The price of a barrel of oil fell from $ 38 / barrel in November 2020 to $ 75 / barrel recently. This is a solid recovery given the price jumped to $ 0 earlier in 2020 due to the coronavirus pandemic and a feud between Saudi Arabia and Russia.
New Mexico’s oil production hit an all-time high in 2020, although employment remains depressed. In the Delaware Basin, wellhead oil and gas revenues were about $ 24 billion per year.
But wasn’t the pandemic supposed to be a great opportunity to accelerate the transition from fossil fuels to renewable energies? The point is that oil and gas around the world contributes about 40% of all greenhouse gas (GHG) emissions, so that needs to be reduced one way or another.
This is where peak oil comes in, to decide when oil production will start to decline around the Paris Agreement date of 2050, and to determine if $ 75 / bbl is the ideal price for oil in 2021.
How to optimize the price of oil?
Answer: you want the highest price that you can get for the longest time possible.
Think of the kids at their lemonade stand on a hot July day. They want to make as much money as possible, but also want to sell all the lemonade. They have to predict the future. Maybe it will be a very hot afternoon and they think shoppers will go to the beach or stay under the air conditioning at home. They therefore decide to lower the price at the end of the morning to sell more lemonade.
It’s the same approach with oil – sellers have to predict the future. This of course depends on the demand for oil, and it depends in part on climate change: how quickly will fossil fuels give way to renewables.
Figure 1. BP data and forecast of global fuel consumption for a “fast” scenario, due to increased regulation, carbon taxes, consumer conservation. Source: BP 2020 energy outlook, September 14, 2020.
Forecasting global demand is essential.
The multinational oil and gas company bp has given it a lot of thought. In 2019, bp predicted that oil would reach its peak demand in 2030. A year later, in two separate model cases, they predicted that peak oil had already occurred in 2019 at around 100 million barrels / day.
In their “fast” scenario in Figure 1, the global share of oil drops by half, from 33% in 2020 to 15% by 2050, and that of gas drops from 22.5% in 2020 to 21%.
Demand for oil will decline dramatically through 2050, in part due to the pandemic, but more so due to government climate policies such as carbon pricing. In the more aggressive case, bp assumed that consumers would change their own energy preferences.
According to bp, global oil demand could rise from around 100 million barrels / day in 2020 to a range of 30 to 55 million barrels / day by 2050. At the same time, renewable energies will increase rapidly. In Figure 1, the “Fast” case of bp (the less aggressive of the two), renewables would drop from 5% today to 45% by 2050.
Going forward, oil consumption as low as 30 million barrels / day in 2050 would be a shock and fear for the oil and gas industry – a 70% drop from 2020. Even 55 million barrels / day, that’s a 45% reduction, still a shock.
Declining demand for oil in the United States due to Biden’s targets.
A simple analysis of supply and demand shows that in the United States, if request decline in the electricity and transport sectors, then supply should follow in the form of reductions in 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 study by full modeling of electric vehicle adoption by 2040. The decline in natural gas is based on a US federal government goal of carbon-free electricity by 2035.
The easiest route might be for US oil and gas companies to diversify into renewables. Europe is show the way.
OPEC + deliberations.
The OPEC + cartel consists of OPEC and Russia, producing around 40% of the world’s oil. Last year’s drilling cuts, due to the pandemic, have not been restored, but demand for oil has increased and the price of oil has therefore risen to $ 75 a barrel. The cartel met last week to try to agree on an increase in production, but that did not happen because the UAE wanted to produce more oil than other countries wanted. No consensus meant no decision.
A Analysis indicates where renewable energies come into play. OPEC + wants oil to be cheap enough so that it can compete with incoming renewables. But since many countries depend on oil revenues, they don’t want the price of oil to collapse. Thus, forecasting the growth of renewables is an important part of calculating an ideal asking oil price now.
OPEC + sees that electric cars are coming, which means less demand for gasoline / oil. The price of oil will go down. If a country, or even a company, sees that it will no longer be able to realize the profits it once made, it could try to maximize the value of its reserves now, even if that means producing more oil which would lower the price. petrol.
As the analysis states, “In a way, climate policy pushes oil consumption forward over time, forcing countries to drill for oil. today that they would once have planned to drill next decade. “
To put it another way, as solar and wind power and their storage of large batteries become 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 can get very oily on the first step.
The need to reduce greenhouse gas emissions.
The need to reduce GHGs is real, especially given the potential links to the exceptional extreme weather disasters of 2020 and the recent unprecedented heatwaves along the west coast of the United States and Canada. Oil and gas companies and their headquarters countries need to seriously tackle the transition to renewable energy.
From 2006 to 2020, US oil production increased 2.6 times. While the United States still raves about the success of the shale revolution, a renewable energy revolution is coming. The caution, if not resistance, of the US oil and gas industry is understandable, as the shale allowed the United States to become self-sufficient in oil and gas for the first time since 1947.
US industry would like to avoid reducing oil production by focusing on (1) greening the carbon footprint of their operations, such as drilling and hydraulic fracturing; (2) clean up flaring gas and methane leaks; and (3) bury the additional GHGs deep underground. Their logic seems to be: initiate indirect cleanings around all their operations, from upstream to downstream, and bury all the CO2 that comes from the combustion of the oil and gas they produce. In other words, keep the wells pumped at all costs.
But this perspective ignores the demand side of the equation. If demand falls, supply falls or the price of a barrel of oil falls. But companies have started to divest from oil and gas drilling and reinvest in renewable energy. Look to Europe for see how they do.
Perhaps now is the perfect time to start divesting oil and gas in the United States. Federal authorities have a moratorium on rental and drilling. But with oil prices so high, wellhead money is available to spend. In addition, drilling and hydraulic fracturing of more wells has lost its appeal to banks, investment firms and shareholders – wind and solar storage and large batteries are more attractive.