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The Next Oil Price Spike May Cripple The Industry

by Andreas de Vries and Dr. Salman Ghouri for Oilprice.com

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.

Link to original article: http://oilprice.com/Energy/Crude-Oil/The-Next-Oil-Price-Spike-May-Cripple-The-Industry.html

Comments

Trees

I doubt the last gasp description of oil industry. The industry will get more competitive. Consumers will gain another choice for energy needs. Light vehicle owners may economically chose to go battery car if it suits their needs. Also, families may keep their 4x4 for rough weather or off road adventure.

Air pollution will be a draw. Modern ICE vehicles have ultra low pollution not that far from grid pollution. Ethanol is rated -34% carbon with the phony +22% ILUC hit. Ag department analysis says ethanol will be over -70% in 2020. So, modern hybrids vehicles on par with grid power. Read that Mazda had a model that operated on diesel cycle with gasoline. +30% efficiency gain. Expect biofuel to continue nip at the heels of petrol as well as efficiency gains.

Davemart

'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.)'

Just so, and the difference cannot be closed for big battery BEVs using current chemistry IMO, with different chemistry in mass production out to beyond 2025 at the earliest,

So big battery BEVs are a product of subsidy and mandate likely to crash in sales when either are reduced as happened recently in Hong Kong, for instance.

Trees

Yes, there may be a day of reckoning unless the industry can come up with cheap, lighter, and much more powerful batteries that last for the cars lifespan. True that zealots will and now will afford BEVs and mostly chose per the desire to refuel at home. But for the industry to dislodge the ICE a miracle battery must be invented.

Car companies don't know either and continue to invest in all technologies. Most believe the hydrogen fuel cell is the optimum battery that will dislodge the ICE. Indicators are pointing to that end.

SJC

Oil went from under $20 to over $100 during Bush and Cheney, that was NOT a coincidence.

dursun

It's like Schrodinger's Cat Oil, it goes up and down at the same time.

HarveyD

For BEVs to better compete with new improved ICEVs, batteries have to be improved:

1) lighter more performance (from 200 Wh/Kg to 600+ Wh/Kg),
2) price has to drop from $150+/kWh to less than $75/kWh,
3) recharge time reduced from 60 minutes to 10 minutes,
4) duration from 6-8 years to 12-16 years.

Those improved batteries may not be around before 2030 or so.

Meanwhile, improved FCs will soon meet the above specs but H2 price has to drop from $10/Kg to about $3.50/Kg to make FCEVs competitive. Another 10 years may be required.

SJC

Exxon and Chevron made a ton, imaging getting FIVE times the price for your oil.

Gasbag

So you have someone who has a vested interest cherry-picking data from an old report based on older data from an analyst with questionable expertise on what they are analyzing. If only we had a report from an non conflicted reputable source based on recent data. Voila! Two days ago AAA released a report on TCO and contrary to BCA Research's findings AAA found that EVs currently have a lower TCO than the average for ICEVs!
Vehicle_Type Annual_Cost
Small Sedan $6,354
Small SUV... . $7,606
Hybrid...... .... $7,687
Med. Sedan . $8,171
E. Vehicle..... $8,439
Average....... $8,469
Minivan....... $9,146
Large Sedan. $9,399
Medium SUV.. $9,451
Pickup Truck $10,054

One flaw in AAA's report is that they included depreciation but did NOT include incentives.
Incentives directly increase first year depreciation. If you factor that in then EVs are less than $10 /month more than the cheapest ICEV class listed.

Also worth pointing out that pickup trucks sell very well even though they are not cost competitive. TCO is largely irrelevant for the general public even if it favors EVs.

What is a challenge for EVs is the higher upfront costs. These are significant and are much more significant in the minds of the American general public.


~

Trees

The AAA report brings up some interesting questions. First maintenance is not that costly anymore at least the maintenance attributed to ICE only. Fuel is costly, but automotive continues to improves performance of ICE and hybrid technology. Also, plug in electric power is not paying fair share of road tax yet.

The largest cost of car ownership is the initial investment. Until batteries become cheaper then engines the battery car suffers a disappropriate cost here. The killer cost of car ownership is depreciation, insurance, cost of interest, taxes, licenses, insurance. So much expense tied up with the initial cost of vehicle. Other costs fixed and not a factor of comparing vehicles.

The cost information would suggest to me that those that purchase a vehicle want the best bang for investment buck more so than peak MPG. They will spend big bucks on vehicle and want value on the front end or luxury and appeal if enduring the purchase tag. Fuel costs should level out. Also, pollution concerns should level out given the impact ethanol and technology will have. Grid power efficiency per tail pipe emissions are not as clean as some hybrids running conventional fuel. My guess the grid will take for ever to improve. The grid will improve slower than our car vehicles, so we should not conclude battery car is superior solution.

Also, electric cars are a misnomer. It means little as most cars utilize electric power, hybrids use more, and future cars may be powered by electric drive as a replacement for mechanical drive. We should limit comparison of fuel to grid powered batteries, hydrogen fueled battery, or liquid fueled ICE. Electric doesn't mean much. It is a given that transportation will utilize more electric power within the drive components. We need to instead talk of fuel comparisons. Where the car gets its energy to operate. Also, grid power is a misnomer for auto fuel. Electricity like hydrogen is just a carrier of power. The ICE is a generation plant under the hood. The battery car is just a fuel tank under the hood. The battery car is just a reflection of fuel or energy consumed within the grid. The grid has plenty of problems.

James McLaughlin

People buy EVs because they are COOL. Most American's could not calculate total cost of ownership if you gave them a calculator and the equations. They care about fun and comfort or looking this way or that.

Burning stuff to move your sorry backside around is no longer cool, and it never will be again Get over it.

And prices? Who knows, those are almost as rigged as USA elections.

;)

Gasbag

> 1) lighter more performance (from 200 Wh/Kg to 600+ Wh/Kg),

I believe this is a false requirement believed by those who think that BEVs need to be able
to have 500 mile per charge ranges in order to compete. Based on consumer surveys I believe that mid-range BEVs (140-190 mile range) can satisfy most consumers who have
the good fortune to live in moderate climates. Like you most BEV enthusiasts disagree with me. If they 2018 Leaf supports an adequate charge rate we should have our answer next year.

2) price has to drop from $150+/kWh to less than $75/kWh,

Essentially you're saying that battery prices need to drop in half in order for BEVs to be competitive. I agree with that. battery prices dropped by an average of 14% per year
from 2010 thru 2014. From 2015-2016 the pace of price decline increased to 16% per
year. At that rate it takes four years for prices to drop in half. In 2016 a Nissan director stated that it was cheaper to build short range BEVs than it was to build [parallel] hybrids.
Put those two tidbits of info together and by 2020 we can expect midrange BEVs to be cheaper than parallel hybrids. Add to that the knowledge that consumers have a strong preference for electric drive vehicles. How strong? Consumer surveys show they are wiling to pay up to $5,000 more for a BEV.

3) recharge time reduced from 60 minutes to 10 minutes,

More accurately the 40-50 minutes needs to be reduced but how low? Consumer surveys show that in the US that needs to be reduced to 20 minutes. In Europe they require a reduction to 30 minutes. Not only do batteries have to improve but the charging infrastructure also has to improve. The ability to satisfy consumers expectations is possible with existing battery technologies but this involves a bit too much explanation for me to put here. I'll explain this and consumer range requirements n separate post.

> 4) duration from 6-8 years to 12-16 years.

6 years? Most EVs sold n the US in 2017 were sold in California. The batteries on EVs sold in CA are required to have a minimum of an 8 year warranty. It would be as silly to expect a battery to fail at 8 years as it would to expect an ICEV drive train to fail after 5 years just because that is the length of the warranty.

Those expensive FC high pressure fuel tanks are an exception as they currently have a 10 year expiration date. If FCs ever sell in volume the laws may change.

If you exclude Nissan's gen 1 batteries (which are the only ones which lack thermal management) and the early Tesla roadster batteries there are no significant reports
of battery failures. Moreover Jef Dahn has said that in his teams first year they exceeded their goal of doubling the life of Tesla's batteries. Since it generally takes a couple of years for design improvements to make it to production we can expect this in 2018 or 2019. I don't expect this to have a significant change in transportation but it we would expect it to gut the cost in half for grid storage.

> Meanwhile, improved FCs will soon meet the above specs but H2 price has to drop from $10/Kg to about $3.50/Kg to make FCEVs competitive. Another 10 years may be required.

How soon is soon? Hyundai just gave us details of their 2.5 year update. The most significant improvement was the 9% efficiency increase which will help reduce the cost of fuel consumption by about 9% and extend the range. They also standardized on a single size tank rather than two different sizes. This will allow them to reduce production costs slightly. Those are welcome improvements but not what FC needs. They need dramatic reductions in the costs of their vehicles. Absent from Hyundai's announcement was any indication that there would be any price reduction. They're still leasing these and not selling them which is a clue that they don't view them to be ready for prime time. If "soon" is before 2020 don't expect it to be from Hyundai.

HarveyD

In our area with rugged long cold snowy winter months, we realy need extended range BEVs or FCEVs (500+ Km) to replace ICEVs.

Short range good weather BEVs, like the Leaf (Nissan) and other similar BEVs are restricted for use during 6 to 7 months/year. Short range BEVs are very risky during the 12+ yearly snow storms. They actually created a huge pile-up for 14+ hours on major highways during a regular snow storm last winter. Many users had to be evcuated by local firemen.

In EU and where bio-fossil fuel price is much higher, a decent price for clean H2 would be more like $7.00/Kg. That is doable by 2025 or so.

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