political disruptions of supply that sent prices soaring were misinterpreted as “new
paradigms” which set new, higher floors on prices, and that appears to be the case
Forecasted price of $100/barrel and more are not impossible to reach, but would
primarily require major producers to hold their oil off the market for long periods.
Climate change policies or expanded electric vehicle sales would tend to depress
the price, not raise it, which have a positive effect on demand.
IMPACT OF PEAK OIL DEMAND ON PRICE
Bloomberg New Energy Finance’s claim that a loss of 2 mb/d of demand because of
rising electric vehicle market shares would cause a price collapse similar to 2014 is
simplistic. From 1980 to 1985, oil demand dropped by only 2 mb/d, but was about
20 mb/d below trend. Given projections that future oil demand will grow by 1-1. 5
mb/d per year, a reduction (as BNEF suggests) of 300 tb/d per year is significant, but
remains only one part of the supply/demand equation. Saudi Arabia, now producing
10 mb/d, could easily accommodate a 2 mb/d cut, and US shale oil production growth
has dropped from 1 mb/d per year to 0.3-0.5 mb/d per year, more than offsetting the
implied BEV effect. Similarly, Iraqi production could potentially grow by 0.3 mb/d
per year, or be flat for an extended period.
Thus, an aggressive electric vehicle adoption rate could put pressure on oil prices,
but there are much greater threats to price levels.
THE POTENTIAL FOR WASTED INVESTMENT
Carbon Tracker Initiative has argued that meeting Paris Climate Accords targets
means that 43% of capital expenditures in oil between now and 2025 are unneeded.
As argued above, it is questionable that there would be much impact from peak oil
demand on current assets, but could the threat to future investment be more
Interestingly, those who argue that long-term investment programs should be
guided by current market assessments are also quick to point out how bad projection
of renewable investments have been. More tellingly, the oil industry invested billions
in the early 1980s in response to “expert” predictions of future market tightness and
rising prices (after they had just tripled), with both the Carter and Trudeau Admin-
F1: 2016 OIL PRICE FORECASTS
istrations insisting that markets were
too myopic to recognize the need for
synfuels and Arctic oil resources,
Which brings back the question of
decline rates: if the world loses 4-5 mb/d
of production capacity every year, how
hard would it be to respond to demand
that is weaker by 10% of that amount
due to the adoption of BEVs? The raw
numbers imply that this is not a challenge, but of course, in the real world,
different behavior by OPEC NOCs, independents, and majors could make this
much more complex in practice.
Expectations that world oil demand will
peak within the decade are based primarily on assumptions about electric
vehicle battery technology and consumer choice that do not appear well founded. The odds that fossil fuel use will come
screeching to a halt likewise seems extremely optimistic. But the simple fact
is that the rapid decline in discounted
cash flow from current reserves implies
that the impact on equity values for petroleum producers will be quite small.
That said, long-lived assets such as
oil sands and stranded natural gas fields
are more at threat than shale oil or offshore reserves, whose production tends
to decline the fastest. Those with aggressive expectations for BEV or climate
change policies should adapt their investment strategy accordingly.
ABOUT THE AUTHOR
Michael Lynch graduated
from M.I.T. and has researched energy economics
for four decades, with publications in six languages.
He was a researcher at M.I. T.
and chief energy economist for DRI-WE-FA, and has served as president of the
US Association for Energy Economics.
He currently is president of Strategic
Energy & Economic Research, blogs for
forbes.com, and recently published The
Peak Oil Scare and the Coming Oil Flood