Oil at any price will eventually lose market share to renewables
Why oil isn't selling, even at 40% off.
Not very long ago, the world was buying oil for $100 a barrel, and in enormous quantities, tens of millions of barrels a day. But today, selling incremental oil is rather like trying to push rope. If we think about this, it isn't hard to understand why the oil market is so inelastic.
Basically, we really don't like having to buy oil and burn gasoline. This stuff stinks, it's sticky, dirty, ugly, carcinogenic, it tastes bad, it may even be destroying our planet. Running you car on gasoline, or running your economy on oil feels like being enslaved to oil producers, and some oil producers tend to engage in rude, anti-social behaviors that we prefer not to encourage.
We, in this case doesn't refer to a few over the top environmentalist crazies. The vast majority of consumers feel this way to some degree. And entire nations and their Governments feel this way as well. Tax policy and vehicle regulation has, for decades, in most of the world, sought to minimize vehicle fuel consumption in the interest of the environment, local economies, national balances of payment and the like. And, these policies have worked. Oil demand today is much less than it would have been had we not made efforts to increase efficiency and minimize petroleum fuel use.
The simple fact is that oil demand is at least as inelastic as the supply and rates of demand growth are coming in lower than predictions made some years ago. In the U.S., carmakers are working toward the 54 mpg CAFE target, twice the mileage of current offerings, which are already far more efficient than just a few years ago. In China, the government has come to realize that fuel burning cars and power plants are a threat to habitability of their cities and pressuring carmakers to supply cleaner - and in many cases - more fuel efficient cars.
The longer-term trend for oil looks even worse. California, which leads the U.S. and much of the world in technology and regulatory policy has set, by law, the target of reducing statewide carbon emissions to 80% below 1990 levels by 2050. Achieving this goal will require that essentially all grid electricity and all surface transport be powered from renewable or nuclear sources. This will effectively remove the California market for petroleum, except possibly for aircraft and marine fuel, and petrochemicals.
Countries with severe pollution, and countries concerned with CO2 emissions and climate change will follow California's lead because that is the only practical solution to these issues short of collapsing their economies.
All of this, the current oil price, efficiency regulations already in place, and future policy roadmaps for dealing with pollution and climate all point to an approaching peak demand for oil. The situation we face is not entirely an unanticipated one. Some years ago, a Saudi Oil Minister summed it up nicely:
Thirty years from now there will be a huge amount of oil - and no buyers. Oil will be left in the ground. The Stone Age came to an end, not because we had a lack of stones, and the oil age will come to an end not because we have a lack of oil. - Sheik Ahmed Zaki Yamani
With the latest crash of oil prices and market turbulence, we may, in fact, be seeing the beginning of the end of the age of oil. If this change is now upon us, or is even beginning to come into our view and forward expectations, that will "change everything." Current market turbulence would seem the product of just the sort of uncertainty we would expect from a sea change like the ending of oil's dominance of the world energy business.
AI
