As Niels Bohr famously said: “predictions are difficult, especially about the future.” And they are doubly difficult if you are talking about the future of oil.
The more uncertain the future, the more vehemently each side presents its case. For years a debate has raged about peak oil, the dreaded moment when we start running out of accessible oil reserves, a debate made only more heated by suspicions of vested interests. So environmental campaigners have been crying out that modern society is about to be plunged into darkness, while oil industry experts have blithely assured us that the oil is there, and they will fetch it for us. Even if it lies several miles under the Arctic seabed or has to be stripped from tar in Canada.
Down Dale
Now BP chief economist Spencer Dale, a former Bank of England policymaker, has thrown his reputation into the fray by claiming we will never exhaust the world’s reserves of oil. Concerns about carbon emissions and climate change mean that most of it will have to be left in the ground.
Burning existing reserves of oil, gas and coal would emit more than 2.8 trillion tonnes of climate-harming carbon emissions, much more than the 1 trillion threshold scientists have set to limit global warming to 2 degrees, he says. If he is right, this has major implications for troubled Footsie-listed oil giants such as BP and Royal Dutch Shell, and stricken explorers such as Premier Oil and Tullow Oil. This means the relative price of oil may not rise much over time. Oil at $50 a barrel could be here to stay.
Up Shale
There is another factor changing the dynamics of the global oil industry: the shale revolution. This has weaned the US off energy imports and effectively made wildcat drillers global swing producers, usurping Saudi Arabia’s traditional role. Shale production has soared from zero to 4.5 million barrels a day — about 5% of global production — in just five years. Iran could add another 500,000 barrels as soon as US sanctions are lifted (assuming they are), then an additional 500,000 within six months.
The future of renewables is another energy battleground, again, with lines drawn between left and right. Some claim China could save the world by becoming a renewables powerhouse, others see this as pie-in-a-smoggy-sky. Personally, I expect solar to break through in the next 10 years, with major implications for oil companies. We will never hit peak sunshine.
Peak And Troughs
Supply is just one side of a very complex equation. Demand is another. Both are pointing at the same worrying direction for oil investors banking on a rising price. The International Energy Agency’s October report has just predicted that global demand growth is expected to slow from its five-year high of 1.8 million barrels a day this year to 1.2 million barrels next year.
Spencer Dale is correct. We will never hit peak oil. There will always be reserves out there, but they will either be too inaccessible or politically controversial to extract. Just look at how Shell was forced out of Alaska by a combination of costs, campaigners and regulatory pressure.
Oil stocks could continue to struggle in this climate but with Dale also predicting that global energy demand will rise 37% by 2035, I don’t expect them to fall off a cliff.