The End of The Oil Age?

Headlines like Yes, oil is dead. Just read the writing on the wall. , The coronavirus pandemic may have one silver lining: the potential collapse of big oil. and Green Party declares that “oil is dead” are not only misleading and inaccurate, but also dangerous.

 

Unfortunately, these types of headlines are always from those in the first world.  Often with the best of intentions (though not always), they look around their regional environments and see decreased consumption.  They then wrongly project those regional decreases to a global transition.

If you doubt this, here are the numbers.  Before the COVID pandemic the world consumed 101 million barrels or oil per day.  It was projected that in just two short months, the global economic shutdown would reduce consumption to 65 million barrels per day.  If you look at the US, Canada, Britain, France and friends, that may have been a reasonable prediction.

However, the world is a lot bigger than just these first world countries and much of the globe had not been notably effected by COVID.  Think about virtually all of Africa and South America.  Then think about the worlds most populous country, China and recall that while it did lock down a previously unheard of 400 million people often against their will, that precious little changed for the other 3.5 billion Chinese.

That being said, it now appears that global oil production did take a massive hit, all the way down to 82 million barrels per day.  That is about a 20% decline but it is far from the 33% many predicted and, more importantly, that decline is very temporary.

Bloomberg World Energy Index After COVID

WTI oil price after COVID 2

 


Why The Price of Oil Collapsed In Spring 2020

Nearly all of those who were claiming the end of oil because crude oil prices dipped below zero for a few hours, did not even understand why oil prices collapsed.  Again, we know that many people dislike facts, but here they are:

  1. The price of oil initially dropped coincidentally with the start of the 2020 COVID crisis not because of demand issues, but because Vladimir Putin saw a chance to both tell OPEC (Saudi Arabia’s future king Mohamed Bin Salmon really) who was in charge by INCREASING production kicking off a production war that created a massive global glut.
    .
  2. The price of oil then tanked out (pun intended) because the excess global production combined with a the COVID generated reduced consumption in Canada and the US filled up storage tanks.  For a variety of reasons it is difficult to slow oil production so companies found it preferable to loose money than shut in their wells.

If you would like more details on this read our article from March 2020: Why Is Gas So Cheap Right Now? … and it isn’t Because of COVID-19

mbs putin oil crash 2020


Oil Production Will Increase, Not Decrease

As a globe it is indisputable that we will INCREASE production for the next 15 to 25 years and then oil will only slowly trail off from numbers that a vastly higher than they are today.  The most respected independent energy (not just oil) the International Energy Association says that the bounce back will swift even in the short run:

“…Following a contraction in 2020 and an expected sharp rebound in 2021, yearly growth in global oil demand is set to slow as consumption of transport fuels grows more slowly, according to the report. Between 2019 and 2025, global oil demand is expected to grow at an average annual rate of just below 1 million barrels a day. Over the period as whole, demand rises by a total of 5.7 million barrels a day, with China and India accounting for about half of the growth.
Source

demand for oil after covid19


Isn’t Norway Getting Out of Oil?

Many anti-oil activists point to massive sovereign wealth funds divesting from oil, like Saudi Arabia’s and Norway’s, as a sign that oil is going away.  What they fail to realize is that those countries are actually expanding production.

Saudi Arabia and Norway both correctly decided that they were over exposed to a single industry.  Just think about Detroit and their cars, or Ohio with their steel industry, or Northern British Columbia with lumber.  Having most of employment and revenue coming from a single source is a bad idea.

These countries decided to take the massive profits (both dollars and employment) and invest in something else to diversify.

If your company ever gives you stock you would be wise to sell it and buy stock in a different industry.  You are already over exposed to the ups and downs in the company you work for.

rusted steel factory in a field


The World Has Changed, Putin Is Now In Charge

It is also irrefutable that the post-COVID world will be different.  However, do you remember how events like September 11, 2001 or similar coronavirus like SARS and MERS were predicted by rational educated people that everything would forever be changed, but just a few short years later we returned to mostly “normal”.  COVID will be same.

What has changed for the oil industry is that there is a new sherif in town.  That sherif speaks Russian and benefits from destabilizing “the West”.  Putin has turned the tables on OPEC and is now firmly in control.  If you want the details, read our March 2020 article Why Is Gas So Cheap Right Now? … and it isn’t Because of COVID-19.

The investment community had already stopped funding illogical shale oil (think fracking) projects at the start of 2019 and by the time COVID and Putin came around, Wall Street was running scared.  Investors and the oil companies they supported now know that while 80% of their business is rock solid, 20% can be shut down in a few weeks if Putin and/or Saudi Arabia feel like it.  Like most industries Oil budgets for slow steady growth or decline and is complete incapable of handling 20% shocks.

putin mbs trump oil cuts


What About Oil Production in the US and Canada?

Contrary to what most people think, the Canadian oil industry operates under very different circumstances to the American industry.  Specifically, Western Canada produces most of its oil from the boiling bitumen in giant machines and systems or from conventional oil that you and I see as pump jacks dotting the surface.  Contrast that to the United States that produces most of its oil from under the water in the Gulf of Mexico or by fracking (injecting water, sand and chemicals) to break rock and release oil/gas.

The changes in the market, certainly leave US fracking in great peril, where is belongs:

Multi-billion dollar investments in both US Gulf of Mexico floating oil platforms and Canadian oil/tar sands will not shut down because of COVID or any other crisis.  Even if they became non-economic, the current owners would go bankrupt and their systems would be sold to other companies at a discount but would not cease production.

Both Canada and the US will have large scale production for decades to come.

While exploration will have massive and permanent declines specifically in Alberta and British Columbia, that is largely a factor of our reserves being both known and what the industry calls “proven”.  Production is here to stay.


Why Is Predicting The End of Oil Dangerous?

At the start of this article we said predicting the end of oil was only misleading and inaccurate, but also dangerous.  It is dangerous because that false narrative leads to complacency.  If citizens, voters and oil consumers think that the end of oil is near, they will believe a critical issue has been solved when it has not been which will lead them to both stop changing their behavior and stop pushing for change.

If you want to live a carbon and pollution reduced world you are going to need to do three things:

  1. have few children
    • over population will likely take care of itself in the coming three decades, but fewer children directly equates to lower demand
  2. reduce your personal consumption
    • Your, LED lights, solar panels and electric car will not solve the problem, but they will send an important signal to markets and governments alike
  3. demand higher standards
    • The solution to large scale problem is not having a government pick winners but supporting one technology or another, it is having the government pick losers.  In this case governments can raise the standards for coal and oil making them less profitable which makes alternate energy sources like natural gas and solar more economic

having few children helps with carbon emissions co2 global warming


Don’t Cry For the Oil Industry

Oil will not end with a bang; it will end with a whimper… decades from now.

oil refinery lights man standing

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