'There are 2 existential threats to the oil industry' - and it has nothing to do with OPEC
Oil prices are tanking because several oil producers, responsible for almost half of the world's output, failed to reach a production-freeze agreement at a meeting in Doha on Sunday.
However, while everyone is focusing on the failed Doha talks between the world's largest oil producers, research house Bernstein warned that there are two other "existential threats to the oil industry" - and they don't have anything to do with OPEC.
Bernstein's note, entitled "The Future of Oil Demand: Are we nearing the end of the oil age, or is there more gas left in the tank?," warns that there are two other factors that could put major pressure on the oil industry:
1. "The first is advances in battery technology and computing power, which have resulted in a surge in interest in electric vehicles and autonomous driving."
2. "Climate change."
Firstly, let's take a look at the immediate threats.
Bernstein analysts acknowledge that there are some immediate threats to oil demand that are a bit more tangible - economic growth (GDP) and "oil intensity."
When it comes to economic growth, as Bernstein analysts put it, it's pretty "straightforward." If a country's GDP is expanding, demand naturally grows. That's a bit of a no brainer. It adds that the International Monetary Fund's "economic projections imply that global GDP growth will accelerate over the next five years" although "global investors seem less convinced" due to the potential impact from China's economic slowdown.
However "oil intensity" - or barrels of oil consumed per unit of GDP - is a lot more complex. It involves:
- Oil price.
- Per capita wealth.
- Urbanisation.
- Service intensity of the economy.
- Technology/policy.
So in other words, it's a whole melting pot of issues that affect demand.
But Bernstein warns that the two existential threats are difficult to monitor but should be earmarked as potentially major issues for oil demand (emphasis ours):
The first is advances in battery technology and computing power, which have resulted in a surge in interest in electric vehicles and autonomous driving.
While their share of the overall transport market is small, EVs [electric vehicles] and PHEVs [plug-in hybrid electric vehicles] will gain market share over time and eventually have a material impact on demand growth. While we do not foresee this being material in the next five years, EVs will start to have an impact toward the middle of the next decade.
The second existential threat is climate change. The climate change agreement reached at COP21 in Paris in 2015 amounts to a declaration of war on the fossil fuel industry. While the targets are ambitious, the specific measures to curb the use of fossil fuels remain non-binding and still lack teeth to make a significant change in consumption patterns.
Nevertheless, the G8 statement to end the fossil fuel era by the end of the 21st century highlights the commitment by world leaders to phase out fossil fuels (coal and oil in particular) from the energy mix.