U.S. oil production is set to hit a record 11 million barrels a day by 2019, according to latest figures from the U.S. Energy Information Administration. Meanwhile permits are being issued for further exploration in national parks and pressure is being put on deep water drilling and exploration in the Arctic. Domestic oil production is seen as a key to global U.S. energy dominance and is a priority focus of the current presidential administration. But what if these developments show the U.S. to be on the wrong side of history – does it really need more oil?
In 2017, for the first time, the International Energy Agency predicted a peak in global oil demand by the 2030s. Similarly, BP’s Energy Outlook in 2018 predicted a plateau in oil demand - shifting its projections from mid-2040s to mid-2030s – moving a decade within one year. And yet the U.S. oil industry continues to invest heavily in more and more ways to develop oil and gas reserves.
Whether you believe this to be a sensible move or not depends on your market view and assessment of the trends that are driving change in the global energy industry. What matters is the oil demand curve, which will be highly dependent not only on the level of transition to low carbon energy, but also on social factors such as concern for the polluting effects of petroleum-based plastics.
The energy transition being planned is as big a disruption as digital. At the Chatham House Energy Transition conference in London, it was clear that there is wide-spread agreement between policy makers, utilities, industry and financiers that the energy transition is happening. The collapse in cost of wind and solar PV have driven a dramatic market expansion. Not only are renewable alternatives now cost competitive with fossil fuels in many established markets, they are also often the most effective way to address energy poverty in developing markets.
According to January 2018 figures from IRENA, global weighted average costs over the previous 12 months for onshore wind and solar PV now stand at 6 cents and 10 cents per kWh respectively. In the last five years, the price of offshore wind has fallen from a couple of hundred dollars per MWh and in the Netherlands, Vattenfall has announced it is to build the first two subsidy free offshore wind farms
McKinsey Energy Insights has said that power generation investments across all regions will be dominated by solar and wind, which will contribute to approximately 80 per cent of new built capacity until 2050. So what does that mean for oil and gas? While many traditional analysts suggest that natural gas and renewables will dominate the power sector in coming decades, increased electrification will definitely have an impact on oil demand.
A fall is expected to be driven by a growth in the electrification of customer transport, as well as efficiency improvements in internal combustion engines. While there may be challenges with air freight and heavy trucks, electric trucks are already in the mix. With today’s 800 million personal vehicles projected to hit 2 billion by 2040, the speed of electrification will make a huge difference.
Mainstream analysts predict that the petrochemicals market will replace much of the demand from transportation fuel. The IEA has said that plastics will drive around 25% of oil demand by 2023 but there are threats to this as well. An increasing focus on plastics pollution of land and oceans has led to concern among consumers and policymakers alike.
Energy transition will also require a social and behavioural transition, and consumer and political expectations will have an increasing impact. China has taken a clear stand on plastics which is set to drive recycling and alternative plastics manufacturing everywhere. The EU has unveiled plans to ban all non-recyclable plastics used in packaging by 2030. Meanwhile, the bioplastics sector is set to grow by 50% over the coming years. Coca-Cola is experimenting and is already the largest consumer of bioplastics. Adidas sold 1 million trainers made from ocean plastics in 2017, while Reebok announced plans with Dupont Tate to develop non-petroleum bio-based materials for footwear.
Given these developments how can chasing ever increasing supplies of oil be the right choice for energy and or indeed industrial growth? While investors are still making money from oil, the risks are increasing. The latest report from Carbon Tracker warns that energy companies could risk $1.6 trillion if they ignore the transition to low carbon. Around the world state owned and privatised oil companies are taking note. Statoil, which has invested in the world’s first floating wind farm (which could bring offshore wind costs down 60%), is dropping the ‘oil’ from its name.
There are also huge development opportunities in alternatives to fossil fuels. Former IMF chief economist Raguram Ragan has suggested that the current U.S. interest in international trade deficits is focused on manufacturing and goods, rather than services where there is a surplus. Encouraging the U.S. to become the base of a massive transition to clean sustainable technology could position it at the head of the international markets.
Of course what happens in China, India and other emerging economies will be critical. If they use energy transition as an opportunity to leapfrog failed or non-existent infrastructure, the effects on future global oil demand will be significant. While that aspect of the future may not yet be clear, a focus on oil for economic development seems unsustainable given current trends. It might be time for a rethink of U.S. energy policy.
