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What The Oil And Gas Industry Is Not Telling Investors

What The Oil And Gas Industry Is Not Telling Investors

Oil prices crashed because of too much supply, but will rebound as production shrinks and demand rises. But what if long-term demand for oil ends up being sharply lower than what the oil industry believes?

That is the subject of a new report from The Carbon Tracker Initiative, which looks at a range of scenarios that could blow up oil industry projections for long-term oil demand.

Historically, Carbon Tracker says, energy demand has been driven by population, economic growth, and the efficiency (or inefficiency) of energy-using technologies. Carbon Tracker looks at a couple possible future scenarios in which those parameters are altered, resulting in dramatically lower rates of oil consumption. Related: Iran May Not Be That Attractive To Oil Industry After All

Carbon Tracker has been a pioneer in the concept of “stranded assets,” the notion that fossil fuel assets will lose their value as the world moves to restrict carbon emissions. If an oil field cannot be produced profitably in a carbon-constrained world – or cannot legally be produced because of certain regulations – then it ceases to have value. That puts investors’ dollars at risk, a risk that financial markets have not fully grappled with.

However, in a new report, Carbon Tracker expands upon the possible scenarios in which oil demand may not live up to industry predictions.

For example, if the world population hits only 8.3 billion by 2050 instead of the 9.7 billion figure typically cited by the UN, fossil fuel consumption could end up being 17 percent lower in 2050 than the oil industry thinks. Coal would be affected the most, with 25 percent reduction in demand compared to the business-as-usual case.

How about GDP growth? The expansion of the global economy is pivotal to energy consumption. The industry typically bakes in a GDP growth rate of 2.8 to 3.6 percent per year into its forecasts. But these figures could be on the high end, especially since so much hinges on the ongoing blistering growth from China. But, using BP’s pessimistic GDP scenario in which China and India only grow at 4 percent per year, global energy demand could be 8.5 percent lower in 2035 than the business-as-usual case. Related: Policy, Coincidence Or Conspiracy: What’s Really Holding Oil Prices Down?

Perhaps more threatening to future oil demand are global policies to ratchet down greenhouse gas emissions, as previously touched upon. Although international negotiations have largely failed to halt the growth of carbon emissions, a significant effort to zero out carbon over the long-term would necessarily cut deeply into demand. Industry projections largely ignore this possibility, as industry estimates for fossil fuel demand in the future would likely lead to average global warming of 4 to 6 degrees Celsius, exceeding the stated goal of capping warming at 2 degrees. More importantly, industry projections for fossil fuel use already exceed the totals that would result if the carbon reduction goals already laid out by countries heading into Paris are implemented. Caps on emissions would upend the entire business model of the oil industry.

Carbon Tracker looks at a few other scenarios, including the possibility that renewable energy could make cost reductions and deployment much greater than the oil industry thinks. Indeed, energy prognosticators like the IEA consistently underestimate the market penetration of solar PV and wind. Actual deployment wildly exceeds every projection that the IEA publishes. It is not hard to see oil industry projections off the mark, undone by falling costs and rapid deployment of solar and wind. Related: SPR To Be Used To Raise Cash For US Gov

Moreover, the combination of energy storage and renewable energy could transform power markets, solving the problem of intermittent energy. Battery storage continues to get cheaper, another trend that the oil industry could be underestimating. Electricity market transformation would also help scale up battery manufacturing, which in turn would reduce the cost of electric vehicles.

Take Toyota’s recent announcement that it will target a 90 percent reduction in greenhouse gas emissions from its vehicles by 2050 by developing fuel cell vehicles. There is a long way to go before such a scenario becomes viable, but the announcement should is a shot across the bow for the oil industry.

In short, Carbon Tracker concludes, there are very real threats to the business models of oil companies, threats that need to be explained to investors. Right now, those threats are not being taken seriously.

By Nick Cunningham of Oilprice.com

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  • Lee James on November 01 2015 said:
    I very much agree that today's threats to the business models of oil companies are not being taken seriously by industry, or even most Americans. The predominant view is that this is like any other oil-production cycle. "We're already probably on our way up."

    Nick focuses on oil demand and the potential for business disruption. I agree with his short list of new conditions that are in play today. But there's more.

    Taking our eye off of the all-important demand for oil a second, on the supply side there's much that is disruptive. Foreign supply is exceedingly vulnerable to interuption from a host of conflicts. U.S. production is more sensitive to the relative cost of production -- especially in regard to the unconventional extraction techniques: tight-rock (oil-source rock, commonly called shale), and deep-water.

    I think our domestic oil producers look for crude prices to be in the neighborhood of $80/bbl, whereas foreign producers are happy with $60 -- assuming the barrel can be successfully delivered to a buyer.

    Putting it all together -- and factoring in national insecurity issues around oil -- it's time to cease buying oil from bad-actor states and greatly reduce demand for our own increasingly high-priced domestic oil. All in all, oil is not what it used to be. Let's grow alternatives to oil, and fossil fuels generally.
  • Larry Lawrence on November 03 2015 said:
    "For example, if the world population hits only 8.3 billion by 2050 instead of the 9.7 billion figure typically cited by the UN, fossil fuel consumption could end up being 17 percent lower in 2050 than the oil industry thinks. "

    Considering that the world's population is already 8.5 billion, not the 7.3 billion put forth by the always accurate governments of this world. As well as the fact that earth is adding approximately 100million to the human population per year, with no end in sight. We are on track for 11.5 - 12 billion by 2050.
  • Dominic on November 03 2015 said:
    Yeah if there is a 1.4 billion person shortfall demand will be lower... Obviously. I don't see that number as realistic though. Oil will fall eventually as battery technology and renewable energy replaces it but I don't see that happening for awhile. I'm not selling my stake in chevron over this
  • Dee on November 03 2015 said:
    Great article, thank you.

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