Is the Oil Industry at the Beginning of the End?

"While some have worried about peak oil (supply) in the past, the reality is that we will run out of demand before we run out of supply". Oswald Clint (Bernstein). September 2016

Full Abstract

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As most people are aware the hydrocarbon industry follows a cyclical process driven by the price of a barrel of oil which is a function of supply and demand. The current (apparent) low oil price being a function of too much supply partly with the introduction of significant domestic US production and reduced demand from China. The new supply from unconventional reservoirs was not something forecast 10 years ago, consequently this didn't feature in previous estimates of peak oil supply.

In previous cycles the "global environment" was relatively consistent; however, in 2016 this isn't the case because of the introduction of unconventional hydrocarbons but also because of the growing presence of global warming.

In my opinion the beginning of the end of the oil era has started.

Let me qualify this statement: Assuming the current system of allowing free pollution continues, there will be increasing pressure to not use hydrocarbons for transport and electricity generation. The coal era is currently coming to a close even though there are several hundred years’ worth of coal available to generate electricity.

"Peak (oil) demand is what we should be really worried about. While most long term industry estimates (BP and Exxon), the IEA and OPEC project demand will continue rising indefinitely (to at least 2040) to around 110 MMbbls/d, we project that demand is likely to peak between 2030-35 at around 108 MMbbls/d before entering into long term decline. While population and economic growth will drive demand higher to 2030, the relentless march of fuel efficiency and technology will eventually cause demand to peak before 2035". Oswald Clint (Bernstein). September 2016

The fundamental flaw in this is that the pollution cost from burning fossil fuels isn't free; which everyone should understand and acknowledge. In reality the full, real cost of burning hydrocarbons is huge because of the pollution.

It would appear that the predictions made by Clint don't try to account for the cost of pollution, which is understandable because most Economists & Policy-Makers ignore this crucial element; however, Clint foresees "technological" changes reducing the demand for oil from about 2030 onwards. Whereas (not surprisingly) the oil companies see demand increasing and continuing much further into the future.

With the December 2015 Paris Accord on global warming agreed by 197 countries; this suggests to me that the World now agrees we have a problem due to the burning of fossil fuels.

So, the global context for the current & future oil price cycles is quite different from all previous cycles.

Oil & gas companies are in a finite industry which is now starting to see an end-point that is not that far away. Keep an eye on your investments in these companies!

But if oil & gas companies could offer (environmentally) carbon-neutral hydrocarbons by dealing with the pollution either through upstream or downstream de-carbonization; they would have a much longer timeline available. This would require a global consensus on pricing hydrocarbon pollution, which unfortunately is not likely in the near term.

However, companies like Saudi Aramco could take the lead on de-carbonization, possibly using cheap solar power as input.

It's difficult to see how the large number of small and medium sized oil & gas companies will exist in 25 to 50 years’ time. Indeed, unless all oil & gas companies wake up to the changing world, even the independent super majors will struggle to maintain their current exploration & production business model in the next 25 to 50 years. The oil-rich National Oil Companies will likely live the longest, particularly if they can address de-carbonization. Some companies are actively moving out of hydrocarbons and into renewables, for example DONG and Centrica. Hindsight might show these were the forward thinking companies...

So, 2016 would appear to mark a threshold into a different hydrocarbon world; potentially the beginning of the end of the oil era.

Thoughts?