The price of a barrel of oil has risen from $38/barrel in November 2020 to $75/barrel recently. This is a sturdy recovery given that the price went to $0 earlier in 2020 due to the coronavirus pandemic and a squabble between Saudi Arabia and Russia.
New Mexico oil production hit a record high in 2020, although jobs remain depressed. In the Delaware basin, oil and gas revenue at the wellhead was roughly $24 billion/year.
But wasn’t the pandemic supposed to be a grand opportunity to accelerate the transition from fossil fuels to renewable energies? The fact is that oil and gas across the world contributes about 40% of all greenhouse (GHG) emissions, so this needs to be reduced somehow.
This is where peak oil comes in, to decide when oil production starts to decline toward the Paris Agreement date of 2050, and to determine if $75/barrel is the ideal price of oil in 2021.
How to optimize the price of oil?
Answer: you want the highest price you can get for the longest time.
Think about the kids at their lemonade stand on a hot July day. They want to make as much money as they can but also want to sell all the lemonade. They need to predict the future. Perhaps it’s going to be a very hot afternoon and they figure buyers will go to the beach or stay under the AC at home. So they decide to lower the price in late morning to sell more lemonade.
It’s the same approach with oil – sellers need to predict the future. This depends of course on demand for oil, and that depends partly on climate change: how rapidly will fossil energy give way to renewable energies.
Forecasting global demand is critical.
The multinational oil and gas company, bp, have thought a lot about this. In 2019, bp forecast that oil would reach its peak demand in 2030. A year later, in two separate model cases they predicted that peak oil already occurred in 2019 at about 100 million barrels/day.
In their “Rapid” scenario of Figure 1, global oil share drops by half from 33% in 2020 to 15% by 2050, and gas drops from 22.5% in 2020 to 21%.
Demand for oil will decline substantially through 2050, due partly to the pandemic but more so due to government climate policies such as carbon pricing. In the most aggressive case, bp assumed the consumers will change their own energy preferences.
According to bp, global oil demand could fall from about 100 million barrels/day in 2020 to a range of 30-55 million barrels/day by 2050. Meanwhile renewable energy will rise rapidly. In Figure 1, bp’s “Rapid” case (the less aggressive of the two cases), renewables would rise from 5% now to 45% by 2050.
Looking ahead, oil consumption as low as 30 million barrels/day in 2050 would feel like shock and awe to the oil and gas industry – a 70% drop-off from 2020. Even 55 million barrels/day is a 45% reduction, still a shock.
Falling US oil demand because of Biden’s goals.
A simple supply and demand analysis shows that in the US, if demand falls in electrical and transport sectors, then supply is likely to follow in the form of cuts to oil and gas production.
As a rough estimate, the numbers suggest a 24% drop in crude oil production by 2040 and a 32% drop in natural gas by 2035. The drop in crude oil is based on a comprehensive modeling study of the uptake of electric vehicles by 2040. The drop in natural gas is based on a US federal government goal of carbon-free electricity by 2035.
The simplest way forward might be for US oil and gas companies to diversify into renewable energies. Europe is showing the way.
The OPEC+ cartel consists of OPEC and Russia, producing about 40% of the world’s oil. Drilling cuts last year, due to the pandemic, have not been restored, but demand for oil has risen and so the price of oil has increased to $75/barrel. The cartel met last week to try to agree on a production increase but it didn’t happen because UAE wanted to produce more oil than the other countries wanted. No consensus meant no decision.
An analysis indicates where renewable energies come into the picture. OPEC+ want oil to be cheap enough so it can compete with the renewables that are coming in. But since many countries depend on oil income, they don’t want the oil price to crash. So the prediction for renewables growth is an important part of the calculation of an ideal asking oil price now.
OPEC+ are seeing that electric cars are coming, and that means less gasoline/oil demand. Oil price will fall. If a country, or even a company, sees that they won’t be able to make the profits they once did, they might try to maximize their reserves value now, even if it means producing more oil that would lower the price of oil.
As the analysis states, “In a way, climate policy is shifting oil consumption forward in time, forcing countries to drill oil today that they once would have planned to drill next decade.”
To say this another way, as solar and wind and their big-battery storage get cheaper, oil companies will be tempted to produce more and more until a flood of cheap oil fills the world. The road to green energy may become very oily on the first leg.
The need to reduce greenhouse gas emissions.
The need to reduce GHG is real, especially in view of potential links to exceptional extreme weather disasters of 2020, and recent unprecedented heat waves along the west coast of US and Canada. Oil and gas companies, and their headquarter countries, have to address seriously the transition to renewable energies.
From 2006 to 2020, US oil production rose by 2.6 times. While the US is still basking in the success of the shale revolution, a renewables revolution is coming. Caution, or even resistance, by the US oil and gas industry is understandable, because shale enabled the US to become self-sufficient in oil and gas for the first time since 1947.
The US industry would like to sidestep cutting oil production by focusing on (1) greening the carbon-footprint of their operations, such as drilling and fracking; (2) cleaning up flaring gas and methane leaks; and (3) burying extra GHG deep underground. Their rationale seems to be: engage indirect cleanups around all their operations, upstream to downstream, and bury all the CO2 that comes from burning the oil and gas they produce. In other words keep the wells pumping at all costs.
But this outlook ignores the demand side of the equation. If demand dwindles, supply subsides or else the price of a barrel of oil sinks. But companies have begun to divest from oil and gas drilling and to reinvest in renewable energies. Look toward Europe to see how they are doing it.
Now may be the perfect time to start divesting from oil and gas in the US. The feds have a moratorium on leasing and drilling. But with oil prices so high, wellhead cash is available to spend. Further, drilling and fracking more wells has lost its glamor for banks and investment houses and shareholders — wind and solar and big-battery storage are more appealing.