IEA projection of oil consumption peak goes against what many in the industry believe – Share Radio

 

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Share Radio:  Let’s take a look at oil, because oil consumption is tipped to peak no sooner than 2040, even if the Paris climate agreement is implemented, that is according to the outlook of the International Energy Agency, the IEA. This projection goes against what many in the industry believe, such as the CFO of Shell Simon Henry, who predicted that supply could peak within 5 to 15 years. So who is right? For his thoughts on this story, I am joined on the line by Tom Burke, who is Chairman of E3G, Third Generation Environmentalism. Tom, a very good day to you, what’s you take on this report?

Tom Burke: Good Afternoon. I think it reflects the reality that we are going to see a very volatile future for the oil price, as the cycle of investment slows down, and that works through to prices. But into that gap I think that we are going to see a far faster acceleration of the deployment of renewables than the IEA is currently projecting. All their previous projections for the rate at which the cost of renewables will go down and the uptake of those renewable will go up, they have all enormously underestimated the take up of renewables. The same is true of storage and the cost of batteries and the way they are going down. So I suspect that the long run future for oil is going to be closer the Simon Henry’s view than the IEA’s view.

Share Radio: Which is quite extraordinary really, because not many people would have actually thought that someone who head up, or is at least a key player in, an oil company will actually say, you know what, demand for our product will actually tail off in between 5 and 15 years.

Tom Burke: Yes, but there is some wrinkle that you need to be aware of in Simon’s decision. Shell is now mostly a gas company, more of its product is gas than oil, and so what you’re really looking at is to petrol consumption, because the bulk of oil is used in transport, and the high value piece of that is in petrol for vehicles and I think that what we are going to be seeing is a race between Elon Musk and the oil companies, for how quickly we drive forward with electric vehicles. And if that takes out the top end of the barrel, then it is much more likely that Simon Henry will be right, than it is that the IEA will be right.

Share Radio: Yes, but clearly if that forecast holds true, and it really is putting pressure on the oil companies, the other players in the field, to have their “wake up and smell the coffee moment”, unless this is it.

Tom Burke: I think that you are absolutely right about that. And I think that what is very important to bear in mind is, that if Simon Henry is right, the consequences for everybody are quite dramatic. We get in Britain, around 60 billion per year in tax revenues from the oil and gas industry, and we get about 20% of our pension fund dividends, so you would begin to see an impact, over that time frame, you will begin to see an impact on those revenue flows and tax flows, and we need to be pretty thoughtful about how we replace them.

Share Radio: And certainly, if we take Simon Henry’s forecast, and that really does appear to suggest that oil prices will fall under phenomenal pressure, and we have actually seen that this year, how oil went from three digit growth around 2015, and before that in fact, to where it is now registering at about 45-50, dollars per barrel. So if it begins to deplete where can we actually see prices being if we look forward? Could we actually have a return to those three digits?

Tom Burke: I doubt it. Well, you could get spikes where the price goes up. You’ve got the underline transition out of whatever is going on, especially if interest rates go up, and the world continues to be pretty turbulent politically, then you are going to see a deep reluctance in being will to invest in the kind of project that the oil companies run, which are highly capital intensive, very long life projects, with a big gap between spend starting and revenues coming in. I think that there will be a real lack of appetite for those kinds of projects. Renewables are going to look much more attractive, because they are much lower capital intensity, you can do them on a much more modular scale. So in terms of capital allocation, it is easy to see how in these circumstances of very high volatility and political turbulence, investment in renewables doesn’t only look more appealing from an energy or climate perspective, it also looks more attractive from a financial security perspective.

Share Radio: And given the pendulum swing as well we shouldn’t forget that the move away from oil does have geopolitical ramifications as well, particularly for the likes of OPEC.

Tom Burke: I think that’s exactly right. Mr Putin is pretty dependant on oil revenues for sustaining his popularity at home. I would be more concerned about what we do about countries like Mozambique or Egypt, for whom a gas resource is a very important part of their ability to generate revenues going forward. So you are absolutely right, there could be very significant geopolitical consequences, if we don’t think through how this is going to work, and what else we need to do other than sit in our cars and take advantage of low petrol prices.

Share Radio: Yes of course. In the introduction I mentioned the Paris climate accord, negotiated in fact in December last year, so where does this fit into the jigsaw puzzle, because they set emission targets and of course there are concerns as to whether America can fulfil those targets given the change at the White House next year, and Donald Trump’s own scepticism about global warming.

Tom Burke: Yes, I get that. I think that is important. I think the thing to remember is that Paris marked a really significant turning point in the whole debate on climate change. Really what’s happened now is that the political risks to governments of not doing something  on climate change are growing, and the political risks of doing something are falling as the cost of renewable falls. So you have more extreme weather events, more of the effects that scientists have predicted occurring, putting real pressure on governments to do something, meanwhile the costs of doing something are going down. Up until Paris, the regulatory push was the thing that was driving us towards a low-carbon economy, but what I think that we are beginning to see now is a much stronger opportunity pull. Now Mr Trump can maybe slow down the regulatory push, though probably not as much as he thinks, but he can’t do anything to stop the opportunity pull. So what you are seeing is the Elon Musk’s, the people with better technologies, really coming in. If you think about the IEA projections about the oil going out to 2040, 60% or more of fossil fuel use is waste heat. To start a company like Uber or Air BNB, that is exactly the kind of thing that looks like an opportunity, to eliminate that waste heat.  I think that we are going to see a lot more creativity in that sort of area. So I think that things will happen faster and the opportunity pull will become increasingly important as we go forward.

Share Radio: Ok Tom, we have to leave it there. It was an absolute pleasure speaking to you. That was Tom Burke who is chairman of E3G, giving his reaction to the IEA’s latest oil report. Basically, saying that oil consumption will peak no sooner than 2040. Although that view puts them in collision with the CFO OF Shell who predicts that supply could peak within 5-15 years. A debate which will go on, I’m sure, for some time.

 

 

About tomburke

Tom Burke is the Chairman of E3G, Third Generation Environmentalism, and an Environmental Policy Adviser (part time) to Rio Tinto plc. He is a Visiting Professor at both Imperial and University Colleges, London. He is a member of the External Review Committee of Shell and the Sustainable Sourcing Advisory Board of Unilever and a Trustee of the Black-E Community Arts Project, Liverpool.
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