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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