Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Custom Build PC 2021 - Ryzen 5950x, RTX 3080, 64gb DDR4 Specs - Scan Computers 3SX Order Day 11 - 17th Jan 21
UK Car MOT Covid-19 Lockdown Extension 2021 - 17th Jan 21
Why Nvidia Is My “Slam Dunk” Stock Investment for the Decade - 16th Jan 21
Three Financial Markets Price Drivers in a Globalized World - 16th Jan 21
Sheffield Turns Coronavirus Tide, Covid-19 Infections Half Rest of England, implies Fast Pandemic Recovery - 16th Jan 21
Covid and Democrat Blue Wave Beats Gold - 15th Jan 21
On Regime Change, Reputations, the Markets, and Gold and Silver - 15th Jan 21
US Coronavirus Pandemic Final Catastrophe 2021 - 15th Jan 21
The World’s Next Great Onshore Oil Discovery Could Be Here - 15th Jan 21
UK Coronavirus Final Pandemic Catastrophe 2021 - 14th Jan 21
Here's Why Blind Contrarianism Investing Failed in 2020 - 14th Jan 21
US Yield Curve Relentlessly Steepens, Whilst Gold Price Builds a Handle - 14th Jan 21
NEW UK MOT Extensions or has my Car Plate Been Cloned? - 14th Jan 21
How to Save Money While Decorating Your First House - 14th Jan 21
Car Number Plate Cloned Detective Work - PY16 JXV - 14th Jan 21
Big Oil Missed This, Now It Could Be Worth Billions - 14th Jan 21
Are you a Forex trader who needs a bank account? We have the solution! - 14th Jan 21
Finetero Review – Accurate and Efficient Stock Trading Services? - 14th Jan 21
Gold Price Big Picture Trend Forecast 2021 - 13th Jan 21
Are Covid Lockdowns Bullish or Bearish for Stocks? FTSE 100 in Focus - 13th Jan 21
CONgress "Insurrection" Is Just the Latest False Flag Event from the Globalists - 13th Jan 21
Reflation Trade Heating Up - 13th Jan 21
The Most Important Oil Find Of The Next Decade Could Be Here - 13th Jan 21
Work From Home £10,000 Office Tour – Workspace + Desk Setup 2021 Top Tips - 12th Jan 21
Collect a Bitcoin Dividend Without Owning the King of Cryptos - 12th Jan 21
The BAN Hotlist trade setups show incredible success at the start of 2021, learn how you can too! - 12th Jan 21
Stocks, Bitcoin, Gold – How Much Are They Worth? - 12th Jan 21
SPX Short-term Top Imminent - 12th Jan 21
Is This The Most Exciting Oil Play Of 2021? - 12th Jan 21
Why 2021 Will Be the Year Self-Driving Cars Go Mainstream - 11th Jan 21
Gold Began 2021 With a Bang, Only to Plunge - 11th Jan 21
How to Test Your GPU Temperatures - Running Too Hot - GTX 1650 - Overclockers UK - 11th Jan 21
Life Lesson - The Early Bird Catches the Worm - 11th Jan 21
Precious Metals rally early in 2021 - 11th Jan 21
The Most Exciting Oil Stock For 2021 - 11th Jan 21
Financial Market Forecasts 2021: Navigation in Uncharted Waters - 10th Jan 21
An Urgent Message to All Conservatives, Right-Wingers and Patriots - 10th Jan 21
Despite Signs to the Contrary, Gold Price at or Near Top - 10th Jan 21 -
Ultimate Guide On The 6 Basic Types Of Index Funds - 10th Jan 21
Getting Vaccinated at TESCO - Covid-19 Vaccinations at UK Supermarket Pharmacies and Chemists - 10th Jan 21
Cheers for the 2021 Stock Market and These "Great Expectations" - 9th Jan 21
How to Plan Your Child With Better Education - 9th Jan 21
How To Find The Best Casino - 9th Jan 21
Gold Is Still a Bargain Buy - 8th Jan 20
Gold Price Set to Soar as Hyperinflation Looms - 8th Jan 21
Have Big Dreams? Here's How to Pay for Them - 8th Jan 21
Will the Fed Support Gold Prices in 2021? - 8th Jan 21
Stocks trading strategies for beginners - 8th Jan 21
Who is Buying and Selling Stocks in 2021 - 8th Jan 21
Clap for NHS Heroes 2021 as Incompetent Government Loses Control of Virus Again! - 8th Jan 21
Ultimate Gaming and Home Working PC System Build 2021 - 5950X, RTX 3080, Asus MB - Scan Computers UK - 7th Jan 21
Inflation the bug-bear looking forward through 2021 - 7th Jan 21
ESG ETF Investing Flows Drive Clean Energy to Fresh Highs - 7th Jan 21
5 Financial Market Surprises in 2021 - 7th Jan 21
Time to ‘Reset’ Your Investment Portfolio in 2021? - 7th Jan 21
Bitcoin Price Collapses almost 20% at the start 2021 - 7th Jan 21
Fed Taper Nervous Breakdown - 6th Jan 21
What Will the U.S. Dollar Ring in for 2021? - 6th Jan 21
Stock market frenzy- Ride the bandwagon but be sure to take along some gold coins - 6th Jan 21
Overclockers UK Custom Build Gaming System Review Heat Test and Final Conclusion - 6th Jan 21
Precious Metals Resuming Bull Market, Gold, Silver, GDX Trend Forecasts 2021 - 5th Jan 21
Trump’s Iran-COVID-Gate Anniversary  - 5th Jan 21
2021 May Be A Good Year For The Cannabis / Marijuana Sector - 5th Jan 21
Stock Market Approaching an Important Target - 5th Jan 21
Consumer Prices Are Not Reflecting Higher Inflation; Neither Is The CRB - 5th Jan 21
NEW UK Coronavirus PANIC FULL Lockdown Imminent, All Schools to Close! GCSE Exams Cancelled! - 4th Jan 21
The Year the World Fell Down the Rabbit Hole - 4th Jan 21
A Year Like No Other for Precious Metals… and Everything Else - 4th Jan 21
The Stocks Bull Market is Only Half Completed - 4th Jan 21
An In- Depth Look At Gold Price Trend - 4th Jan 21
Building America Back After a Dark Covid Winter - 4th Jan 21
America's Dark Covid Winter Ahead - 4th Jan 21
Buy a Landrover Discovery Sport in 2021? 3 Year Driving Review - 3rd Jan 21
Stock Market Major Peak in Early April 2021 - 3rd Jan 21
Travel and Holidays 2021 - Flight Knight Cabin Bag Review - 3rd Jan 21
�� Happy New Year 2021 Fireworks and Drone Light Show from London and Sheffied - BBC�� - 2nd Jan 2
The Next IMMINENT Global Catastrophe After Coronavirus - 1st Jan 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Global Energy Transition Is Moving Fast

Commodities / Energy Resources Jun 07, 2012 - 11:56 AM GMT

By: Andrew_McKillop

Commodities

Best Financial Markets Analysis ArticleOil analysts already integrate “disruptive technology” in the shape of hybrid and all-electric cars in their forecasts of probable decline in the total oil demand of the world's two-largest car fleets - in the EU27 and USA - and lower demand growth going forward for the world's fastest-growing fleets of China, India and smaller emerging economies.

Disruptive energy economics is also at work changing the energy piechart, especially the future role of oil, gas and the renewables. Under increasingly rational outlooks, oil's share in global energy can fall from its present 36% - 37%, to well below 33% by 2020, this forecast decline being set by the IEA and similar energy agencies as only possible by about 2030 or later.


For the US fleet whose total size, currently 200 million may attain almost zero annual growth from 2015, car additions or replacements in the 2017-2020 period could average 44 mpg (5.3 litres/100 kms) compared with 29 mpg today. For the EU27 fleet of 215 million cars already at present close to 6.5 litres/100 kms on average, radical gains in fuel efficiency are unlikely in the short-term to 2020, but average trip lengths and trip numbers-per-year are already in decline. Urban utilization of cars and their replacement by a mix of non-car alternatives is increasingly realistic and probable, with further downward impacts on oil demand.

The current combined total car fleet oil demand of the US and EU27 fleets is about 13.25 Mbd and relative to total OECD consumption of 44.25 Mbd (as of February 2012 using IEA data), these two car fleet's oil demand is about 30% of OECD total demand and about 15% of world total demand. Other road, rail and marine transport oil demand in OECD countries adds at least another 5 Mbd to this 13.25 Mbd total, further raising the role of transportation in OECD countries in world oil demand.

Since its most recent and likely all time peak in 2007 at about 9.2 Mbd, the US car fleet's oil demand has fallen by about 0.6 Mbd. In Europe, car fleet oil demand contraction in the Union since 2006, using Eurostat data, has averaged 2% per year and this rate of contraction can easily grow. The effect of these trends to 2025-2030 may become dramatic: US gasoline and diesel fuel demand could fall to 5 Mbd, and EU27 car fleet fuel demand could fall to 4 Mbd by 2025-2030 even assuming only a "trends continued" forecasting scenario, for a total saving of at least 4.5 Mbd and up to 4.75 Mbd.

Total combined savings, only by the US and EU27 car fleets would exceed Japan's present total oil demand, and would exceed the present total oil production of any OPEC state except Saudi Arabia.

 

ECONOMIC RUPTURE
As oil supply peaks, this cuts total global supply growth to zero annual growth. Driven by multiple and converging factors global oil demand will also peak. Forecasts of when this will happen are published by the IEA and are usually set at 2017. The role of oil prices in this process is also set by the IEA at prices spiking to the region of $175 - $200 per barrel. This paradigm for oil supply and demand reaching a peak is however unrelated to or disconnected with global oil supply-demand elasticities, notably because oil demand is imagined to be only elastic, and fall, when traded oil prices reach historic peaks: as any European car driver knows, filling station prices averaging about 1.60 euros per litre in April 2012 are equivalent to about $350 per barrel.

The upstream traded price of oil is treated as predominant, that is higher prices only or mostly cut demand, ignoring a host of other energy and non-energy factors driving real energy transition faster than expected and predicted. The model is "crisis-dependent", assuming that inelastic demand hits a global oil supply ceiling, oil prices spike, and demand collapses in an economic catastrophe.

This is rearview history. Using IEA data comparing 1973 with 2009, the OECD group in 1973 depended on oil for 52.6% of its energy. By 2009 this had fallen to 36.3%.

The IEA economic disruption model is therefore "classic and catastrophic", and firstly assumes oil prices can attain and sustain, for a certain period of time, about $175 - $200 per barrel. Experience from 2008, when prices very briefly hit $147 a barrel in Nymex trading, shows otherwise and today we can call it the "pre-2008 model", due to multiple and massive changes taking place in the global energy economy - which include and integrate market, non-market, technology and policy changes, social change, and fundamental economic changes.

Taking only two examples of these many changes, we can question the likelihood of oil prices hitting nearly $200/b in a context where global natural gas prices can only and will only decline to 2020 (the IEA estimate is for a 30% cut), and European energy transition to renewable energy has moved so fast and has already reached such extremes that Germany is forced to give electricity away for free on "green power Sundays".

THE SUBSIDY MAZE
Any economic analysis of global, regional or national energy has to confront the subsidy maze. According to the IEA, state subsidies to fossil fuels attained about $409 bn in 2011, proving for starters that oil prices are not "pure market" and never will be. This distorted pricing and resource allocation, or "market misallocation", also applies on the oil upstream: global major energy companies holding about 75% of global oil production, analyzed by Citibank and Deutsche Bank spent an increasing amount on oil & gas exploration and production (E&P) through 2000-2011 despite ever declining net additional additions to total production capacity.

Spending was estimated as rising from around $150 bn annually in 2000, of which two-thirds was spent on oil E&P, to a peak of more than $450 bn in 2008 of which about three-fifths was spent on oil E&P. Since 2008 this has flattened to around $350 bn (annual rate for 2012 based on Q1), with less than 60% of this spending going to oil E&P. Overall, for 2000-2011 the increase of net oil production capacity from this spending was an annual average of 1.75%. Conversely and only concerning stranded gas and shale gas reserves (reporting of which is complex and difficult to compare with conventional gas and oil), these unconventional gas reserves have risen by hundreds of percent since 2000.

The former 7 Sisters or Oil Majors are now 5 ex-oil majors rapidly shifting to becoming Gas Majors underlining that the writing is on on the wall for oil investing versus gas investing. This is made even more certain because shale gas exploration, and stranded gas exploration can both yield major oil condensate finds, as well as extractible gas resources. The classic economic paradigm for a catastrophic version of "Peak Oil" in 2017, entirely supply side driven, can or may come well before this date simply due to falling oil E&P spending or investment, but unexpectedly fast growth of gas supply and renewable energy supply, and unexpectedly rapid pogress in energy saving and efficiency raising may well remove the economic catastrophe - leaving only the end of oil as global dominant fuel.

Oil price spikes to beyond $150 a barrel are today only possible under intense geopolitical stress (Middle East or Iran war), they are no longer credible as spinoffs from oil demand staying totally inelastic and non-oil energy alternatives being few and far apart, and often expensive.  Oil prices by 2017 may more rationally be rangebound in the $50 - $75 per barrel range, in 2012 dollars, which spells serious problems both for the global energy majors, and oil exporter countries.

This price range can be compared with current energy prices in boe terms (barrel oil equivalent) for natural gas and coal. Gas as of early June 2012 in the US is priced at less than $16 per barrel-equivalent, even if Asian and European prices are well above $65 per barrel-equivalent, while global coal prices are around $25 - $30 per barrel-equivalent. For the upstream "fuel" supply to unconventional and new renewables (excluding biofuels), eg. windpower and solar power, this price is $ Zero per barrel-equivalent.

Oil was too expensive, and stayed too expensive.

SIGNALLING THE END OF OIL
The most likely scenario, today, is for the current sell-out on oil markets to bottom, or flatten from about $75/b for WTI with a considerable compression of the Brent-WTI premium.

While the $75/b price level is claimed to be a Saudi Arabian "nice price", by its oil minister, from which oil's share of the energy market will not suffer too much erosion, this hides the fact that producing oil has become high cost, needing price levels around $75/b. When or if oil falls below this price level and stays there, the negative impact on oil E&P will further intensify the wipeout curve for oil, because as noted above, oil prices can only again rapidly grow to uneconomic levels, due to insufficient supply and non-replacement of existing capacity.

Separating the economic recession-effect driving down oil demand, from the price-effect and other factors (like technology change) we find this "surprisingly high" real market price, of close to $75/b, as the minimum needed for oil replacement at rates able to support present rates of world oil demand (89.9 Mbd). Going forward, we can expect this supply renewal factor will also maintain the downward pressure on world oil demand - with or without economic recession.

The period of 2012-2015 is critical for analyzing and predicting the coming global energy mega shift.

Economic change towards resource-lean, resource-conserving economic models and paradigms was already a policy poster child, often muddled and bundled together with heroic myths like the "fight" against global warming, but the present OECD-wide recession and economic slowdown makes for radical changes when the end of the tunnel is reached. Energy saving and efficiency raising are themselves maturing as a technology-economy-policy mix, and will become even more acute when "free power Sundays" as in Germany, today, become more widespread due to spiralling growth of wind and solar power. In this new real world, filling station oil prices at the April 2012 EU27 average of about $350 per barrel are an anachronism.

These energy prices cannot coexist together - and oil will be the big loser. The energy major corporations, and oil exporter states will at some near-time stage start to show signs they understand this, and will unveil their strategic responses to this endgame. At this time, as shown by Saudi oil minister Al-Naimi's repeated calls for prices to fall to around $75/b, the oil corporate and producer country thinking is that "moderate prices" can save oil's role in the global energy economy and slow its rate of decline.

This is unlikely to be the real world outcome.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2012 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules