THE OIL MARKET
MOMENT OF RECKONING
Praveen Jaiswal turns to the crystal ball to map the likely scenario for black gold
Deferring problems has been the oil industry’s bugbear and this is precisely why price volatility is frequent. Hope causes the oil market to rally while reality causes it to sink.
Members of the Organization of the Petroleum Exporting Countries (OPEC) including oil majors believe that the industry will enjoy decades of growth as it feeds the energy needs of the world’s expanding middle class.
But what if they are wrong?
The International Energy Agency (IEA) sees oil demand rising by over 10 percent to 104 million barrels a day by 2040 based on assumptions of a best-case and ‘business as usual’ scenario.
Forecasters don’t usually anticipate seismic shifts in technology that could slow demand growth or even eliminate it altogether.
Advances in vehicle efficiency, growth in electric cars, tighter emission standards and shifts to other fuel sources would result in the demand for oil being much lower than what the industry is currently betting on. Economists believe that it’s not a question of ‘if’ but ‘when’ the timing of the arrival will be.
Innovators are shifting toward low-cost clean energy technologies much more rapidly than political leaders are preparing society. They also believe that our current system of fossil fuel energy will be rendered obsolete and be replaced by a new energy source that’ll become society’s main power supply.
About 60 percent of liquid fuel is used in transportation from which the most significant technological changes are emerging. Recent developments will solve the twin problems of decreasing dependence on the oil-based economy to reduce air pollution, and vehicles becoming smarter with improvements in aerodynamics to enable them to travel farther on less fuel.
These and other technologies would reduce emissions and costs especially in a world where the IEA sees oil prices rising from around US$ 50 a barrel for most of this year to 80 dollars at the end of the decade and above US$ 100 dollars by 2030. Efficiency improvements could eliminate the need for about 12 million barrels a day of oil supply, it says. The most noticeable shift in transport will probably be electric cars. This is expected not only in battery technology but more so in the amalgamation of communications and automobile engineering to make the entire transportation sector smarter.
A transfer is expected from individual ownership of traditional petroleum-powered vehicles to sharing hi-tech and possibly driverless cars, which would have far-reaching economic and social consequences. China’s most recent auto industry plan expects new vehicle growth emanating from electric vehicles. India also plans to sell only electric cars by the end of the next decade.
In essence, the industry is expected to evolve more in the forthcoming decade than in the last century.
Oil companies are proactively planning for this shift. Oil major Shell is betting on zero-emission hydrogen cars, and building liquefied natural gas (LNG) refuelling stations for trucks and ships. In India, Indian Oil Corporation (IOC) has already made advancements in hydrogen refuelling outlets in a few cities.
Biofuels are also set to grab a slice of the pie from oil in markets such as aviation with airlines seeking to eliminate carbon emissions through their usage.
The International Air Transport Association (IATA) supports R&D and the deployment of alternative fuels. It believes that a six percent share of sustainable second-generation biofuels is achievable by 2020. This is in support of the goals of the aviation industry achieving carbon-neutral gains by 2020 and a 50 percent decrease in carbon emissions by 2050.
It says radical measures would be required to limit global warming to within two degrees Celsius. That would mean oil demand peaking around 2020 and declining by about 20 million barrels a day by 2040 – about 36 million barrels a day lower than the average oil company forecast for 2040.
A downward shift on this scale would have dramatic consequences for oil producers who are among the world’s largest companies today.
Assuming the above turns into reality soon, the landscape of downstream oil and gas business looks dramatically different. State-run oil giants that dominate OPEC are even more at risk and could one day be left with billions of barrels of unwanted oil.
Regardless of which perspective resonates most, the future is uncertain. Oil companies will need to be alert and fundamentally robust for all-round organic and sustainable growth.
Population growth and economic development will drive the global demand for natural resources that are both renewable and non-renewable. While the world’s supply of non-renewable resources is technically finite, new technologies will continue to impact future supplies especially in valuable oil and gas.
And the application of new technologies will drive future business models in the energy sector and drastically impact the geopolitical balance of power.