The end of oil will/may arrive, but when/how…?

The Oil Age has had quite a run over the past 100 years or so, and its possible demise is a source of constant debate, as competing forecasts and scenarios try to illuminate when and how such factors as alternative energy sources; non-ICE*-powered vehicles; and concerted action on “climate change” will cause a significant decline in use of oil-derived fuels.

What seems sometimes to be overlooked is that a) forecasts are usually wrong in terms of timing and scale; b) one has to have the appropriate assumptions; and c) there are often unexpected linkages or factors that can significantly affect actual outcome(s).

So, let us think about some of the variables involved, and how they might affect the supposed outcome:

Firstly, while the rise of the EV** may seem inexorable and rapid, Bloomberg recently forecast that the displacement of oil usage by EVs would be some 7MM bpd by 2040. Compare this figure with current global oil production of c. 100MM bpd. An incremental change over the next 20+ years will not happen in isolation, and it is hard to take into account how demand for more ICE vehicles in so-called emerging markets may rise over the same timeframe, offsetting likely declines in terms of generating capacity and industrial processes. Yet even in the case of industrial processes, demand for petro-chemicals is likely to continue to rise for the foreseeable future, absent a radical re-think or rapid replacement of those same processes.

Secondly, the rise in demand for EVs is unlikely to be smooth, as it creates its own economic and geopolitical consequences and risks. Consider the days when the Middle East completely dominated oil production, and the fact that now mining house Glencore is seeking to expand production of cobalt (essential for most EV batteries), when over 50% of reserves come from the chronically unstable DRC; or that it seems quite clear that the PRC has set its sights on controlling the supply of the lithium (another essential component) needed to support its own push towards EV usage. And what of copper? While its mineable resources may be more widely spread geographically, the amounts required to create clean energy infrastructure are so large that it seems likely that there will be a push to consolidate that market.

Thirdly, all those new EVs will require a network of charging stations in the same way that ICE vehicles now have gas/petrol stations, leading to disruption in real estate markets as those seeking prime locations (which cannot be replicated) are constrained by lack of supply. The ICE re-fueling network is hardly going to be re-purposed that easily. And more EVs will lead also to increased (not lower!) demand for reliable 365/24/7 electric power generation from baseload sources. While oil itself may form a smaller part of the fuel for such capacity, its “sibling” natural gas is likely to see demand rise.

As Sanford Bernstein pointed out in a recent report (The Future of Oil Demand) “…the pace and the path of ending an extractive industry [i.e., oil] are measurably slow and uncertain.”

Therefore, it seems that the probability of any near-term “death of oil” has been greatly exaggerated. Decline over the forthcoming decades may at some point become first relative and then absolute, yet many of us are likely to be in our dotage (or worse!) before the end of oil arrives.

As always, the Awbury team constantly assesses key scenarios such as the future demand for oil to ensure its ability to make appropriately-informed judgements on existing and future portfolio risks and opportunities.

The Awbury Team

*Internal Combustion Engine
**Electric Vehicle


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