One of our four mega-trends identified years ago has been the END OF THE OIL ERA which we detailed in a lengthy article dated October 27, 2018
In the article, we were writing
“The world seems chaotic and unpredictable.
It is a time of changes and the world we are living in is going through major structural changes. We call them MEGA TRENDS
Understanding those mega-trends is paramount to proper investment positioning as they provide the backbone of the scenarios that will unfold in the years to come.
In this series of posts before the end of 2018, we examine the FOUR MEGA TRENDS that are currently at play and that will be shaping our world for the coming decade, and they are :
1. The End of America
2. The End of the Oil Era
3. The End of Technology
4. The End of Radical Islam
Indeed, last week’s crash in the price of oil took the world by surprise but not us.
We had been advocating for months that oil prices were artificially kept high by Saudi Arabia and Russia ahead of the floatation of ARAMCO and that they would collapse one day towards our long-established target equilibrium price of 10 to 20 US $.
Indeed, last Monday’s crash in oil prices follows the open disagreement between Russia and Saudi Arabia, the world’s two largest oil producers after the USA, about how to contain the development of shale oil and the oversupply on the market.
As ee had been advocating for years, OIL is in almost infinite supply thanks to technological developments such as deep-sea drilling and shale oil fracking while demand is bound to diminish due to cheaper alternatives such as solar, wind, nuclear and Hydrogen and to increasing political pressure due to climate change.
The end of an Era
Our analysis on the end of the oil era dates back to 2008 when oil prices were hovering around 140 and Goldman Sachs Australia was toting the dubious theory that there was a finite amount of oil to be exploited and that the world would be running out of oil soon.
This obviously was before major discoveries of offshore fields in Brazil. the Arctic and Scotland and also just before the massive development of the shale oil fields in the USA.
We were mocked by Swiss TV then for predicting that oil prices would soon collapse to US$ 25 and indeed they did 6 months later.
Again, in 2014 we warned about oil prices falling to 26 $ and they did it again.
Our fundamental thesis is that Oil was the energy that powered the 20th century in exactly the same way coal was the energy that powered the Industrial revolutions of the 18th ad 19th century.
We are now moving into an era of INFINITE, ZERO MARGINAL COST, CLEAN energy
The supply/demand equation. for oil is negative as has been negative for years.
In our October 2018 article as in subsequent articles, we made the case that oil consumption would peak in 2019 or 2020, against most prognostics that it would peak in 2030 or 2035.
There are three factors that work against fossil-fuel energies in the future :
. The rapidly decreasing cost of solar and renewable energies makes Oil far less competitive
The following chart form the IEA shows the projected breakdown of energy investments in the future and the total of Fossil oil and Natural gas is decreasing substantially over the years not only in relative terms but also in absolute terms while investments in Renewables and power storage increases substantially,
The following chart published by Japan’s NEDO illustrates the phenomenon better than. anything as Japan is an Oil importing country, like most countries in the world and has developed its own nuclear energy program to become independent.
As this chart shows, Solar photovoltaic power has become cheaper than Oil power by 2015 and is now almost half the cost of oil-powered energy.
The net result can be seen in the following chart that summarizes the NET NEW CAPACITY added between 2009 and 2019 in electricity generation worldwide which shows that OIL capacity has decreased by 2 GigaWatt while Hydro, Wind and Solar have expanded by 1.5 Terawatt over the period.
Interestingly enough, the main addition in coal over the period was China at the beginning of the period while it is now China that invests the most in renewable energy due to pollution concerns.
Electric Vehicles and Hydrogen-powered vessels will phase out fossil oil from transportation
The Energy Information Administration data shows g that the transportation of people and goods accounts for about 25 percent of all energy consumption in the world and that passenger transportation, in particular light-duty vehicles, accounts for most transportation energy consumption. Light-duty vehicles alone consume more than all freight modes of transportation, such as heavy trucks, marine and rail.
The United States is the world’s largest transportation energy consumer. The United States consumes 25 percent of global transportation energy.
The development of Electric vehicles combined with the “Uberisation” of transportation means that oil consumption coming from light vehicle transportation will diminish considerably over the coming decade.
5 Million Electric vehicles were sold in the first half of 2019, a 64 % increase when compared to the same period in 2018.
In 2040, Electric Vehicles are estimated to represent 60 % of the total number of vehicles sold around the world
According to most mathematical models, the rate of equipment of high-speed charging stations is accelerating sharply, itself unleashing demand for Electric vehicles.
Hydrogen Fuel-cell technology is also taking hold in mass-transit buses and cities public vehicles as well as in powering ships.
In 2019, it is estimated that the 5 million electric vehicles will have reduced oil consumption by 100’000 Barrels per day. In 2040, the figure is expected to rise to 6.4 million or 6.4 % of the actual. daily oil consumption.
Finally, technological advances in electricity storage and photovoltaic cells efficiency are making Electric Vehicles and domestic solar panels cheaper and far less complex than Internal combustion engines and fuel heating systems, leading to lower operational costs and longer life spans.
Climate Change is accelerating the phenomenon
Fossil fuels are the main culprit behind the massive climate changes experiences=d in the past ten years and the global warming of the planet. Politicians have been slow to react initially, but save for Donald Trump, most of the world leaders are now putting clean energy and the phasing out of fossil fuels high on their political agenda.
China is leading the fight with massive investments in clean power generation to phase out its coal-powered production and encouraging the spreading of electric vehicles through incentives and tax breaks.
Many countries, including some US states, have passed legislation banning fossil-fuel vehicles form their roads as early as 2025.
The International Energy Agency forecasts a decline in Oil consumption in 2020
he IEA now sees global oil demand at 99.9 million barrels a day in 2020, down around 90,000 barrels a day from 2019. This is a sharp downgrade from the IEA’s forecast in February, which predicted global oil demand would grow by 825,000 barrels a day in 2020.
The short-term outlook for the oil market will ultimately depend on how quickly governments move to contain the coronavirus outbreak, how successful their efforts are, and what lingering impact the global health crisis has on economic activity.
To account for the extreme uncertainty facing energy markets, the IEA has developed various scenarios for how global oil demand could evolve this year. In a pessimistic low case, global measures fail to contain the virus, and global demand falls by 730,000 barrels a day in 2020.
Besides massive offshore oil fields discovered in Brazil, Scotland, the Arctic and even the Eastern Mediterranean where the advancement of deep-sea technologies has made the extraction cost more competitive, the main supply shock has been the US shale oil revolution
The development of the U.S. shale patch is a bit like that of a person. During the first growth spurt in the four years to 2014 the industry was in the toddler phase. Everything was new and exciting, the toddlers stuck their fingers (or in this case their drill bits) into everything, just to see what would happen, and they pushed the boundaries in every direction. The toddler developed quickly, but the outside world taught it a hard lesson with a crash in the oil price in 2014.
The second boom from 2016 has been more like the adolescent phase. After picking themselves up and learning to live in their changed world, the young adults developed their muscles and concentrated only on the things that interested them (the sweet spots in the shale deposits) to the exclusion of everything else. This focus has brought bigger output gains than the first boom.
In the three years between December 2016 and December 2019 output has increased by 4.2 million barrels a day, compared with 3.9 million barrels a day between December 2010 and December 2014.
The biggest challenges of the second shale boom have been identifying and exploiting those sweet spots, consolidating acreage to enable the use of longer wells, and building infrastructure to move the gas and liquids to markets.
`The net result of the development f US shale oil has been to make the USA the world’s largest oil producer and to change its status from an oil importer to an oil exporter, completely changing the rapport de force between OPEC and non-OPEC producers.
This massive increase in oil supply even compensated drastic decreases in output by countries such as Venezuela, Iraq or Lybia.
The following graph shows the massive increase in US shale oil production, amounting now to 8 % of the world consumption
The following graph shows the massive increase in supply since 2011, at a time where oil demand growth has never exceeded 1 % per annum.
When you combine the negative impact on de and of EV, Clean energy and political pressure and the increase in the supply of 6 to 8 % of the world consumption, the downward pressure on prices has been considerable.
In 2016, OPEC decided to reduce output to sustain prices and counter the effects of this natural downward pressure on prices. Saudi Arabia and Russia agreed to cuts sending oil prices above 50 US$ again.
This agreement was prolonged at every OPEC meeting until last Saturday where Russia decided to take another route to counter the effects of US Shale oil.
Indeed, a lot of shale oil producers have elevated extraction costs and are only marginally profitable. A sharp fall in oil prices will ultimately shut down a lot of capacity in the US as there are little economies of scale in what is by essence low cost and low volume production units.
Russia’s strategy is to lower oil prices sufficiently to cut output by 2 or 3 million barrels a day so as to sustain prices in the long term.
Saudi Arabia Strategy was to maximize the cash returns of its reserves knowing full-well that any increases in prices would create higher supply anyways and that ultimately demand is bound to fall.
The jury is out on which strategy will ultimately be the best of the oil-producing countries, but the short term effects of an oil war is another shock to the world’s stock market and corporate earnings.
An all-out oil-price war between Saudi Arabia and Russia, and the bloating oversupply exacerbated by the Covid-19 outbreak, signal very weak fundamentals for oil prices, in the short term.
Crude ultimately fell below $30 a barrel following 2014’s oil crash, and the supply shock this time coincides with a virus-induced demand shock to create the perfect storm with no price floor.
While stimulus plans have helped slow the crash, a reversal by OPEC+ in supply management to cut an aggregate 3.5 million barrels a day would provide a more sustainable support.