It’s too early to write obituaries of oil
27 Aug 2017 - 9:24
Reports after reports write off oil’s future. But will it happen anytime soon? As people, businesses and countries are rapidly shifting attention to alternative sources of energy for reasons as varying as environment to efficiency, obituaries for oil are rife.
Obituary writers have convincing arguments. They base their reports on variables such as technological advancements; efficiency improvements; fall in the cost of alternative energy production and the growth of electric cars.
There’s no denying that the sector is changing so fast. The silent shale revolution that started in North America few years ago is now making big noises. Worldwide, many businesses are losing money due to the fast changing industry environment. The companies are being forced to invest constantly on R&D to restructure their businesses. Oil prices have come down almost 80 percent from their peak in 2014 and now have been hovering around $50/barrel.
Some analysts argue that the Opec, which meets nearly one-third of the global oil market demand, lost their influence because they no longer command prices. They say despite Opec efforts to boost prices, they remained subdued due to surge in shale output.
However, there are reasons to believe that demand for oil will only grow. At least for several decades, if not centuries to come. When oil was first discovered, coal was the dominant fuel. People said the future of the ‘black stone’ turned very dark. But both grew simultaneously.
Currently, the daily global demand for oil is about 90 million barrels per day , which is expected to reach 111 million barrels by 2035. Dr Omar Abdul-Hamid, Director of Opec’s research division recently said in an interview that the oil demand would continue to grow as there is a continuous investment in combustion engine.
Now, about 85 percent of energy comes from fossil fuels. And oil accounts for a major portion of over 33 percent. And by 2035 the share of fossil fuels is expected to remain still very high with nearly 80 percent in the global energy mix.
The prices of crude averaged about $50/barrel during the first six month of this year, which is about 20 percent higher than the last year’s. Experts believe $50/barrel maybe a new-normal. The lower prices have pushed the industry back to aggressive research as to how to cut corners. A recent Goldman Sachs report notes this: “Big Oils are showing strong ability to adapt to lower oil prices through cost cutting.”
Many analysts do not agree with the prolonged oil market glut. Once the current inventories are cleared, the market will witness a boom as the fall in investments will create future supply shortages.
Oil giant ExxonMobil estimates the energy demand from 2010 to 2040 is expected to register 140 percent increase (without efficiency gains across economies worldwide). However, as demand increases, the world will continue to become more efficient in its energy use. As a result, the global energy demand seen rising 35 percent from 2010 to 2040 despite the significant gains in energy efficiency across sectors.
With over one billion people , mostly in Indian-subcontinent and Sub-Saharan Africa, without access to energy, the focus shifting to developing nations. Carbon fuels will continue to meet about three quarters of global energy needs through 2040. This is consistent with all credible projections, including those made by the International Energy Agency.
The global middle-class population is expected to touch 5 billion mark by 2030. That middle-class expansion — largely in China and Indian subcontinent — will be the largest in history and will have a profound impact on energy demand.
The last 10 years saw energy demand increase by more than 30 percent. Half of that came from China. The oil enjoys competitive advantage over other fuels due to various factors, including government support. The massive $550bn subsidies (worldwide) on oil are four times bigger than that on renewables.
Along with income-gains, expanded infrastructure, electrification, urbanisation and people’s quest for a more comfortable lifestyle, will contribute to greater energy demand. Emerging South Asian countries hold key in energy demand growth.
Energy trade will be highly skewed in Asia with 80 percent of coal trade, 70 percent of oil trade and over 65 percent of gas be going to Asia. Despite slowdown, China will continue to be one of the largest energy consumers in the world.
The oil pessimists don’t deny the future energy demand altogether, but they say that will be for alternatives such as nuclear, solar, wind and other renewables. They say that there will be a major shift toward lower-carbon fuels in the coming decades that, in combination with efficiency gains, will lead to a gradual decline in energy-related CO2 emissions.
China is influencing the market in a big way as the country is moving from the energy-intensive heavy industry to light industries and service sector, to address the country’s climate change issues. The result is a new phase in the demand for energy growth in China. From 2000 until 2014, China’s energy demand growth and GDP growth moved in a parallel. But after 2014, the demand for energy fell behind GDP. But fall in Chinese oil demand will be offset by India.
The main driver of the energy demand will be India, where over 200 million people live with no electricity. By 2040, India’s energy consumption will match that of US. And the demand will continue to grow in India because the per-capita energy consumption in the country will still be about 40 percent lower than the global average.
The car ownership in India is now less than 20 per 1000 people, which is very low as compared to the US and Europe’s 750/1000 and 500/1000, respectively, according to an IEA data. The number of cars in India by 2025 is expected to be in the range of 45–60 million, or 35/ 1,000, according to TERI, a Delhi think tank.
The rising income and urbanisation means more demand for cement, steel and other construction materials, necessitating more trucks and other heavy vehicles to the already huge transportation sector. Furthermore, unlike China, India is pushing, under the ‘Make in India’ campaign, to boost the energy-intensive heavy industries.
No doubt, wind, solar and biofuels are expected to be the fastest-growing energy sources, increasing about 6 percent a year on average through 2040, when they will be approaching 4 percent of global energy demand. Despite all that cost efficiency improvements and other factors, renewables will account for only about 15 percent of energy demand by 2040.
However, fossil fuels, including oil, will continue to have a dominant share in the global energy mix, which experts believe will continue for the next several decades. And the Opec’s efforts are not futile, as the share of Middle East countries in global oil market has increased to about 40 percent, for the first time since the 1969 Arab-Israeli war.
The writer is a Doha-based journalist.