A decade ago, one of the greatest concerns of the energy market was whether producers could extract enough oil out of the ground to meet growing global demand. This led Goldman Sachs analysts to famously predict $200 per barrel oil within five to 10 years.1 Today, however, the greatest challenge energy markets face is gauging how innovation and disruptive technologies will affect demand for oil.
How quickly will electric vehicle adoption spread worldwide? Answering this question can lead to various oil pricing scenarios, all of which depend on electric vehicle sales, changes in regulation, decreases in battery cost, electric vehicle infrastructure investment and geopolitical conflicts, among other variables.
This is a unique period in history because, for the first time, technology companies are disrupting and becoming major competitors of automotive companies. Software, artificial intelligence and electrical engineers are the new driving force in the auto industry. A few weeks ago, there was a video on social media where a Tesla owner was asleep at the wheel while their vehicle drove safely home.2 Our cars are slowly but surely becoming robots on wheels. Not only are these vehicles becoming increasingly autonomous, but they are running on more efficient batteries.
This innovation is disrupting multiple industries: energy producers, auto manufacturers and taxi/ride hailing companies. Regulators around the world are key in determining the adoption speed of greater autonomous and battery powered autos. This creates a sense of desperation within traditional auto companies as they rush to incorporate more software, artificial intelligence and electrical engineering into their vehicles. The industries above will likely look completely different within the next decade.
What about oil producers and prices?
The head of oil market research at Rystad Energy, Bjønar Tonhaugen, has an interesting take on the energy market, noting that energy markets rely on three pillars in the short term: no global recession, continued OPEC production cuts and the effect of new International Maritime Organization (IMO) 2020 regulations.3 In this regulation, marine sector emissions in international waters are slashed by over 80 percent by switching to lower sulfur fuels.4 These could cause net new crude demand of about 1 million barrels per day. Tonhaugen adds, “If the stars fail to align, however, OPEC may need to discuss much deeper cuts to support the market.”3 The necessity of these events to align in order to simply support current prices is not a bullish sign for energy producers.
However, energy producers do have some potential positive developments that could allow prices to move higher. Increasing geopolitical conflicts, such as the current tensions between Saudi Arabia and Iran5, may cause prices to increase. Additionally, the CEO of Pioneer Natural Resources, Scott Sheffield, believes that many major oil companies’ production targets are too aggressive.6 He believes Permian Basin production targets cannot be realistically achieved and will eventually lead to a consolidation of Permian producer players. Perhaps a recovery in energy companies might be coming to support a mean reversion to higher valuations. Ultimately, long-term uncertainties about oil prices are growing larger with electric vehicle adoption and only time will tell.
Sources:
1. MarketWatch – New ‘super-spike’ might mean $200 a barrel oil
2. NBC News – Video shows motorist asleep behind wheel of self-driving Tesla
3. Rystad Energy – Oil price rests on three factors
4. International Maritime Organization – Sulphur 2020 – cutting sulphur oxide emissions
5. BBC – Why Saudi Arabia and Iran are bitter rivals
6. The Motley Fool – Oil CEO: Don’t expect an M&A wave yet
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