Category Archives: Oil & Gas

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

It’s a Trap!

Guest blog by S. A. Shelley

Revenue Trap: ” A focus on revenue at the expense of weakened strategy and reduced profits.”

Oil prices seeming to whipsaw back and forth, weekly, daily, even hourly is the result of many oil and options traders clearing trades at whatever slim profit they can eke out. Of course, multiply that slim profit by the huge volumes traded and well, Wall Street still makes a hefty profit whether oil is up or down.

Other folks are starting to talk about oil supply and demand hitting a new equilibrium, or that shale production has peaked. Fair enough. In fact, I agree that efforts to constrict oil supply are starting to have some effect. I doubt however that restricting oil supplies will be effective in the long run. OPEC claims that compliance with the production quotas is strong, but on the other hand, some OPEC members have recently vowed to opt out of the quotas and to even increase production. Don’t forget about some of the African members of OPEC who were free to pump and sell as much oil as they could. Continue reading It’s a Trap! Published by Our World of Energy

Can the United States become Energy Self-Sufficient?

Guest blog by S. A. Shelley Absolutely, the United States can become energy self-sufficient, but it is unlikely to become self-sufficient in oil production.

Since the end of last year and the beginning of this year, several governmental and intra- governmental bureaucracies, independent think-tanks of all sorts and large energy producing companies have issued annual energy outlooks in one form or another. I characterize them as “Business as Usual” (BP, Exxon, etc.), “Business is Changing” (Shell, Carbon Tracking Institute, etc.) and “Fanciful Delusion” (OPEC). In all forms these reports are interesting reading. Continue reading Can the United States become Energy Self-Sufficient? Published by Our World of Energy

OPEC Supply Cuts Will Accelerate Decline in Oil Demand

Guest blog by S. A. Shelley Imagine a future where your choices for purchasing a new car include numerous options for electric vehicles (EV’s) and internal combustion vehicles (ICV’s). But competing with the typical federal or state subsidies for the EV’s are hefty rebate checks from OPEC or Russia for purchasing a fossil fuel burning ICV. That may sound crazy, but in today’s age of large supplies of easily produced shale oil, inexpensive renewable energy options, and changing societal demographics, it’s only a matter of time before the current oil glut results (see EIA figure below) in stranded oil resources that are too expensive to produce for many of the suppliers, drastically reduced supply-side control from oil producers, and a critical need for oil suppliers such as OPEC to find creative ways to stimulate demand.

Source: EAI Dec 2016

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Did the World Hit “Peak Oil” in 2015 and Nobody Noticed?

Guest blog by S. A. Shelley The concept of “peak oil”, i.e., the time when production of oil hits its maximum and then declines, has been postulated for decades, but, as time passes, industry experts push the peak oil date further and further into the future. However, the events of the past 2 years since the collapse of the price of oil raise an interesting question: “Did we experience peak oil in 2015, and nobody noticed?” As someone who’s had a career in the oil and gas industry and who observes and tries to understand both the successes and failures of that industry, I postulate that we might have passed such a crucial point in history. Continue reading Did the World Hit “Peak Oil” in 2015 and Nobody Noticed? Published by Our World of Energy

Toxic Nature of Energy Dialogue in the US

Aerial view of Aliso Viejo gas leak
Aerial view of Aliso Viejo gas leak

A perfect example of the toxic nature of the energy dialogue in this country arose last week in Southern California. There has been a long running environmental disaster north of Los Angeles involving a methane gas leak from an injection well at the Southern California Gas storage facility near the town of Aliso Viejo and the community of Porter Ranch. Continue reading Toxic Nature of Energy Dialogue in the US Published by Our World of Energy

The Human Side of the Oil Price Collapse

To the typical American consumer, the recent collapse in the price of oil is viewed as a good thing on several levels: 1) it means more money is available from income to spend on other fixed or discretionary expenses and 2) it means the evil oil companies are hurting. The downsides are rarely considered or understood. For example: 1) some of the highest paying professions in the US are in the oil industry and employees are being laid off by the tens of thousands, 2) economies in cities like Houston, and entire states like North Dakota, that are highly dependent on the oil industry are in a tailspin, leading to foreclosures, business failures, and reduced public spending, 3) oil companies that took on too much debt during the oil boom are declaring bankruptcy and defaulting on their debts, which has contributed to the recent stock market slide, and 4) one of the goals of the Saudi Arabian orchestrated price collapse, that of destroying the US shale oil industry and maintaining Saudi market share has been successful. Continue reading The Human Side of the Oil Price Collapse Published by Our World of Energy