The latest note from Carbon Tracker warns that Peak Oil demand is coming sooner than most people think and could lead to stranded assets and massive losses.
It may not appear so at the moment, as energy in all forms is in massive demand, coming out of the economic doldrums of the covid epidemic. But climate change makes a case for a rapid fall in the middle of the decade as renewables outpace fossil fuels in supplying the world with energy.
Climate change makes the case for managed investment to limit losses. However, recent research from BloombergNEF indicates that many executives have reversed their opinions on the reduction in demand for fossil fuels and now see a possibility that they will be profitable for a longer term. There are calls for significantly increased investment into new oil as demand and pricing are rebounding — thus placing at risk the global production reductions required to meet climate goals.
National policy action to move away from fossil fuels is likely to strengthen post-COP26. Add to that the rapid adoption of EVs, which will decrease the demand for oil. Companies basing investment decisions on short-term demand signals risk significant over-investment.
The Carbon Tracker analysis explores the financial implications of a scenario where oil demand grows in the short term before falling rapidly in mid-decade. Shareholders could lose $530 billion of capex this decade under a high-investment scenario — “as demand starts to decline and the oil price falls back to c.$40. This amount would double at $30/bbl.
“As an alternative, we explore a ‘managed’ case where companies sanction more conservatively for long-cycle projects, only up to $30/bbl breakeven. The managed case then assumes companies sanction more liberally for short-cycle projects (which ramp up production quickly), up to $50/bbl breakeven, to meet elevated short-term demand. The key is to avoid locking in high-cost, long-cycle projects. Our managed case significantly cuts oversupply over the long term and eliminates wasted capex at a $50/bbl long-run oil price. The managed case wastes less capital than the high investment case irrespective of oil price.”
There is enough oil to meet the short-term demand increase. “OPEC needs to deploy its spare capacity much more aggressively to avoid even higher prices than today — up to an extra 2mbd in the managed case. This is what can stop the oil price spiking beyond $80; without this, higher prices could last for several years. We believe this is in the group’s long-term interests.”
The next few years will be an exciting ride.
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