This article covers the prospects of Oil majors like ExxonMobil (NYSE:XOM), Shell (NYSE:RDS.A) (NYSE:RDS.B), Chevron (NYSE:CVX), BP (NYSE:BP) and for some in renewables. It also gives insights to the comparative positioning of companies like Tesla (NASDAQ:TSLA), given the new data from BP's Statistical Review 2016, which came out recently.
First of all, the oft-repeated statement that the world is running out of fossil fuel needs some careful scrutiny. The data shows increasing reserves and the rising ratio of reserve to production. It may not be wrong to project that the world will not be devoid of reserves even hundred years from now.
This leads us to the three charts of Reserves covering three time periods: 1995, 2005 and 2015 as given in the BP Statistical Review on page-7. The charts by themselves need to be seen in the backdrop of the prices prevailing in the intervening period. The most dramatic period has been 2005 to 2015 when the average price hovered above $85 per barrel, which has led to the dramatic rise in reserves, although the production data did not show any signs of slowing. The charts also need to be seen against the rising production data given on page-8.
I have compiled the global reserves and production data, taken from Reserves and Production of Crude (BP Statistical Review 2016)
Global Reserves in Billion Barrels
Global Production in Million Barrels/day
Reserves to Production (No. of years to deplete reserves)
So it is clear that under the 'stable high price regime' (2008 to 2015), the reserves grew at a frenetic pace and the ratio of reserves to production (in number of years) moved from 37.7 years in 1995 to 50.7 years in 2015. A ball park estimate of this ratio if extrapolated for the next twenty years would mean that in the year 2100 there could be substantial reserves of oil still left.
For U.S. this ratio of reserves to production is however quite low at 11.9 in 2015.
Let me start with the Crude prices for the period 2005-2015, which gives an indication of three things, global supply and demand, rise in consumption in certain specific regions (like China, India) and the economics of new exploration given the sustained period of stable high prices. The most dramatic period of high price was however 2008-2014:
|Crude Price ($/BBl)||17||20.6||19||12.7||18||28.5||24.4||25||28.8||38.3||54.5||65.1||72.4||97.3||61.7||79.5||111.3||111.7||108.7||98.9||52.3|
No small wonder that the share of oil in global energy is still high at 33%. This is a number that has remained same since 1950. The dwindling share of coal has been taken away by the increases in Nuclear energy and renewables, which has now touched 2.8% of the global energy.
The primary energy consumption however grew very little in 2015, just 1% (against a 10 year average of 1.9%). The emerging economies accounted for 97% of the increase in energy consumption. Emerging economies now account for 58.1% of global energy consumption. Chinese consumption growth slowed to just 1.5%, while India (+5.2%) recorded another robust increase in consumption.
The supply growth in the period 2010 to 2015 was prompted by the new explorations getting into production. This was aided by a stable period of high price. But subsequently this became the primary driver of the lower prices we have seen stabilizing in 2015. Supply did not match demand or the projections of future demands.
The period 2005 to 2015 has seen the most dramatic rise in reserves in oil and natural gas. The ratio of reserves to production has improved for most entities. It may not be very difficult to find the reason for this dramatic change in reserves as this was the period that the world saw the most sustained period of high Oil prices. This prompted players like ExxonMobil, Chevron, BP and Shell to increase their reserves. The same has been true for Aramco and others well.
Some of the 2015 data looked interesting:
-Global oil production increased even more rapidly than consumption for a second consecutive year, rising by 2.8 million b/d or 3.2%, the strongest growth since 2004.
-Production in Iraq (+750,000 b/d) and Saudi Arabia (+510,000 b/d) rose to record levels, driving an increase in OPEC production of 1.6 million b/d to 38.2 million b/d, exceeding the previous record reached in 2012.
-Production outside OPEC slowed from last year's record growth but still grew by 1.3 million b/d. The US (+1 million b/d) had the world's largest annual growth increment and remained the world's largest oil producer. Elsewhere, production growth in Brazil (+180,000 b/d), Russia (+140,000 b/d), the UK and Canada (+110,000 b/d each) was offset by declines in Mexico (-200,000 b/d, the world's largest decline), Yemen (-100,000 b/d) and elsewhere.
If the reserves to production ratio have to grow in the future years, the prices must hold good at economic levels. But too high prices would also make entry of alternate fuels that much more feasible. The low price of fossil fuel like Oil and coal vis-à-vis any alternate fuel acts to facilitate consumption of these fuels at a higher rate. Secondly the economics would depend on how new innovation in electric batteries would respond to oil prices given the price sensitivities of oil over battery costs. This is very important as oil cannot be replaced by solar or wind for transportation.
The economics of fossil-fuels versus alternate fuel is heavily dependent on three factors:
- Price of Oil/natural gas
- Exploration of new reserves and the growth of reserves as a ratio of production
- Technology upgrades in renewables, especially in Solar and in car batteries that compete directly with natural gas or oil.
Reducing demand for petroleum will also require low-carbon sources of transportation, potentially through the large-scale adoption of electric vehicles.
The Journal of Economic Perspectives notes in the thesis, 'Would we ever stop using fossil fuels', "If we analyze trends in production costs for these cleaner technologies we would find it implausible that these trends alone will sufficiently reduce fossil fuel consumption for the world as a whole".
U.S. Transportation Sector uses 60% of oil consumed in U.S. and the paper summarizes the findings by analyzing:
1. Recent changes in the relative prices of carbon-free and fossil-fuel-based energy technologies
2. To characterize what future relative prices are necessary to reduce demand for fossil fuels in a substantial manner
The results of the study showed that:
- Even if oil prices were at $100 per barrel, the price of batteries that store the energy necessary to power these vehicles needs to decrease by a factor of three.
- The time needed for these batteries to charge must be shortened.
- Third, the electricity that is fueling these cars will need to have sufficiently lower carbon content than petroleum.
The study looked at discounted value of operating an internal combustion engine, compared with the present discounted cost of operating an electric vehicle, as in Tesla. The chart given on page 133 of the paper is striking.
The study found: At a battery cost of $325 per kWh, the price of oil would need to exceed $350 per barrel before the electric vehicle was cheaper to operate. For comparison, the current December 2020 oil futures price using the West Texas Intermediate benchmark is $55/barrel, requiring a battery cost that would fall to $64 per kWh.
If one accounts for the innovation in electric cars, one must also account for the innovation in internal consumption engines as well. Even at the US Department of Energy target price for 2020 @$125 per KWh, oil prices would have to rise to $115 per barrel for electric cars to break-even.
So it is never going to be economics that will drive the decision of Oil over an electric car in the current levels of known innovation. The social costs however could be another matter and the economics of social costs would need several other assumptions, which I am not getting into.
So in sum:
- If the current trend of Oil prices continue, the short run may not see any dramatic change in reserves to production ratio
- The economics of alternate energy sources that compete with Oil, especially in the transportation sector, do not pose as serious challenges
- The reserves to production ratio for Oil would likely taper off in the near future, but would still point to a continuation of fossil fuel dominance for several years to come
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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.