What will happen to the oil price? It is a straightforward question, yet the oil market has proved fiendishly difficult to forecast. But if you are an investor in Royal Dutch Shell (LSE: RDSB), or other energy businesses, then you have to know the answer to this question.
What surprised me about the fall in oil price over the past year is that virtually nobody predicted it. You see, this sector is going through dramatic change, and that has clouded our crystal ball.
The oil market has proved fiendishly difficult to forecast
We have the cycles of commodity bull and bear markets, described by investing experts as the commodities supercycle. This tends to alternate with share price bull and bear phases. The commodities boom of the past 17 years is coming to an end. So you expect the price of crude to tumble.
But layered upon this we have a picture of a world with a growing and wealthier population, and where hydrocarbon reserves are gradually diminishing. At some point, theorists argue, the supply of oil will peak, even as demand increases.
And the final layer is the changing energy mix. Even as global energy demand rises, so the contribution from renewables such as solar and wind is ramping up. What’s more, energy efficiency is increasing as concerns about the environment grow.
In a recently published report, consultancy firm McKinsey may have shed new light on this. They say that the increase in oil demand will slow as the renewables sector grows. They have thus cut their predictions of oil consumption, and estimate that demand will peak around 2030.
Oil demand will peak around 2030
Remember all that discussion about Peak Oil during the commodities boom of the past few years? We were all saying that we had entered a new age of permanently high energy prices, because supply was not able to catch up with demand. Well, it seems, the predictions will come true. It will just be 20 years later than we thought.
But just what does this mean for the price of Brent crude? Well, I still think that there will be no rapid turnaround in prices, and I expect the current commodities bear market still to play out. But after this, there is likely to be one final oil boom. But this will only get underway in the 2030s, as the diminishing supply of hydrocarbons starts to bite.
And then, I suspect, the oil age will at last fade out, as renewables start to dominate the energy picture, and we see a transition to electric or fuel-cell vehicles. But none of us are clairvoyants, and figuring out exactly when this Schlumpeterian shift will take place is incredibly difficult.
During the commodities boom Royal Dutch Shell invested heavily in exploration and production. Much of this production capacity is becoming uneconomic, and that means this is a firm that is highly endebted. Employees may need to endure drastic cuts in the years to come.
Even if the oil price rises a little more, taken in the round, my view is still to avoid Shell and other oil companies.