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Looking to oil's vanishing point

Hard-to-quantify shifts may be underway in global energy and the oil industry will ignore them at its peril

THE OIL industry has big problems – and they go deeper than $45-a-barrel Brent, the Doha debacle, corporate losses and the slump in upstream spending.

In Paris on 21 April, energy executives, Opec officials and academics pitched up at a hotel for IFP and Petrostrategies’ annual oil summit. So did the protesters.

They picked an odd target. The Paris summit is no showcase for Big Oil excess and the views from the dais were as sceptical of oil’s future as they were confident. How did an industry that keeps ambulances running and remains essential to global prosperity come to be as deplored as the tobacco business?

Other industry assumptions have also been overturned. Four principles used to prevail, says Emmanuel Haton, director of BP’s European government affairs: that oil output would eventually peak; that oil would flow from the East to the West; that Opec would always balance the market; and that supply and demand were inelastic.

How did an industry that keeps ambulances running and remains essential to global prosperity come to be as deplored as the tobacco business?

Tight oil has reversed three and a half of those assumptions. The geological peak is decades away; the US is now exporting crude and the oil flow is Mideast to East; Opec has surrendered its swing role to tight oil; and supply is far from elastic.

Demand elasticity is a bigger question – but maybe the bigger threat. Oil advocates keep plugging their case. Billions of people still lack access to energy, says Abdalla El-Badri, Opec’s secretary general. Long-term demand growth is assured, whatever the protesters say. For the world’s poor, access to energy, not climate change, is their priority.

But as the basis for oil’s longevity, this premise is starting to fray at the edges. Plunging prices – of any commodity – should revive demand and kill off alternatives by luring consumers back to the cheapened product. True to the law, oil consumption rose sharply last year, by about 1.8m barrels a day, and the coming US driving season is expected to offer a bumper harvest for refiners. So the bit about reviving demand is working, even if the world’s oil thirst isn’t expected to increase as quickly this year as last.

A new archetype

But alternatives to oil are not dying, they’re thriving – even after a 75% drop in the oil price. Walk the streets of a European capital or Manhattan and the evidence is plain. Hybrids and electric vehicles (EVs) are flourishing. Charging points are cropping up in parking bays. This might not be obvious from the back of an Escalade in Riyadh. But elsewhere drivers are starting to vote with their engines.

The global fleet of EVs is still tiny – a fact wearily repeated at oil-industry conferences. But as Øystein Noreng, an energy expert and professor at the Norwegian School of Management, points out, in 1903 horse-drawn carriages dominated New York’s streets. In 1913, Fords did. Technological shifts are hard to predict, but as PCs, iPhones, and Model Ts show, penetration can be bewilderingly quick.

And for all the efforts of Tesla, Google and Apple to lead the next disruption in mobility technology, the West’s vast infrastructure, built around the internal-combustion engine, means the really fast breakthrough might come elsewhere.

China’s government has mandated swift development of an electric-vehicle sector. Just as important, says Victor Zhikai Gao, vice chairman of the Sino-European United Investment Corporation and a leading thinker on Chinese international relations, the country’s private sector is adding momentum. Alibaba, the huge e-commerce firm, now sells cheap battery-powered cars. Charging points are sprouting up in the cities. China wants to lead the world in both using and manufacturing EVs.

Road transport still accounts for about half of global oil demand. So, according to Gao’s argument, if China’s electric-vehicle sector blossoms as the signals suggest it could, the oil industry should stop basing its demand models on future Chinese drivers. It follows, too, that if battery vehicles break past the margin, older-technology diesel and gasoline drivetrains will have to get cheaper and more efficient to compete.

Oil has been a gift to humanity. But its industry is losing that argument – among young Parisian protestors who now mistake it for a social evil; in a marketplace that increasingly sees plausible alternatives in mobility; and in emerging economies that can still plot a less oil-needy future.

It has seen off threats before, and in calorific terms oil still packs the biggest punch. But these nascent, hard-to-predict demand-side perils are coming not during a period of supply insecurity - it’s just the opposite. The price recovery the industry now expects would cheer up the sector, but might also just lift the cost of a product that is already going out of fashion.

 

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