Kopin Tan recently wrote an article in Barron’s entitled “Get Ready for the Oil Age to End”. The article cites Paul Sankey’s opinion that electric and hybrid vehicles are game changers and the decline in U.S. gasoline demand as backing up the title’s claim. Further, the article states that competition from natural gas will also crimp oil demand. The overall tone of the article suggests that mankind is moving away from oil, and therefore the age of oil will be over sooner rather than later.
The facts simply don’t support these claims. While slack demand for gasoline is certainly a fact, it has more to do with economic contraction than any move away from gasoline as a transportation fuel. While Boone Pickens and Clean Fuels (CLNE) have been successful in moving some large truck fleets over to natural gas transportation, this alone will not have a significant effect on U.S. oil consumption.
The U.S. still consumes roughly 25% of the world’s oil and imports 2/3 of that oil. The U.S. uses 70% of this oil in the transportation sector. The only way the U.S. can significantly reduce oil consumption in the transportation sector, over the next 5 years or so, is to leverage its domestic natural gas supplies and get NGVs [natural gas vehicles] in middle class American’s garages. If 50% of American cars and trucks were converted to run on natural gas, the U.S. would reduce oil consumption by 6-7 million barrels a DAY. However, this is simply not happening. President Obama, Energy Secretary Chu, and Congress are asleep at the oil switch.
With respect to electric cars, they too are an illusion and not available. Even when they do arrive, they’ll be way too expensive for the battered American middle class to afford. The battery pack requirements for fully electric vehicles will be very large indeed if the vehicle is to have an acceptable range. Further, there are independent studies showing the raw materials to make the batteries are not only insufficient to build out a worldwide EV fleet, but even if they were, the ability to make them economically viable is highly questionable. Also, the vast majority of farm equipment still being utilized and sold new are all based on gasoline or diesel fuel (oil). So, as in 2008, U.S. consumers will get a triple whammy when the next oil price spike hits:
1) higher gasoline prices
2) higher food prices
3) weaker dollar
No wonder the U.S. government likes to take food and energy out of the inflation numbers (wink-wink).
Natural gas alternative
Meanwhile, the absolute best transportation solution (a natural gas/electric hybrid – think Toyota Prius with a natural gas internal combustion engine), is completely ignored and unavailable although the technology is proven and exists. A natural gas/electric vehicle is superior to gasoline, gasoline/hybrid, or fully electric vehicles for a number of reasons:
Much lower overall emissions
Much smaller battery requirements than 100% EV’s
It runs on natural gas, not gasoline derived from foreign oil
It is more affordable than 100% fully electric vehicles
The technology is mature and proven
The long-term reliability is better than fully electric cars because the battery pack is smaller
The fuel (natural gas, no plug-in) is abundant, cheap, and clean!
The “cash-for-clunkers” program has been touted for reducing oil consumption, which is true, but the big picture view of this program is that the cars purchased still run on gasoline. This will keep the U.S. addicted to oil in a future where worldwide oil supply won’t keep up with worldwide oil demand. It was a bad policy from a strategic point of view. The only way the U.S. will reduce its oil consumption is to adopt a strategic long-term comprehensive energy policy.
This is only common sense for a country whose economy is built on a faulty foundation of foreign oil, so of course such a policy has not been adopted or even discussed. Energy Secretary Chu should be fired.
China's even worse
Things aren’t much better in China. The Chinese don’t have the natural gas infrastructure, pipelines, and home distribution network that the U.S. has. If they did, you can bet they’d make the U.S. look like idiots for not leveraging their network in the transportation sector. The end result here is that China has taken over world leadership in monthly car sales and you guessed it, the overwhelming majority of these vehicles run on gasoline (oil). Thus, China is locking up oil supplies all over the world.
As Boone Pickens pointed out on CNBC last week, this is a game the U.S. cannot participate in as the Chinese central government control of their oil companies allow them to finance oil transactions with government backing. And, as we all know, the Chinese hold trillions in U.S. dollar reserves. They are certainly in the catbird seat. The China/Exxon (XOM) showdown in Ghana will be interesting to watch. If Exxon cannot compete with the Chinese, what oil company can?
Of course the most obvious sign that the age of oil is not near at an end is the price. Although the severe economic contraction took oil prices down from $145/barrel to under $40/barrel, prices have snapped back to $70/barrel. Think about that for a moment. Here we are in the deepest recession since the great depression and oil prices are still $70/barrel – a price that only 5 years ago would have seemed fantastically high. The chart below is courtesy of Omega Research and SuperCharts. (Click to enlarge)
Light Crude Oil Monthly Prices (CL, NYMEX)
In conclusion, while I certainly agree with Mr. Tan that automobile fuel efficiency will continue to improve, and that gasoline demand in the U.S. has suffered some demand destruction, I disagree with the implied assumption that the “end is nigh for the age of oil” due to man’s movement away from oil. On the contrary, man has done very little to move to transportation solutions away from oil. No doubt Paul Sankey and Kopin Tan both jumped into their gasoline powered automobiles after a hard day’s work at the office. Further, the move to very expensive 100% electric vehicles prior to building out a renewable and nuclear infrastructure to recharge these vehicles will simply put little coal generators on the highways spewing CO2 and toxic particulates into the atmosphere.
So, what we’ll have is another oil price spike with the next 3-5 years, and the price of oil will blow past the last price peak of $145/barrel. The continuation of Bush era deficit spending and weak dollar policies by the Obama administration officials mean the long-term outlook for the U.S. dollar will continue to be weak, giving oil supply/demand fundamentals a financially based kicker. In addition, we all now understand the geopolitical risk premium due to oil wars and continuing tension among countries to obtain long-term oil supplies will also support higher oil prices. The combination of all these factors mean oil prices are locked into a state of permanant long-term “contango”.
How to play it
All that said, I certainly do agree with the article’s assertion that Exxon Mobil (XOM), Occidental Petroleum (OXY), and ConocoPhilips (COP) have mature assets producing low-cost oil and that these stocks are very attractive at current prices. I don’t understand why Exxon Mobil has a lower dividend yield now (in an age when oil prices will continually march upward) then it did back when oil was $20/barrel. See my last article on this subject.
Foreign oil companies will continue to outperform as their dividends are higher and they will benefit from the falling U.S. dollar. In this space, I like BP, StatOil (STO), and Petrobras (PBR). Chevron (CVX) is also undervalued and has a very bright future in terms of year-over-year production increases.
Disclosure: The author owns COP, STO, and PBR.