started the year 2022 at $73/bbl, reached a peak of $113/bbl, somewhere in June
and gradually corrected to $81/bbl now. The Russia-Ukraine war, Fed, recession
fears among others shaped and guided the oil price during the year. Stepping
into 2023, it is interesting to see the tension between producers and consumers
of oil. This is an attempt to deduce long-term global trend for energy in general
and oil in particular. There are some structural trends that are shaping the
course and they are examined below:
- Energy Security: Before the Russia-Ukraine war, world was moving with steadfast
devotion towards energy transition. The idea was to reduce the share of fossil
fuels (now accounting for more than 80% of the pie) and increase renewals and
clean energy. New investments even by traditional oil majors have been always
directed towards renewals to score ESG brownie points and win investor
endorsement as well. However, the war changed the narrative totally as Russia
was among the largest producer and exporter of oil to many global destinations
including Europe. When sanctions and embargoes were imposed on Russia, worries
about oil supply mounted taking the price up as well. Given the fact that US,
Russia and Saudi Arabia dominate the oil market, disruption in one of the three
is bound to stir concerns especially among major oil importers i.e., China and
India. While the good news is that much of Russia oil, otherwise embargoed in
other parts of the world, found its way into China and India thus making it a
zero-sum game. But it did change the narrative from energy transition to energy
security. The current war kept the total
oil production almost intact but redirected their flows. However, the worry for
long-term is if current production levels are affected it can spike oil price
and hence the import bill. Hence, major importers may start focusing on
building their strategic petroleum reserves in anticipation of such a trend.
While the aspect of energy transition serves the cause of oil importers well in
the long-term, I believe it will be pursued less vigorously compared to energy
security. That is oil price positive.
- Demand Scenario: As US is widely expected to enter into a recession in 2023 while
Europe is already into one, this is being viewed as a minus from oil demand
angle. However, India is expected to clock a growth rate of 7% in GDP while
China is expected to grow at 3.5% in 2023. Together they account for a lion’s
share of incremental oil demand. Hence, while overall demand for oil is bound
to be affected by US and European recession, it can very well be balanced out
by India and China, especially if China loosens its Covid restrictions and
brings back some more growth to the system. Given the protests that we see in
China, it may happen sooner than later. Also, the shift in focus from energy
transition to energy security may see the demand up for the short-term.
However, in the long-term (next 10 to 15 years), world will move away from
fossil fuels towards renewables as it can meet multiple goals including climate
change pressures on countries. However that transition need not be as swift as
analysts are penciling today. This gives sufficient room for oil demand to
taper off in an orderly manner. This is oil price negative
for the long-term.
- Supply Scenario: The biggest Achilles heel for the supply is the decade long underinvestment
in oil discoveries and extraction. Except for National oil Companies (NOC’s)
based in the Gulf, oil majors like BP Shell, Chevron and Total have lagged in investment
due to investor and board pressures to go clean. The consistent under
investment have been overlooked by many and has laid the foundation for tight
oil supply going forward. This has given room for OPEC+ (OPEC+ Russia) to
control the sparse spare capacity in order to shape oil prices. Tight supply
can also mean that any geopolitical disruption to oil fields in US or Saudi
Arabia or Russia (due to natural or unnatural events) can have the potential of taking some supply
off the market. The tight supply triggered by decade of under investment
and the geo political threats can be oil price positive.
- Peak Oil: Peak
oil is the point in time where oil production peaks and from there it can only
be a decline. Analysts have called peak oil many times in the past only to be
on the wrong side of the call. Since then, the question of peak oil keeps
coming back with no answer of course. This time around, thanks to
Russia-Ukraine war, Europe and to an extent US will move aggressively towards
energy transition via renewables. That can actually bring peak oil to reality
(finally) and major oil exporters (OPEC+) will then focus on maximizing revenue
opportunities by converting oil below the ground to wealth before it becomes redundant.
If peak oil is clearly in sight, a rush to maximize oil below
the ground can actually be oil price negative.
- Renewables: Technology
advances have reduced the cost of renewables significantly during the last one decade
be it wind, solar, hydrogen, etc. Hence the unit economics of generating solar
power or hydrogen power is much better today than before and can only get
better. This sets the structural shift towards renewable energy. However,
presently bulk of electricity generation in the world needs the support of
coal, oil and gas and in some parts of the world nuclear (mostly Europe). Electricity
generation and transport constitute bulk of energy consumption in the world.
The speed with which renewables can replace conventional energy sources for
these two most important consumption items will determine the long-term trend.
The aspect of renewable gets interesting for GCC producers and exporters like
Saudi Arabia, Abu Dhabi and Kuwait. Most of their electricity generation needs are
being fired by oil and gas and this results in less oil to be exported. As
these economies are almost totally dependent on oil and gas, it makes immense
sense for them to accelerate on renewables and replace their electricity and
transport needs away from oil. From an opportunity cost point of view this can
free them more oil to be exported. This becomes crucial especially in a peak
oil scenario. Another aspect of renewals is the transition towards electric vehicles
touted as the green form of transportation. However, research shows that
producing electric vehicles (especially batteries) is a serious call on
non-green sources and hence benefits of EV’s cancel out with their cost. That
is a hurdle that governments will find it difficult to jump. On the whole, the rapid strides that will be made in favor of
renewables is oil price negative.
In summary, energy markets
especially oil is in for an interesting transition both in the short and
long-term. Given their large share in the energy consumption, the change can be
gradual and maybe long as well. This gives enough room both for importers and
exporters to prepare for a world that depends less on fossil fuels. Barring any
geopolitical turn of events that can bring large swings to this assessment, ceteris paribus oil can ride a healthy,
strong and gradual decline.
Stay Tuned To Marmore MENA Insights!
Never miss a patch or an update with Marmore's
Newsletter. Subscribe now!
Green sukuk – An emerging asset class in the GCC
ESG Sukuk is gaining momentum in GCC with green and sustainability sukuk making up 80% of the green bonds issued till H1 2022.
Saudi Arabia’s diversification strategy rests heavily on Giga projects
The Giga Projects of Saudi Arabia are focused on diversification of oil revenue by unlocking new sectors for the economy with the core concept of sustainability.
Estimating the cost of FIFA World Cup 2022
The article takes a closer look at Qatar's spend on the FIFA World Cup 2022 and how hosting the event would benefit the country.