenario which gives a drop in oil demand of one-third.
Another factor which keeps cropping up and creating doubts comes from the revolution of the electric vehicles. The forecasts about the rise in market share of electric vehicles are sucking the life out of investor confidence in upstream oil investments. While it is true that decades from now, there will be changes in the transportation sector coming from increasing sales of electric vehicles, there is still a long-term need for more oil.
The electric vehicle industry requires substantial and continuous liquidity to start having an impact on the transportation sector. In order to get that investment, there are constant efforts to divert funds away from the upstream oil industry. Last year saw a cumulative increase in electric vehicle sales over 2016. Yet, electric vehicles still account for about one percent of global sales. Electric vehicles currently pose no threat to oil demand.
It is expected that oil prices will escalate after 2020. This is due to huge cuts in upstream oil investments of almost one trillion US dollars as a result of the low oil price environment since mid-2014. Despite this situation, investor attention to electric vehicle sales is creating a climate of confusion that is holding back the increase in upstream investments required to meet the growing demand for oil.
Consequently, global oil supplies will undergo huge supply challenges. Producers will try to maintain stability by turning their taps on to maximum production and short-term impacts will be limited. However, if the trend continues, in about a decade the world will be facing a crisis. The oil being refined now was not discovered yesterday. It is the result of capital expenditure made years ago.
Electric vehicles will come into general use at a gradual pace. The manufacturing of electric vehicles is far from reliable. The support infrastructure, from maintenance to charging facilities, is yet to be generally available. Battery technology needs to improve and become less costly. More lithium and cobalt must be responsibly and reliably sourced. Battery recycling is currently an environmental challenge. Costs of operation for electric vehicles must come down. More power plants must be built to supply electric vehicle transportation demands. All this will happen, but over many, many decades.
It is expected that oil prices will escalate after 2020. This is due to huge cuts in upstream oil investments of almost one trillion US dollars as a result of the low oil price environment since mid-2014.
Looking at the forecast average annual growth of electric vehicles and traditional cars, with an extremely optimistic outlook toward electric vehicles, it is predicted that electric vehicles will make up just 25 percent of the total by 2050. This doesn’t equate to even a ten percent reduction in oil demand for transportation. Additionally, electric vehicles will spike electricity demand, putting more strain on the power network!
According to the International Energy Agency (IEA), the transportation sector accounts for about 25 percent of all energy consumption globally. ExxonMobil forecasts that there will be 1.8 billion cars, trucks, and SUVs in the world in 2040, up from one billion now. This will result in a rise in energy demand, albeit at a slower pace because new vehicles will be more efficient – whether running on electricity or gasoline.
The demand for oil continues to grow and the IEA predicts that increasing demand will continue until at least 2040. Oil is used not just for transportation, in fact the fastest-growing reason for oil demand growth is petrochemicals. A rising middle class globally means the need for petrochemicals will also increase as petrochemicals are at the foundation of product manufacturing from paint to personal care items. Thus far in 2018, the increase in upstream oil investment has been modest and mostly in the United States.
The IEA pointed out that every year, three million barrels per day of oil supply lost from mature fields must be replaced before accounting for any new growth. In 2017, discoveries of new oil resources fell to another record low. If the world is to avoid a castorophical oil supply shortages and an asrtonomical oil prices, investors must look beyond the propaganda of the electric vehicle revolution.
- Faisal Mrza. @faisalmrza