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Page added on May 24, 2016
What Happens When Demand for Oil Peaks?
A gradual move away from oil, will have many benefits for the global economy, write Amy Myers Jaffe, executive director of energy and sustainability at the UC Davis Institute of Transportation Studies, and Jeroen van der Veer, former CEO of Royal Dutch Shell. According to Myers Jaffe and Van der Veer, a diminished role for oil means markets will become more stable and costly price subsidies can be reduced. The authors, both members of the new Global Agenda Council on the Future of Oil & Gas, part of the World Economic Forum, urge oil and gas companies to explore how they can develop profitable alternative energies, noting that this will require “a change in the mindset of investors”.
Since the First Industrial Revolution, oil and gas have played a pivotal role in economic transformation and mobility. But now, with the prospects that major economies like the United States, China and European nations will try to shift away from oil, producers are coming to realize that their oil reserves under the ground – sometimes referred to as “black gold” – could become less valuable in the future than they are today.
Of the four scenarios for the future of the industry outlined in a new set of white papers from the Global Agenda on the Future of Oil and Gas, three of them envisage this type of world. Factors such as technological advancements, the falling price of batteries that power electric vehicles, and a post-COP21 push for cleaner energy could even drive oil use below 80 million barrels a day by 2040 – 15% lower than today.
So what would a future of falling demand mean for the oil and gas industry?
We’re already feeling the effect
Uncertainty about whether oil demand will continue to grow is already impacting the strategies of oil and gas firms. Through the 2000s and up until last year, the Organization of Petroleum Exporting Countries (OPEC), whose policies influence global oil supply and prices, took a revenues-oriented strategy, believing that scarce oil would be more valuable under the ground than out in the market, as global demand rose exponentially over time. Oil companies, too, responded to this world view by pursuing a business model that maximized adding as many reserves as possible to balance sheets and warehousing expensive assets.
Now, with new trends discussed in a new white paper, producers are coming to realize that oil under the ground might soon be less valuable than oil produced and sold in the coming years. This dramatic shift in expectations is changing the operating environment for the future of oil and gas.
A post-oil world: not all doom and gloom
Countries with large, low-cost reserves, such as Saudi Arabia, are rethinking strategies and will have to think twice about delaying production or development of reserves, in case they are unable to monetize those reserves over the long run. Saudi Arabia, for example, has recently announced that it is creating a $2 trillion mega-sovereign wealth fund, funded by sales of current petroleum industry assets, to prepare itself for an age when oil no longer dominates the global economy.
Declining revenues that could be reaped from exploitation of remaining oil reserves would adversely affect national revenues in many countries that have relied on oil as a major economic mainstay. Those countries will face pressing requirements for economic reform, with the risk of sovereign financial defaults rising.
But for the majority of the world’s population, structural transformations related to the future outlook for oil and gas offers an opportunity. If the global economy becomes less oil intensive, vulnerability to supply dislocations and price shocks that have plagued financial markets for decades will fade, with possible positive geopolitical implications. Moreover, many countries have reeled under the pressures of fuel subsidies to growing populations. According to the IMF, fuel subsidies cost $5.3 trillion in 2015 – around 6.5% of global GDP. Lower oil prices and larger range of alternative fuel choices would reverse this burden and lay the groundwork for shallower swings in prices for any one commodity.
Source: IMF
Staying competitive in an industry under change
Eventually, players who remain competitive in the oil and gas industry will have to consider whether it can be more profitable to shareholders to develop profitable low-carbon sources of energy as supplement and ultimately replacements for oil and gas revenue sources, especially to maintain market share in the electricity sector.
This will require a change in the oil and gas industry investors’ mindset. To develop this flexible, supplemental leg to traditional oil and gas activities, the oil and gas industry may find new opportunities by addressing the technological challenges associated with the different parts of the renewable energy space, as well as how one can develop efficient combinations of large-scale energy storage and transportation solutions in a world with a lot of variable renewable electricity.
Industry players can benefit from partnerships for flex-fuel technologies to ease infrastructure transitions and improve their resiliency to carbon pricing by achieving carbon efficiency for end-use energy through collaborations with vehicle manufacturers and mobility firms. Such responses will enhance the industry’s attractiveness with customers and investors, and most importantly, will promote a smoother long-term energy transition.
Amy Myers Jaffe is a leading expert on global energy policy, geopolitical risk, and energy and sustainability. She serves as executive director of energy and sustainability at the UC Davis Institute of Transportation Studies (ITS-Davis), and as lecturer in the Graduate School of Management.
Jeroen van der Veer was the chief executive officer at Royal Dutch Shell from 2004-2009, when he retired. Van der Veer then continued as a non-executive director on the board of Shell until 2013. He started to work for Shell in 1971 and has experience within all sectors of the business. In addition, he is the chair of the supervisory boards of ING Bank and Royal Philips Electronics and member of the supervisory board of Boskalis Westminster Groep. He has also been a member of Statoil’s board of directors since March 2016.
This article was written for The Global Agenda Council on the Future of Oil & Gas, a part of the World Economic Forum. The Global Agenda Council on the Future of Oil & Gas is developing a vision of what the oil and gas industry might look like in 30 to 40 years.
The three white papers referred to in the article are available here.
14 Comments on "What Happens When Demand for Oil Peaks?"
PracticalMaina on Tue, 24th May 2016 2:39 pm
Well considering the huge volume of oil we will be burning up until 2040, according to this article, I imagine cruises thru the arctic and antarctic will be popular, because they will be the only areas that are not unlivable.
rockman on Tue, 24th May 2016 3:12 pm
“This will require a change in the oil and gas industry investors’ mindset. To develop this flexible, supplemental leg to traditional oil and gas activities, the oil and gas industry may find new opportunities by addressing the technological challenges associated with the different parts of the renewable energy space…”
Interesting that they think companies that little or no background or expertise in alternative energy will lead the charge instead of companies manned by folks that do have experience and background in alternative energy. It’s as if any one smart enough to develop one source of energy can just as easy develop a different source. Maybe that will be the solution to PO: alternative energy companies could start drilling for oil/NG.
Yeah, that’s the ticket. LOL.
penury on Tue, 24th May 2016 4:23 pm
I love dreams of riches beyond all desires. I also appreciate people who have plans for the future with realistic answers to the predicaments of today. But being a pragmatist at hear I prefer something which can show some evidence of existing in the known world or capable of existing in the known world. This article fulfills neither of those conditions.
makati1 on Tue, 24th May 2016 7:43 pm
“…the Future of Oil & Gas is developing a vision of what the oil and gas industry might look like in 30 to 40 years.”
What did the buggy whip industry look like in 1950?
The buggy whip industry? What is that, you ask. Nuff said.
GregT on Wed, 25th May 2016 12:39 am
“What Happens When Demand for Oil Peaks?”
The question is worded incorrectly. Should be; What will happen to cause the demand in oil to peak? The answer? Economic decline.
makati1 on Wed, 25th May 2016 1:03 am
Perhaps there is no demand and it has peeaked? I just read an article that may explain the oil “demand” in China. And what will happen when all of their storage is full.
http://www.zerohedge.com/news/2016-05-24/why-china-being-flooded-oil-billions-underwater-opec-loans-repayable-crude
Interesting, NO?
Davy on Wed, 25th May 2016 2:13 am
“Currency War Resumes – China Devalues Yuan To 5-Year Lows”
http://www.zerohedge.com/news/2016-05-24/currency-war-resumes-china-devalues-yuan-5-year-lows
“a desperate China has reportedly given up on its liberalization goals. As The Wall Street Journal notes,”
Behind closed doors in March, some of China’s most prominent economists and bankers bluntly asked the People’s Bank of China to stop fighting the financial markets and let the value of the nation’s currency fall. They got nowhere. “The primary task is to maintain stability,” said one central-bank official, according to previously undisclosed minutes of the meeting reviewed by The Wall Street Journal.
In August 2015, the PBOC said it would make the yuan’s value more market-based, an important step in liberalizing the world’s second-largest economy. In reality, though, the yuan’s daily exchange rate is now back under tight government control.
The flip-flop is a sign of policy makers’ deepening wariness about how much money is fleeing China, a problem driven by its slowing economy. For now, at least, officials believe the benefits of freeing the yuan are outnumbered by the number of threats… though we note that a 3% depreciation of the yuan could add $25.6 billion to Chinese companies’ annual interest payments on dollar debts.
Davy on Wed, 25th May 2016 2:15 am
Oil, will not see stability until China sees stability.
“All You Need To Know About The China Boom-Bust Cycle In One Chart”
http://www.zerohedge.com/news/2016-05-24/all-you-need-know-about-china-boom-bust-cycle-one-chart
“Our economists expect China’s structural deceleration to continue over the coming years and it should thus remain a major source of uncertainty for commodity prices and equity markets alike. The recent recovery in Q1 16 was based on a sharp rebound in the property sector and significant credit injections.”
“This stimulus can only be temporary, as it increases debt in the system, keeps zombie companies alive, and defers reforms, at the cost of higher risk for financial stability in the future. Policymakers are aware of the risks coming from an overheating housing market and excessive debt build-up. As long as the recovery in the property keeps going, the economy could perform more or less in line with market expectations.”
“But, as Chinese authorities will eventually reduce credit easing, we expect the economy to return on its deceleration path in the coming quarters. The economy is thus likely to continue suffering from a series of mini boom-and-bust-cycles that will create repeated periods of volatility.”
onlooker on Wed, 25th May 2016 5:30 am
http://www.abc.net.au/news/2016-05-24/chinese-banks-1.7-trillion-debt-time-bomb/7439844\
Chinese banks sitting on $1.7 trillion debt time bomb
PracticalMaina on Wed, 25th May 2016 10:36 am
Shareholders want answers.
http://www.cnbc.com/2016/05/25/exxon-chevron-face-shareholder-defiance-over-climate-proposals.html
makati1 on Wed, 25th May 2016 8:27 pm
Maybe we need to take a look at the real problem now, Germany and their Deutsche Bank? China is ‘news’ but the real problems are ignored by the US MSM.
http://www.zerohedge.com/news/2016-05-24/deutsche-bank-ceo-very-disappointed-moodys-downgrade
As goes Deutsche Bank, so goes Germany.
As goes Germany, so goes the EU.
As goes the EU, so goes the US.
Nuff said.
Davy on Wed, 25th May 2016 8:37 pm
Nice try Makati Bill, but no dice. China is the problem in the World today and it will be China that brings the global order down. Funny how you reference ZH in your comment when it is ZH exposing all the really dirty Chinese laundry.
GregT on Wed, 25th May 2016 8:43 pm
Fuck are you ever delusional, Davy.
Davy on Thu, 26th May 2016 5:29 am
Gregor is sticking up for his dumbass clearly delusional buddy Makati Bill both being financial illiterates and choosing to believe anything anti-American instead of what the truth has proven out. Dumbasses, if you look at the Fed currently and their proposed rate hike are they worrying about Germany and DB Bank? NO. The Fed is worried about the PBOC and the Yuan/Dollar relationship. That is the biggest economic issue today and it is China’s economic unravel from years of malinvested growth that is the greatest danger to our collective economic stability short term with POD and abrupt AGW the slightly longer term death cross.
You dumbasses that belong to the anti-American board hate group wouldn’t know because it is you tards who were bricophils a year or more ago preaching how the Brics through the Yuan was going to crush the US and the dollar creating a China/Russia axis of economic and military power. Makati Bill was crowing the Brics were going to take over the world. Greggor, have you seen any Bric photo shoots lately? LOL NO! How delusional was that Bric agenda Greggor T? Right. You and Makati Bill’s agenda failed from financial and economic illiteracy. You constantly criticized me and attacked me but who won? Right again. The Yuan is going to crush the dollar but not how you dumbass anti-Americans think it will.
“Will The Fed Hike In June? It’s All In The Hands Of China Now, Deutsche Bank Explains”
http://www.zerohedge.com/news/2016-05-25/will-fed-hike-june-its-all-hands-china-now-deutsche-bank-explains
This is what BofA said: “By some accounts the Fed is stuck in an adverse feedback loop. They want to raise interest rates so they can “reload” their policy ammunition, but the markets won’t let them. The chart of the day illustrates this nightmarish merry-go-round: the Fed threatens to hike, markets tank, the Fed delays the hike, the market recovers and the cycle repeats. The end result is repeated delays and very little actual policy tightening.”
“But there are reasons to believe that this negative feedback loop may be more severe in the current environment: a stronger dollar is likely to increase pressure on China’s currency and weigh on commodity prices, thereby re-introducing the key elements of stress that led to a sharp tightening of financial conditions earlier this year. If this view is correct, the scope for further rate increases by the Fed is reduced.”