Has the oil industry combusted?
- Oil prices dealt triple blow by reduced demand, electric cars and renewable energy (easyMarkets)
- Renewable energy to account for 26% of global energy supply by 2020 (IEA)
- 35% of cars worldwide will have electric capability by 2040 (Bloomberg New Energy Finance)
Oil prices may have rallied slightly over the past week, but it’s little consolation for producers who are now two years into the protracted slump. In late July, West Texas Intermediate crude futures plunged back down to $40 a barrel. Brent crude, the international benchmark, wasn’t far behind. With hopes of a production freeze fading, the reality of oversupply continues to bog down the market.
But it’s not just the global glut of oil, generated largely by increased production in the US, Canada, Iraq and Russia, that is responsible for the industry’s continued struggle to make production worthwhile.
Nikolas Xenofontos, Director of Risk Management at leading online trading services provider easyMarkets, explains,
“We’re facing a substantial glut in oil thanks to new production techniques and more efficient production, but that’s only half the story. Global demand for oil is dropping and that is keeping prices bobbing around at the low levels we’ve seen for the past couple of years. China’s slowdown means there is less need for oil in Asia, which has had a notable impact on demand levels. Supply has increased at the same time as demand has fallen, so we’re not likely to see oil prices pick up significantly any time soon.”
Following the historic climate deal in Paris, in which nearly 200 countries participated, Russia, Saudi Arabia, Kuwait and other major oil producers have announced plans to overhaul their energy strategy in order to diversify away from fossil fuels. Crude oil is no longer seen as reliable in generating the state revenues needed to foster economic growth and development. Instead, investment is being diverted to renewable energies, with environmentalists around the world rejoicing that market forces are now pushing nations towards cleaner fuel forms.
According to the International Energy Agency (IEA), renewable sources accounted for 13.2% of global primary energy supply in 2012, rising to 22% of worldwide electricity generation in 2013. Looking forward, the IEA has projected that the share will rise to 26% by 2020.
Hybrid and electric vehicles look set to deal a further substantial blow to the oil industry over the coming years. According to analysts, a shift is under way that will lead to growing adoption of electronic vehicles in the next decade. Battery prices fell 35% in 2015, meaning electric vehicles have suddenly become more affordable. This says nothing of the growing efficiencies automakers are introducing to make their hybrid and electric vehicles more affordable.
By 2040, long-range electric cars will cost around $22,000 in today’s dollars, according to a new report by Bloomberg New Energy Finance. By then, about 35% of new cars worldwide will have electric capability.
While electric vehicles are not expected to impact crude oil demand in the short term, this will change over the next decade, plunging another stake into a market that is already struggling with an oversupply of around 2 million barrels per day.
In the longer-term, the rise of greener forms of transportation could be the death knell for the oil industry. Some analysts are predicting that it will be at least a decade until oil returns to commanding prices of $90-$100 per barrel, as was considered the norm up until about mid-2014. Others believe that the development of alternative fuels over that decade might mean that oil’s heyday has passed once and for all. Only time will tell.
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