The Great Oil Slump of the 2020s – Part 2b, Demand and Technology

Guest blog by S. A. Shelley

In my previous two blogs I have offered views on oil supply and the (macro) social changes that are resulting in a slowdown of growth in oil demand. In this blog, I’ll look at some of the technological (micro) factors that that will contribute further to a drop in demand. This combination of oversupply and drop in demand will have significant and far-reaching impacts on oil companies, petro-nations, and all the companies and people who are a part of the industry.

I. Improvements in Efficiency will Affect Oil Demand

Over the last 20 years energy efficiency has started to have an impact. That is, people do more with the same amount of energy input. Looking at air travel (airplanes, Fig. 1) and cars (mileage, Fig. 2), between 1997 and 2016/2017 the mileage per passenger on an airplane or per car has increased by about 32% (while world population has only grown by about 25% over the same time period).

Fig. 1 Air Travel Fuel Efficiency per Passenger (Source data, Wikipedia )
Fig. 2 Automobile Average Fuel Economy (Source data, NY Times)

At some point, especially in the OECD states, demand for cars and fuel will decrease. Airline industry analysts project passenger demand growth year-over-year of about 3.5% for the next 20 years. But as fuel costs are the largest expense for airlines, we can confidently assume that airlines and aerospace engineers will keep finding ways to fly farther with less fuel.

II. Substitutes for Oil in Transportation

What’s looming on the horizon that could affect oil demand? Substitutes for oil by alternative fuels and renewable energy. “Half of oil demand for transportation is driven not by passenger cars, but by jets and heavy-duty trucks.”” (WSJ.com )

We’ve only just started to see large scale buying of personnel EVs (InsideEVs.com), and personnel EVs are getting a lot of press (Reuters; FoxNews.com ). But it won’t be personnel EVs that will quickly kill oil demand; it will be the widespread adoption of EVs by fleet operators that will have a much more immediate and significant effect on oil demand. Fleet EVs such as trucks and buses are being adapted very rapidly, globally, because on a large vehicle, fleet basis, the total cost of ownership of EVs are already economically viable. Even when factoring in the higher initial purchase price for electric delivery trucks the running costs are so much lower for electric trucks (4 cents a mile) compared to diesel trucks (35 cents a mile) in an urban environment (Govtech.com) that the economics can’t be beat.  Electric transit buses (EBuses) are now more economical than diesel or CNG fueled buses in most urban applications (Fig 3). Electric transit buses will just keep getting more economical as battery pack prices fall and battery energy densities increase.

Fig 3 Total cost of bus ownership

Every 1,000 EBuses on the road displaces about 500 bbls of oil demand per day (Forbes). At last count there are over 300,000 EBuses on the road worldwide, with more planned every day, everywhere (GulfNews.com). 

To Fleet EVs I could also add other alternative fuels for fleet vehicles, with hydrogen gaining market penetration and a lot of interest, but a hydrogen discussion will need to wait for a future blog.

I’ve also entirely skipped a discussion about the fuel changes to shipping and the advent of commercial scale electric airplanes. Again, for a later blog (if the readers are curious about that…).

III. Substitutes for Oil as Industry Feedstock

The second major technology shift coming soon to a nation near you is the reduction in the use of single use plastics and the switch from oil based plastics to bio-based feedstocks. After transportation fuel, oil companies are looking at stable demand for oil as a feedstock for petrochemical and plastic industries. That outlook is shortsighted. Projections of growth in oil demand led by petrochemicals are by no means a sure thing, Richard Chatterton, BNEF’s Head of Oil Demand, said in a report looking at the future of plastics and oil demand.

IV. Houston, You Have a Problem

Thinking a bit more about Houston, one of the world’s energy centers, things get a bit more ominous. We are in a world of easy oil and oversupply (see my prior blog), and there are a lot of changes that will erode oil demand steadily and significantly over the long term. So what could the major oil producing companies do to remain profitable and solvent? 

It is comparatively quick and easy to develop tight oil formations as opposed to expensive deepwater or frontier fields (IEA). The timeline for expensive, big projects is on the order of 10 years. For a tight oil field, 1 year. So it is probably financially safer for big oil companies to invest in the shorter term, tight oil projects (Forbes; Bloomberg) that yield quicker returns at lower cost than a big deepwater or frontier project that may eventually start producing in 10 years, just as oil demand is likely to begin to decline. With fewer large and expensive projects to develop, there will be less work for the supermajor engineering firms that grew to engineer, build and install big frontier and deepwater developments. Thus any changes to oil production investment by the big oil companies will have a compounding effect on Houston, Aberdeen, den Hague….

There is nothing pretty about watching an industry devour itself.

P.S.  By the way dear readers, especially you who are bankers, commodity traders and energy producers, this blog is free, whereas you pay consultants large sums for analysis and guidance on energy matters. I, on the other hand, will be happy to provide similar analysis and guidance for a mere pittance, lunch and perhaps a bottle of Glendronach “The Revival” 2016. I promise that my lunch presentation will be informative, enjoyable and as insightful as the high paid consultant reports. More bang for less bucks.

Published by Our World of Energy

The Great Oil Slump of the 2020s – Part 2a, Demand and Society

Guest blog by S. A. Shelley 

Surf into any news or finance website and one can find almost everyone commenting about oil demand (see Reuters, OilPrice.com). It can be contradictory and confusing at times, especially when variables are changed and data is parsed in a myriad of ways. I will try to clarify things by separately looking at societal changes (this blog) and then technological changes (next blog). But there is one thing that I have to make clear right away: Oil demand is not going to zero any time soon. The end of the oil age is nigh upon us, but not quite yet, though there are foreboding changes in society (this blog) and technology (next blog) that will affect oil demand in the most unpleasant manner for producers.

Continue reading The Great Oil Slump of the 2020s – Part 2a, Demand and Society Published by Our World of Energy

The Great Oil Slump of the 2020s – Part 1, Supply

Guest blog by S. A. Shelley  Many readers are probably wondering what is happening with oil prices, especially with all the efforts by OPEC+ to curtail supply and all the efforts by various trade groups and governments (e.g., Denmark and China) to affect demand. Every year in January, big companies (BP, EXXON) and big organizations (OPEC, EIA, IEA, OECD) release their energy reports. I don’t have quite the scale or resources that they do, but I try my best. Back in 2016, when I wrote about oil demand peak, I included a chart of a possible oil price path for the next few years (Fig. 1). I was under on the demand and supply a bit, and relied upon the 2016 futures prices to guide my price thinking, but I was damn near bang on with the timing of the most recent collapse of oil prices, Q3 of 2018.

Continue reading The Great Oil Slump of the 2020s – Part 1, Supply Published by Our World of Energy

California Does Not Need Big, Very Expensive Floating Offshore Wind Farms

Guest blog by S. A. Shelley

Californians do not need big and very expensive offshore floating wind farms. In fact, nobody needs big and very expensive offshore floating wind farms. Fixed offshore wind farms started out very expensive, requiring significant government subsidies, but small. They have since matured to allow for big inexpensive offshore wind farms with no government subsidies of any kind. The latest fixed offshore wind farms are producing and supplying electricity to their grids at a cost competitive rate compared to the current supply, and this is a result of technological evolution, improved execution strategies and increasing turbine size (power output). However, floating offshore wind technology is still in the nascent, small and heavily subsidized phase of the technology lifecycle. Yet, for some reason, various consortia are pitching huge floating wind farms right off the bat to California. That’s a big problem and folks in California need to watch that they do not get forced to subsidize those projects.

Continue reading California Does Not Need Big, Very Expensive Floating Offshore Wind Farms Published by Our World of Energy

Still a Tesla basher? – It’s time to drive a Model 3

It seems that bashing Tesla is the favorite topic for the financial news media. Whether it’s a story about Tesla’s profitability, production woes, product quality, lack of a real market, impending competition from “real” automakers like Volkswagen, or the behavior of Elon Musk, the message is clear – Tesla is all hype with no substance and destined to fail. Apparently, the only question is when. In the present world of “fake news”, social media “bots”, and a news climate that only values the bad, how does a normal person wade through all the BS and make a good decision on what car to buy? Well, I have the answer…just go drive a Tesla Model 3. Until you have the experience of driving a Tesla, you won’t truly understand how it has changed the concept of an automobile. Continue reading Still a Tesla basher? – It’s time to drive a Model 3 Published by Our World of Energy

The human side of the oil market crash

Note from your editor – over two years ago OWOE printed a similarly titled blog The Human Side of the Oil Price Collapse, and shared a story from an expatriate couple living in Angola about the impact on the people of a country where everything is directly or indirectly dependent on oil. This blog by an engineer in Houston brings the situation closer to home and shares how she and her family have coped and even prospered.

Guest blog by Ms. Kelley Ellis

My husband and I are native Houstonians.  We were kids in the 80’s when the oil market crashed, and although neither one of us had parents in the oil business to be impacted directly, like all families in Houston, the economic downturn trickled into our families’ realities.  So when we got married soon after I graduated from Texas A&M at Galveston in 2000 with a degree in Maritime Systems Engineering as oil prices climbed back up from a 1998 low, we knew that my job would never offer the stability that his job as a firefighter offered. Continue reading The human side of the oil market crash Published by Our World of Energy

The latest push for fossil fuels – rhetoric or reality? Part 2 – oil

By W. H. Luyties, editor OWOE. Recently, OWOE initiated a series of blogs to take a closer look into the key US government actions to promote fossil fuels. Since the 2016 election, one lightening rod topic has been the push to increase coal and oil production in the US. This has energized both proponents of fossil fuels, who see an opportunity to possibly save their industries (coal) or increase production (petroleum), and opponents, who fear the environmental consequences of such a change. But is this a real threat to the global move away from fossil fuels, or is it simply rhetoric to energize a political base? Continue reading The latest push for fossil fuels – rhetoric or reality? Part 2 – oil Published by Our World of Energy

Carbon Taxation – A Policy for Combating Global Warning That Has Been Poorly Planned, Implemented, and Marketed

A carbon tax and a carbon cap-and-trade program are fiscal policy tools that a government can implement to reduce carbon dioxide (CO2) emissions to the atmosphere (see figure) and help in the fight against climate change. Continue reading Carbon Taxation – A Policy for Combating Global Warning That Has Been Poorly Planned, Implemented, and Marketed Published by Our World of Energy

Throwing Away 3 of every 4 Gallons of Gasoline Bought

Guest blog by S. A. Shelley

I love the guys and gals over at Lawrence Livermore National Laboratory (LLNL). They tend to produce some of the coolest energy studies with nifty graphics (all the while hiding the space aliens from us). Earlier this year, as it does every year, LLNL published the U.S. energy flow chart which illustrates total US energy production by source and how it is consumed. Continue reading Throwing Away 3 of every 4 Gallons of Gasoline Bought Published by Our World of Energy