THE FUTURE OF OIL IS OPAQUE

October 22, 2020 § 8 Comments

The future of oil has been debated for ever since I can remember.  When I was an undergraduate in engineering in the early sixties, we were taught that the world would run out of oil in 30 years.  Such predictions continued with the concept of Peak Oil oft discussed.  But, with the recognition of immense heavy oil reserves, and more recently with the emergence of shale oil, the discussion has shifted to the demand side. 

For nearly a century all crystal ball gazing centered on sufficiency of a strategic commodity.  Over the last decade or so, oil is well on its way to turning into salt*.  Lest you conjure alchemical imagery, I hasten to explain that oil is merely going the way of salt. Salt used to be a strategic commodity. Canning, and later refrigeration turned it into a useful commodity, no longer strategic.  This was about the time that the era of oil began, with the discovery of Spindletop and the resultant decimation of the price of oil. The era was abetted by the demand created by mass production of economical cars by Ford, which incidentally killed the auto industry of the time: electric cars.  More on the revenge later.

But the demise of oil will be preceded by a protracted hospice stay.  Folks will predict X% electric cars by year Y.  But that will be for new vehicles.  Legacy vehicles will go a long time, especially in countries like India, a major developing market for automobiles.  The electric starter was first installed in a Cadillac in 1911.  I was still hand cranking our venerable Morris 8 sedan in India (with difficulty; I was 6) in 1950.  On the other side of the coin, India is more amenable to conversions to electric drive, in part due to low labor cost and in part due to a way of life that wrings out every drop of value in a capital asset.

The future of oil is now being discussed relative to demand, not so much supply.  Peak oil discussions are replaced by peak consumption ones. Shale oil put paid to the supply issue. Even before Covid-19 destroyed demand, a groundswell of movement was present towards oil alternatives for transportation fuel.  This was driven by climate change concerns, but also to a degree by emissions such as NOx and particulate matter.  But the projections on future demand depend on the tint of the glasses worn.  The Organization of Petroleum Exporting Countries (OPEC) is predicting return to pre-Covid levels of consumption by late next year.  Somewhat surprisingly, the US Energy Information Administration is also singing that tune as are some oil majors such as ExxonMobil. 

Most surprisingly, however, British Petroleum (BP) is very bearish.  Their projections, while being scenario based, are causing them to plan a 40% reduction in their oil output by 2030.  This is to be combined with a big uptick in renewable electricity production.  Shares rose on the announcement.  But BP has been contrarian before, along the same lines.  Over a dozen years ago they announced a pronounced shift away from oil, renaming BP to stand for Beyond Petroleum.  That did not go well.  Particularly unhelpful to their reputation for operating in difficult environments was the oil spill associated with the massive Macondo blow out.

The future of oil is not the future of natural gas.  Together they share the term petroleum, although it is imprecisely used in the parlance to stand simply for oil.  They were both formed in the same way, with natural gas being the most thermally mature state of the original organisms.  But in usage they are different.  Oil is mostly about transport fuel and natural gas is mostly about fuel for electricity generation and the manufacture of petrochemicals, especially plastics. 

The pandemic decimated transportation fuel but had much smaller effects on electricity and less again on plastics.  In the post pandemic world, natural gas will endure for long, while oil will be displaced steadily by liquids from natural gas and biogas, and ultimately by electricity.  This, of course, excludes aircraft, which will need jet fuel for the foreseeable future.  Biomass derived jet fuel will be a consideration, but not likely a big factor.

Electric vehicle batteries costing USD 100 per kWh will be the tipping point, and we are close.  At that level, the overall electric vehicle with modest range will cost about the same as a conventional one.  The battery and electric motors’ cost will be offset by the removal of the IC engine, gear box, transmission, exhaust systems and the like.  For a compact car, each 100 miles in range will add about USD 2500 to 3000 to the capital cost. Maintenance costs will plummet and the fuel cost per mile will be significantly less than with gasoline or diesel.  To top it off, the linear torque profile typical of electric motors enables high acceleration from a stop.  A progressive shift is inevitable. The revenge of the electric car.

The only debatable issue is the rate of change.  And this is where the opacity appears in the future of oil.  The main sticky bits are perceptions of range required (and the willingness to pay for more) and charging infrastructure.  The latter could be influenced by business model innovation, such as battery swapping rather than owning.  But oil is here to stay for decades.  Therefore, improvement in efficiency, to reduce emissions per mile, are paramount.  The industry appears to understand that.  When the US administration announced a drastic relaxation of mileage standards in 2025, four major companies voluntarily agreed to a standard close to the old one.  I suspect this was in part because they already had worked out the techno-economics to get there, and certainly the consumer would like the better mileage.  Could be also that they had projections of electric vehicle sales that allowed fleet averages to be met.  A compact electric vehicle has a gasoline equivalence mileage of about 120.  Quite an offset with even a modest fleet fraction.

The oil barrel has sprung a leak.  But it is likely a slow one.

Vikram Rao

October 22, 2020

*Turning Oil into Salt, Anne Korin and Gal Luft, 2009, Booksurge Publishing

§ 8 Responses to THE FUTURE OF OIL IS OPAQUE

  • anand subramanian says:

    Very insightful. Nicely summarized Vik. I enjoyed it. Looks like the oil business has just entered the hospice now. Will likely go on life support over the next 10 years.

  • Gaurav Bhatiani says:

    Some of the major refining companies in India such as Reliance appear to have a similar perspective and are diversifying to digital and retail businesses.
    On a related but slightly different note, eclipse on oil will likely be accompanied by social and economic turmoil in some countries in Gulf and OPEC.

  • Gaurav Bhatiani says:

    Excellent analysis, enjoyed reading!

  • rtecrtp says:

    True on the societal impact. But the transition will be slow. Also, the Middle East countries are already investing in solar and natural gas. Saudi Arabia is one of the few countries producing electricity from oil. They will switch to gas and solar (high photon intensities in those regions).

  • Robert Fulks says:

    Vik, always a great read. Your style encourages readership along with your compelling references to real life situations. Oh, and yes, the conclusions you reach appear to be spot on.

  • rtecrtp says:

    Thanks, Rob, no idea you were a reader. And your views in this regard matter; you have been closer to the fray recently.

  • Richard D'Souza says:

    Nicely done Vik. I will share with friends in the industry looking for a silver lining. While the content will provide hope for those still in the industry it is unfortunately of little comfort to the tens of thousands who have lost jobs that will never return,

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