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What If The Oil Rebound Never Happens?  

Eagle Ford rig

Oil prices are hovering in the mid-$40s per barrel, and the hopes of a rebound have once again been delayed. The IEA’s September Oil Market Report predicts that the supply/demand equation might not come into balance until next year, suggesting another year of low oil prices. But what if oil prices never rebound?

The question seems ridiculous, not only because the oil markets always go through booms and busts, but also because demand continues to rise. Supplies are also falling from high cost areas, ensuring that the supply overhang will eventually be erased. Moreover, the oil industry has made unprecedented cuts in spending on exploration and development. The IEA says the industry cut spending by more than $300 billion over the past two years and a separate estimate from Wood Mackenzie expects oil and gas producers to slash about $1 trillion from spending between 2015 and 2020. Such draconian measures are surely sowing the seeds of another supply crunch, guaranteeing a price spike in the years ahead.

But the world is still oversupplied with oil, and the recent ramp up in production from OPEC could lead to low oil prices for a few years. Libya is set to bring back around 600,000 barrels per day (although those claims are questionable), and Nigeria has already returned somewhere between 200,000 and 300,000 barrels per day of interrupted supply. Production in the U.S. has also recently leveled off over the past month at 8.5 million barrels per day, after nearly 18 months of declines.

The IEA expects global supplies to exceed demand through next year, and inventories to continue to build through 2017. Crude oil and refined product inventories are only slightly down from record levels, and will take a few more years to get worked through.

All of that is to say there is a good chance that ample supplies could ensure relatively low oil prices for several years, perhaps as long as towards the end of this decade.

Related: The Natural Gas War Burning Under Syria

In the meantime, alternatives will continue to make inroads into the transportation sector. Batteries for electric vehicles (EVs) continue to achieve cost declines, having fallen by 35 percent in 2015 alone. Bloomberg New Energy Finance sees EVs becoming as affordable as gasoline-powered cars – on an unsubsidized basis – as soon as the early 2020s. That could erase about 2 million barrels per day of oil demand by 2023. Given that the global surplus in crude oil over the past two years was only a little more than 2 million barrels per day at its worst point, which was enough to cause a meltdown in oil prices, the displacement of 2 mb/d from EVs in six years is a big, big deal.

By 2040, EVs could cost as little as $22,000 (in 2016 dollars), BNEF says. Electric vehicles could displace 13 million barrels per day of oil demand by then, enough to keep oil prices permanently low. It wouldn’t stop there, if EVs made that kind of progress, the takeover of the transportation sector would accelerate and oil would continue to lose market share. Related: Nigeria Sues Oil Majors Over $12.7 Billion In ‘Stolen Oil’

These, of course, are aggressive scenarios, BNEF concedes. But maybe not. If governments around the world crack down on oil drilling through new taxes and regulation, and also subsidize R&D and the adoption of EVs, all with an eye on climate change, the scenarios could prove to be more of a middle-of-the-road prediction. Major oil spills, or sudden natural disasters could spark a public backlash, demanding deeper reductions in carbon emissions. In other words, the uncertainty around the advancement of clean energy could be on the upside – unforeseen future public policy could very conceivably accelerate EV adoption faster than we can envision sitting here in 2016.

Abundant oil supplies plus huge volumes of oil and refined products sitting in storage – a supply-side problem – could ensure oil price stay low in the near- to medium-term. But steady efficiency and the technological advancements in EVs – a demand-side problem – might mean oil demand ends up being much lower over the medium- to long-term than we currently expect. These scenarios are certainly not inevitable, but if they are even remotely accurate, oil prices could stay low more or less permanently.

By Nick Cunningham of Oilprice.com

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  • Jimmy Gu on September 25 2016 said:
    I am a battery scientist, based on current technology, oil must be fuel for most transportation in next ten years. Battery can work well in small car or light truck, but not 18 wheel or other significant trucks.

    In addition, batteries still need energy (electricity) from gas (natural gas) turbines. Furthermore, needs of plastics and polymer materials will continually increase, use more and more oil. Whatever, oil cannot be so low for too long, don't fool public with a EV drama.
  • JHM on September 26 2016 said:
    It is very prudent for the oil industry to contemplate peak demand scenarios. By in large, there are huge denial blinders that must be overcome in the process. There are two issues that continue to get overlooked.

    First, it is not necessary for EVs to displace massive volume of oil consumption for the price of oil to be severely impacted. A mere flattening out of demand will force gasoline go compete with the price of electricity. This can easily push oil below $20/b to bring oil into parity with natural gas and coal, not to mention wind and solar which are becoming even cheaper. So don't think that the massive size of the oil market is going to protect it from price competition. When transportation fuels must compete with cheap electricity, most oil production will become unprofitable. Consumption volume will still be sky high, but most producers will have no economic future.

    Second, under a scenario that most oil production becomes unprofitable post peak demand, it also follows that oil reserves will lose massive value by this same time. Oil producers sitting on more than 50 years of reserve to production, the global average, will recognize that their reserves will loose value faster than they can pump oil. In deed, if the demand peak comes within 20 years, any reserve with R/P greater than 20 is at risk. The US is at 12 year R/P, so we don't feel this risk. But Saudi Arabia is at 61 years R/P. So 2/3 of the value of the Saudi reserve is at substantial risk. The faster they ramp up production today, the lower their risk of stranded reserves.

    It is increasingly a rational strategy for producers who have very large and valuable reserves to increase production to reduce R/P rates down below 30. This means the Saudis should double their rate of production, but it could take several decades to do so. This is precisely why the threat of EVs can lead to a perpetual oil glut several decades BEFORE EVs come to dominate the auto market. Indeed, I believe we are at a point where any oil exploration that replaces or adds to reserves is destroying the wealth of the largest reserve holders, most OPEC countries and Russia. These large reserve holders cannot allow the price of oil to go high enough to increase investments in exploration. So maybe a short production freeze could increase short-term cash flow, but it comes at the cost of long-term wealth destruction. This is not an easy tradeoff. But as EVs advance, the wealth destruction of sitting on reserves will motivate a perpetual glut. The global R/P needs to drop from 50 to below 30, and this changes everything.
  • El Monoborracho on September 26 2016 said:
    Once the horizontal drilling practices that were developed about 1990 (yes, back then, in the horizontal Austin Chalk boom in S.Tx), were perfected upon and applied to the Barnett Shale, there was a paradigm shift. The Barnett saw substantial vertical wells beginning about 1998-99, then the horizontals took over by 2004, and by 2008 every pipe in N.Tx was full, and the technology headed out to Marcellus and other basins. Wala....paradigm shift.

    Now think oil.....the horizontal boom (and it really is a horizontal boom, not totally a frac boom) gets to the Eagleford, and further explores the Bakken, and out to those source rocks in the Permian, an so forth......

    The shift in gas has made its way to oil, and I believe there is a high probability that the $40-50 range is where we will be for the a long time to come. The rigs are coming back slowly and service company prices are coming W A Y down. The better acreage is still being drilled, Mexico is lining up to sell acreage, etc. And those source rocks in the Middle East oil fields must really be something given the quality of their fields.

    The paradigm shift is underway.
  • Eyass Nassar on October 01 2016 said:
    unless a whole new industry that will consume more oil as its rod material , we obviously will see the end of the oil era

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