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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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The Threat That Will Send Oil Down To $10

Oil prices will need to trade at around $9 to $10 per barrel in the long run if gasoline is going to be able to compete with electric vehicles and renewable energy.

That startling conclusion comes from BNP Paribas, which warned in a new report that crude oil is facing an existential and likely mortal threat from renewable energy and EVs.

“We conclude that the economics of oil for gasoline and diesel vehicles versus wind- and solar-powered EVs are now in relentless and irreversible decline, with far-reaching implications for both policymakers and the oil majors,” Mark Lewis, the global head of sustainability research at BNP Paribas Asset Management.

There is a crucial problem with crude oil that gets to the core of the challenge – one that all but dooms oil to decline. Mark Lewis argues that oil has an inferior energy return on capital invested (EROCI), which compares the given amount of energy that comes from the same amount of capital spent. In other words, how much useful energy is produced when spending a dollar on different forms of energy?

BNP Paribas estimates that for the same amount of money invested, new wind and solar projects combined with EVs will produce “6x-7x more useful energy at the wheels than will oil at $60/bbl for gasoline powered [light-duty vehicles], and 3x-4x more than oil at $60/bbl for LDVs running on diesel.”

Given that calculation, BNP Paribas says the long-term break-even price for oil needs to be $9-$10 per barrel, if gasoline is going to remain competitive with renewables plus EVs. For diesel, the long-run break-even price is $17-$19.

Oil does have a “massive flow-rate advantage,” the bank said, “but this is time limited.” Oil can provide a huge burst of energy because production is so large and the global supply chain is so big, which makes consumption easy and convenient. Related: Oil Industry Faces Imminent Talent Crisis

But over a 25-year operating life, wind and solar are much cheaper. “[W]e think the economics of renewables are impossible for oil to compete with when looked at over the cycle,” Lewis wrote in the BNP Paribas report. Even when adding in the cost of building the infrastructure needed to power a network of EVs, “the economics of renewables still crush those of oil,” Lewis concluded.

Or, put more simply, the world would need to spend $25 trillion on gasoline needs for the next 25 years (extrapolating from 2018 levels), “whereas we estimate the cost of new renewables projects complete with the enhanced network infrastructure required to match the 2018 level of mobility provided by gasoline every year for the next 25 years at only $4.6-$5.2trn,” Lewis wrote.

To be clear, BNP Paribas is arguing that renewable energy combined with EVs easily beats crude oil before even factoring in the cost of climate change from fossil fuels. Renewables simply win on price. Full stop. But after adding in the public health toll paid by air pollution, climate change, and other societal costs, the equation becomes that much more lopsided.

The “oil industry has never before in its history faced the kind of threat that renewable electricity in tandem with EVs poses to its business model,” Lewis wrote.

He tallied up the multiple ways that oil falls short. First, renewables have a short-run marginal cost of zero, which refers to the fact that once solar and wind are built, the energy they produce on an ongoing basis is free. Second, renewables have an environmental benefit. Third, electricity is easier to transport than liquid fuels. And fourth, renewables can easily replace roughly 40 percent of global oil demand if and when it reaches scale.

The challenge for renewables is the massive incumbency advantage that fossil fuels currently enjoy. The global supply chain for oil and gas will be hard to overcome in the short run. However, because oil projects suffer from decline, new dollars invested going forward have to compete with new wind and solar. These new investments will be in the spotlight, and scrutiny is going to grow ever-more intense, “especially those with a break-even of >$20/bbl,” Mark Lewis wrote in the BNP Paribas report. Related: The Biggest Problem With Renewables

Ultimately, the risk of stranded assets is huge, and grows with each additional oil project given a greenlight. But the risk is more acute for projects with long lead times, long production profiles and/or large price tags.

It may be easy to dismiss such predictions, especially given that renewables and EVs make up a small fraction of the capacity of the global oil industry. But as Mark Lewis points out, a century ago oil was the upstart, and few would have predicted its dominance.

But a more relevant example could be that of the utility sector in Europe, which demonstrates how quickly the fortunes of an incumbent can change. Utilities have written off billions of dollars of assets because of the surge of wind and solar in recent years.

“[I]f all of this sounds far-fetched, then the speed with which the competitive landscape of the European utility industry has been reshaped over the last decade by the rollout of wind and solar power – and the billions of euros of fossil-fuel generation assets that this has stranded – should be a flashing red light on the oil majors’ dashboard,” Mark Lewis concluded in the BNP Paribas report.

By Nick Cunningham of Oilprice.com

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  • James Hilden-Minton on August 06 2019 said:
    This analysis suggest an aggregate reduction in energy investment needed to power a motor vehicle fleet of a certain size. It matters not what fuel supplies the power grid, the total investment pie shrinks as the fraction of EVs increases.

    This analysis ignores the investment in the battery supply chain itself. It's not clear if all the investment in the battery supply chain will be counted as "energy" investments. Regardless, even if we add $5T to $10T in battery investments to the $5T in renewable and grid investment, we still come up with a much smaller $25T oil investment needed to sustain current fleet size for the next 25 years. Smart money will eventually find it's way into the more capital efficient investments.

    Perhaps we should not be so concerned about peak oil supply or peak oil demand. Peak oil investment is what investors should watch out for. As battery investments rise, we simply won't need to invest quite so much on oil and the risk premia for that capital could rise as well.
  • Brady B on August 06 2019 said:
    Hmm, where I live, US, our government requires our utility company to purchase every watt of electricity from renewable sources first, THEN produce the remaining demand from conventional methods (coal, nuclear, or natural gas). Natural gas in our case. Our local utility can generate one (1) KW of electricity for $0.06 from conventional methods. They purchase electricity from renewable sources for $0.24 per KW.

    Our rates have been going up ever since we starting using electricity from renewable sources. I cringe every time I read of another wind farm going up in our area because I know what is around the corner.
  • Mamdouh Salameh on August 06 2019 said:
    This is a flawed research based on faulty assumptions and reaching nonsensical conclusions.

    The claim that renewable energy combined with electric vehicles (EVs) easily beats crude oil is not only unsubstantiated but also ridiculous. Despite a global expenditure of $ 3.0 trillion on renewable energy during the last decade, renewables don’t have much to show for it. This is a hefty price to pay just to gain only a percentage point of market share from coal.

    As for EVs, hardly a day goes by without another media report about the impending demise of the Internal Combustion Engines (ICEs) as petroleum-powered cars and trucks are replaced by super-clean EVs. EXCEPT THIS IS NOT TRUE.

    Some experts are now saying that a widespread EV use could spell the end of oil. The tipping point, they reckon, is 50 million EVs on the roads. This they believe could be reached by 2024. However, 50 million EVs could hardly make a dent on the global demand for oil let alone replace it.

    Currently, electric and hybrid cars combined number under 4 million cars out of 1.477 bn ICEs on the roads worldwide in 2015, or a negligible 0.27%. The total number of ICEs is projected to reach 2.0 bn by 2025 rising to 2.79 bn by 2040 according to US Research.

    In 2018 the world used 36.4 bn barrels of oil (bb) of which 73% or 26.6 bb were used to power 1.477 billion conventional cars around the world. Bringing 50 million EVs on the roads will reduce the global oil demand by only 0.9 bb, or 3.4%. This will neither be the end of oil as some experts are suggesting nor a tipping point.

    A tipping point for oil could only be reached once 739 million EVs (50% of the current global ICEs number) are on the roads worldwide. This is impossible to achieve within that time frame. One then can only guess how many decades will have to pass before the entire global car fleet of ICEs is replaced by EVs.

    Moreover, growth in EV sales thus far has been supported by significant government subsidies. Sales would crash once the subsidies are withdrawn according to a report in April 2017 by US Auto research firm Edmunds.

    Furthermore, there will be a need for trillions of dollars of investment to expand the global electricity generation capacity in order to accommodate the extra electricity needed to recharge 50 million EVs. How could such expansion be sourced: nuclear, hydrocarbons or solar?

    The above analysis shows clearly that a combination of renewable energy and EVs are not going to take global energy transition far throughout the 21st century and far beyond. While an increasing number of EVs on the roads coupled with government environmental legislations could decelerate the demand for oil, EVs could never replace oil in global transport throughout the 21st century and far beyond.

    Serious researchers, environmentalists and futurists should realize that there could neither be a post-oil era nor or a peak oil demand throughout the 21st century and far beyond. Oil will continue to reign supreme all through particularly in the global transport system

    And with global oil consumption exceeding 100 million barrels a day (mbd), the notion of imminent energy transition looks like an illusion.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • John Gay on August 09 2019 said:
    @Mamdouh
    You say $3T was invested in renewable energy in the last decade. How much more was invested in oil?
    It is not only vehicles which are getting off of oil - I read a story yesterday about a gold mining company that was going solar and it would save them from having to buy and burn 13.1M (over 82,000 barrels) of oil. Payback was 4 years. How many others will do the same? How many islands are getting off of oil for electricity production?
    A tipping point for oil is more like 10% of demand destruction, not 50%. Too many oil companies are on the edge as it is.

    Dow Jones U.S. Oil & Gas Index (DJUSEN):
    1 Year: -23%
    3 Year: -5.4%
    5 Year: -10%
    10 Year: +0.69

    Seems like a winning hand! Just ask the coal industry.

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