Saudi Arabia aiming to dominate oil’s sunset years

We were heading, the analysts assured us, for an energy crunch. Crude prices would climb ever higher, as would demand for the stuff, and eventually we would run out, landing us back in the dark ages.

Like most grand theories it turned out to be rubbish. As is invariably the case, the market responded to sky-high prices by innovating its way out. We got better at using and conserving energy, and thanks to new technologies like fracking, America is now awash with oil. Literally, as it happens.

For these days there is a new paradigm in town – post-oil. The theory goes as follows: thanks to advances in green technology and net-zero targets there is a real prospect that, far from exhausting all the oil in the ground, we may end up leaving most of it where it is. We are getting a sneak preview of post-oil courtesy of the global lockdown, and it is quite the spectacle.

With cars stuck in garages and factories on standby, global energy demand has plummeted at a record-breaking rate. That has coincided with plentiful supply of wind and solar power, meaning oil and refined products like gasoline are so abundant that the US is running out of storage space.

This shortage of storage and collapsing demand are two thirds of the explanation for the astonishing scenes in oil markets.

Just last week certain crude oil contracts went into negative territory: the cost of storing the stuff outweighed the value of the actual barrel, so for the first time you could charge sellers to take oil off their hands. In part this was because oil is sold in monthly futures contracts, but tempting as it is to dismiss this as a technical glitch there is also something else going on, which brings us to the final third of the explanation.

Usually when demand for energy is on the wane, producers respond by cutting supply. Yet even as COVID-19 began to depress global demand in March, Saudi Arabia opened the spigots. As you read this, supertankers carrying Saudi crude are en route for the US. Given the amount being stored in the US, it is unclear what will happen when they arrive.

On the face of it, the move by Saudi crown prince Mohammed bin Salman (MBS) to increase supply even as the world went off oil looks like one of the most boneheaded decisions in geopolitical history.

Yet view it through the prism of post-oil and you come to a different conclusion. For the point is that eventually the world will wean itself off fossil fuels, so today’s oil producers’ days are numbered; only a handful will survive.

By forcing the oil price down into unprecedented territory, the crown prince has precipitated that crunch: at these levels most oil producers, save Saudi and Russia, can no longer make a profit on the crude they extract.

So while the conventional wisdom is that MBS’s bizarre move derived from a spat with Russia, the post-oil interpretation is that there’s method in his madness.

The lower oil prices stay, the more small-scale fracking companies go under and the fewer rivals are left in the final years of the oil era.

You may not weep for American frackers but consider the implications for unstable parts of the world where the entire economy is reliant on oil exports. What happens now to low-income oil exporters like Iraq or Angola, Ecuador or even Nigeria? An economic transition that was supposed to take decades may instead be forced upon these countries in a matter of weeks – even as they confront the consequences of COVID-19.

There is a chance, of course, that post-oil turns out to be yet another dodgy theory. Indeed, in most recessions environmental investments are the first things to be cut. But consider that in the last recession a decade ago new solar farms cost more than $US300 for every megawatt hour generated. These days the cost can be as low as $US30.

This staggering improvement in price and efficiency means you no longer have to be an environmentalist to plump for renewable power. Indeed, onshore wind is now the cheapest form of electricity generation in Britain, and for that matter the US and Germany – even without subsidies.

Still, renewable power isn’t much use without battery storage for the days when the wind isn’t blowing, and today’s lithium ion batteries simply aren’t good enough: too inefficient, slow to charge and prone to spontaneous combustion. But the man who invented the lithium ion battery, 97-year-old John Goodenough, has now invented a solid-state battery which is far more stable, has three times the capacity and can charge in a fraction of the time. Better still, his glass battery could be made without lithium or cobalt, which involve mining in some of the world’s conflict zones, but with sodium from sea water.

The oil industry is being out-innovated and outmanoeuvred at every turn. So perhaps it’s no surprise that Royal Dutch Shell has cut its dividend for the first time since the 1940s. It’s not just about COVID-19; they need all the money they can get to transition to net-zero by 2050. Perhaps it is no surprise MBS is on manoeuvres to dominate the sunset years of the fossil-fuel era. When even the linchpins of the crude industry buy into the post-oil thesis, it makes you wonder whether it might be right after all.

The Times