I think the analysis misses the fact that the green transition requires huge amounts of materials, new roads and bridges, machinery etc.. Currently everything that is mined, smelted, transported etc requires a lot of diesel and in general oil products. We need e.g. a large amount of copper, bauxite, cement, sand, plastics …to electrify the world. Those mines consume huge amounts of diesel and energy in general. We will have peak oil at 125 million bpd, not 105. Still 15-20 years to go.
Alerted to this due to a Twitter troll (so hey, thank god for trolls). Thanks for the work. I think the probability of an oil price spike over the next three years is reasonably high. This is due to a potential supply shortfall. That said, I think you are directionally correct. There seems to be a yearning for spiking demand and crushed supply from oil bulls as that’s the only scenario they can envisage for higher prices. Thanks again, the Twitter spaces were very helpful.
Random thoughts. (And I know I am mixing various forms of energy below)
- This winter's realization of EV battery life and cold temps may slow adoption.
- Different issue but if supply falls faster than new supply comes online, the net effect is the same, just with a different set of numbers. Shale and OPEC+ may not meet projected numbers in the future.
- I don't pretend to know all the issues, but some Russia production may be lost (at least for many years) from current events.
- One I can't put numbers to, but jets (military, airlines, and private) continue to grow. They gulp oil.
- Plus a more climate summits and WEF meetings are also huge consumers.
- Many have pointed out that not all latitudes work well for green energy, just ask Germany. Without baseload power they need to burn something (and Europe may run out of trees).
- Developing world will continue to use more energy, that is how they develop. And it is also where the population is more stable or growing.
I agree with the concept of declining growth in demand, which is different than declining demand. While supply can increase, the key is at what cost. Not all oil is cheap.
Almost all of these points are long burn conditions, some like negative population growth require decades to accumulate, whereas a China reopening will hit instantaneously and be far more impactful on price which only really discounts current conditions. Andurand's point is far more sound.
Two additional factors that are under estimated - technology improvements and fuel substitution. Everyone is familiar with CAFE regulations, but the potential to reduce fuel consumption in heavy industrial use is even larger (think going from 6 mpg to 8 on a class 8 truck). Substitution of natural gas is also more prevalent in developing countries (until this year, LNG was the primary fuel for heavy trucks in China). Both of these are reducing the relationship between GDP growth and oil consumption which compounds your point about slowing population growth.
Last thing to consider is elasticity of alternative fuels. This is the third de-carbonization cycle in my career. Each time, the real issue is that oil is just cheap. We are approaching price levels (>$80) where synfuels become interesting. Expect liquid fuels generated from natural gas and biomass to become competitive at the margin, especially in jurisdictions where CO2 has a cost.
Under-investment is a real issue, but "to the moon" rarely survives a technology cycle in the energy industry.
I think it makes sense to look deeper into how the Chinese and Indinian demand grows as a bigger percentage of population achieves the "western" level of energy consumption. At the same time it is hard or almost impossible to get away from diesel consumption, as it is used practically in every industry. So you still will refine oil to get diesel and jet fuel and lubricants etc. Gasoline will loose market share to EVs, but if it falls much in price people will still use it...What will happen is that EU makes themselves energy poor, while EM countries will enjoy the benefits of using oil and oil products to improve living standards
Recent TankerTracker's posts on Twitter seem to indicate Russia is willing and able to sell at ANY price. We have precedent in Saudi Arabia which indicates that, when in a pinch, volume is more important than price. So, as long as oil is flowing, Russia likely won't have an issue with frozen pipelines nor lack of markets. Hard to be terribly bullish oil in this scenario.
I think there is a convo around the components of demand that’s instructive.
EV adoption in OECD could hit a “blend wall” given issues around 1. infrastructure but more importantly 2. domestic energy production to charge these EV’s (much more difficult to import electricity at scale than to import liquid fuels). These issues are magnified in EMs.
Passenger Fuels consumption may stay flat, but the middle of the barrel (distillates) are likely to increase with freight, air travel increases tied to overall population growth. Freight might be a better indicator of demand in the “medium” term vs. population growth.
Oil-to-chemicals demand is likely to grow (see Chinese, Saudi investments) since petroleum chemicals are much more difficult to substitute than simple passenger fuels.
I agree with Mike, Pierre failed to take into account what it took China to bring growth back to trend line in the aftermath of 2008/2009 crisis, which is to say China had to run national Debt/GDP ratio up to 340%. A similar run up in debt this time by China, especially when the World is tightening, seems unimaginable and could easily devalue Yuan by 50% and bring catastrophe to the Asian economies!
Mike you don’t address directly but India demand following the Chinese demand curve 2000-2010 would blow up that curve? Yes alternatives available now. Just an X factor models miss- the S curve demand jump. Goehring(spelling?) has extensively written on this the past few years. India has their own billion peasants trying to climb out of poverty. HNY!
Some great points as always. I would just argue it is the "unknown unknowns" factor ( ie. war, weather, famine, general upheaval, filled technology gaps, etc) that makes long-term macro forecasting so difficult if not impossible. If we do get a commodity/energy super cycle it is probably a 90 delta that it will be driven by something completely unexpected to us today. As someone who dabbles in the dark art of cyclicality it seems it is usually the cycle that make the news and not the other way around.
History shows global slowdowns are no time to bet on oil.
But lack of capex, SPR draws, RU war, idiotic EU taxes and not ready for prime time alternatives combine to make a pretty good case for supply struggles.
Find it all terribly easy to be swayed either way and a cross hair in the sticky inflation v deflation debate. Time will tell maybe, as in how long this war lasts and how long before pivot.
I think the analysis misses the fact that the green transition requires huge amounts of materials, new roads and bridges, machinery etc.. Currently everything that is mined, smelted, transported etc requires a lot of diesel and in general oil products. We need e.g. a large amount of copper, bauxite, cement, sand, plastics …to electrify the world. Those mines consume huge amounts of diesel and energy in general. We will have peak oil at 125 million bpd, not 105. Still 15-20 years to go.
Not at all
Alerted to this due to a Twitter troll (so hey, thank god for trolls). Thanks for the work. I think the probability of an oil price spike over the next three years is reasonably high. This is due to a potential supply shortfall. That said, I think you are directionally correct. There seems to be a yearning for spiking demand and crushed supply from oil bulls as that’s the only scenario they can envisage for higher prices. Thanks again, the Twitter spaces were very helpful.
Random thoughts. (And I know I am mixing various forms of energy below)
- This winter's realization of EV battery life and cold temps may slow adoption.
- Different issue but if supply falls faster than new supply comes online, the net effect is the same, just with a different set of numbers. Shale and OPEC+ may not meet projected numbers in the future.
- I don't pretend to know all the issues, but some Russia production may be lost (at least for many years) from current events.
- One I can't put numbers to, but jets (military, airlines, and private) continue to grow. They gulp oil.
- Plus a more climate summits and WEF meetings are also huge consumers.
- Many have pointed out that not all latitudes work well for green energy, just ask Germany. Without baseload power they need to burn something (and Europe may run out of trees).
- Developing world will continue to use more energy, that is how they develop. And it is also where the population is more stable or growing.
I agree with the concept of declining growth in demand, which is different than declining demand. While supply can increase, the key is at what cost. Not all oil is cheap.
Zoom in on India and you will see that you are wrong
Almost all of these points are long burn conditions, some like negative population growth require decades to accumulate, whereas a China reopening will hit instantaneously and be far more impactful on price which only really discounts current conditions. Andurand's point is far more sound.
Two additional factors that are under estimated - technology improvements and fuel substitution. Everyone is familiar with CAFE regulations, but the potential to reduce fuel consumption in heavy industrial use is even larger (think going from 6 mpg to 8 on a class 8 truck). Substitution of natural gas is also more prevalent in developing countries (until this year, LNG was the primary fuel for heavy trucks in China). Both of these are reducing the relationship between GDP growth and oil consumption which compounds your point about slowing population growth.
Last thing to consider is elasticity of alternative fuels. This is the third de-carbonization cycle in my career. Each time, the real issue is that oil is just cheap. We are approaching price levels (>$80) where synfuels become interesting. Expect liquid fuels generated from natural gas and biomass to become competitive at the margin, especially in jurisdictions where CO2 has a cost.
Under-investment is a real issue, but "to the moon" rarely survives a technology cycle in the energy industry.
I think it makes sense to look deeper into how the Chinese and Indinian demand grows as a bigger percentage of population achieves the "western" level of energy consumption. At the same time it is hard or almost impossible to get away from diesel consumption, as it is used practically in every industry. So you still will refine oil to get diesel and jet fuel and lubricants etc. Gasoline will loose market share to EVs, but if it falls much in price people will still use it...What will happen is that EU makes themselves energy poor, while EM countries will enjoy the benefits of using oil and oil products to improve living standards
Recent TankerTracker's posts on Twitter seem to indicate Russia is willing and able to sell at ANY price. We have precedent in Saudi Arabia which indicates that, when in a pinch, volume is more important than price. So, as long as oil is flowing, Russia likely won't have an issue with frozen pipelines nor lack of markets. Hard to be terribly bullish oil in this scenario.
I think there is a convo around the components of demand that’s instructive.
EV adoption in OECD could hit a “blend wall” given issues around 1. infrastructure but more importantly 2. domestic energy production to charge these EV’s (much more difficult to import electricity at scale than to import liquid fuels). These issues are magnified in EMs.
Passenger Fuels consumption may stay flat, but the middle of the barrel (distillates) are likely to increase with freight, air travel increases tied to overall population growth. Freight might be a better indicator of demand in the “medium” term vs. population growth.
Oil-to-chemicals demand is likely to grow (see Chinese, Saudi investments) since petroleum chemicals are much more difficult to substitute than simple passenger fuels.
I agree with Mike, Pierre failed to take into account what it took China to bring growth back to trend line in the aftermath of 2008/2009 crisis, which is to say China had to run national Debt/GDP ratio up to 340%. A similar run up in debt this time by China, especially when the World is tightening, seems unimaginable and could easily devalue Yuan by 50% and bring catastrophe to the Asian economies!
Mike you don’t address directly but India demand following the Chinese demand curve 2000-2010 would blow up that curve? Yes alternatives available now. Just an X factor models miss- the S curve demand jump. Goehring(spelling?) has extensively written on this the past few years. India has their own billion peasants trying to climb out of poverty. HNY!
https://twitter.com/1984_tweeter/status/1611231704525705217?s=46&t=oDKsDiBuk-gS7x0Ejxm05g
https://twitter.com/1984_tweeter/status/1611231704525705217?s=46&t=oDKsDiBuk-gS7x0Ejxm05g
Some great points as always. I would just argue it is the "unknown unknowns" factor ( ie. war, weather, famine, general upheaval, filled technology gaps, etc) that makes long-term macro forecasting so difficult if not impossible. If we do get a commodity/energy super cycle it is probably a 90 delta that it will be driven by something completely unexpected to us today. As someone who dabbles in the dark art of cyclicality it seems it is usually the cycle that make the news and not the other way around.
History shows global slowdowns are no time to bet on oil.
But lack of capex, SPR draws, RU war, idiotic EU taxes and not ready for prime time alternatives combine to make a pretty good case for supply struggles.
Find it all terribly easy to be swayed either way and a cross hair in the sticky inflation v deflation debate. Time will tell maybe, as in how long this war lasts and how long before pivot.