ESG And The Dangerous Structural Increase In The Price Of Oil

No Signs Oil Demand Is In Structural Decline

Americans are understandably blaming the Biden administration for surging energy prices: “Pain at the pump drives Biden’s suffering in the polls.”

At over 100 million b/d, global oil demand is back to above record levels.

This is very strong support for the world’s “black gold” because leisure travel and jet fuel consumption are still well below their pre-pandemic levels.  

U.S. petroleum prices have been hovering around the $90 mark, their highest since 2014. 

Back in 2020, during the worst of Covid-19, so many of the “experts” in journalism, consulting, and academia were proudly short-sighted, erroneously warning us that negative prices in Spring were somehow indicating “the end of the oil age.”

The hard truth for the anti-oil business is that petrochemicals, heavy trucking, and airplanes will ensure that oil will be around for much longer than they dare admit. 

And about that electric car takeover: the world has a growing fleet of ~1,200 million oil-based cars, with just ~13 million electric cars. 

In the U.S., clearly more expensive and less convenient, electric cars constitute less than 1% of our fleet (read that again).  

Elon Musk and his electric cars might bring the clickbait, but U.S. oil demand quietly has been at record levels recently, hitting an astounding 22.4 million b/dfor the week ending January 21 (and remember: this is the low travel season!).   

Check this graphic from the U.S. Department of Energy: electric cars materially lowering gasoline needs is without evidence.

Looking forward, while surely growing in numbers, electric cars might not be the threat to growing oil demand like we’re being told.

You should question their ability to lower oil consumption in the absolute sense, not just lower demand growth.   

Electric cars are already facing surging costs that could make them less affordable than predicted since demand is only just starting: “The Consequences Of A 500% Rally In Lithium Prices.”

For climate and energy, we must look beyond our wealthy Western bubble: 85% of all humans don’t live in it. 

On energy and climate, we don’t matter as much as we think.

The end of oil (and gas and coal) literature we’re inundated with is being written by us in the already developed world, with little regard to the nearly 7 billion people that demand the same access to the same energy that have made us Westerners so rich and long-living. 

We’ve blazed the path to prosperity: oil, coal, and gas constitute 80% of the West’s energy supply. 

And understandably so, the still developing world is now probably realizing us as even more self-centered and hypocritical than before. 

Recently, with the global energy crisis likely now becoming the new normal, the UK (with a GDP of $47,600/capita/year) has been outbidding Pakistan ($1,380/capita/year) for liquefied natural gas – the world’s emerging go-to fuel. 

Cargoes bound for poor Pakistan were literally changing in mid-route and going to rich UK because the British were willing to pay more. 

Indeed, the still developing world might not be so quick to focus on decarbonizing as much as we in the West like to think.  

And finally, know your sectors: immense amounts of new wind and solar (electricity) do about nothing to displace our need for oil (transportation). 

The world continues to expand on all fronts, and oil follows a historical trend: “more people, making more money, means more oil use.”

Set to add another ~2 billion people by 2050, the still developing countries have been clear: economic growth and human development (i.e., access to huge amounts of energy) comes before climate change policies – and the UN has agreed.  

Real experts argue over whether the world’s oil demand will peak in the 2030s or 2040s, but we all should agree on one thing: when oil use does peak, it won’t plummet but plateau. 

The Giant Oil Supply Problem

As economies rebound and oil demand roars back (hardly surprising because the world’s most vital fuel has no significant substitute whatsoever), supplies have struggled to keep up. 

This has major banks calling for $100 oil this year and even higher prices beyond.  

JPMorgan warns that “oil could ‘easily’ hit $120 if Russia-Ukraine crisis escalates.”

Despite rising oil prices, we’re not seeing the investments in new supply that we would’ve seen in previous cycles before the pandemic. 

For the West’s international oil companies (the “supermajors” like BP, Shell, Chevron, ExxonMobil, etc.), the attack is along all fronts.  

There has been: 1) a lack of access to financing because of climate concerns, 2) investor demands to decarbonize, and 3) a shortage of sufficient investments in new supply for many years. 

Thus, crude oil inventories have continued to fall to their lowest levels in many years. 

For the American consumer, troubled times lay ahead. 

As my Forbes colleague Dan Eberhart explains, the growing ESG movement means increasing climate pressure to “not invest in new oil production” – a “cart before the horse” energy fantasy bound to devastate.  

In their investment presentations, the big oil companies are putting “climate, low-carbon, ESG” right up front.  

The new “moderate growth” mode and limited well inventory suggest that we shouldn’t expect American shale to save the day like it used to.

We seem to be entering the stage of “post-shale super growth,” where incremental output from the American oil patch will not be outpacing new global demand. 

In the 2010s peak years, for instance, some of the largest producers in the Permian basin – the largest oil field in the world – were often upping annual production by 20-25%.

Now, the planned increases fall more in the 2-5% range, are staying flat, or have even reversed to declining.

This year, a large part of the higher capital spending in the U.S. oil industry will be just to cover the cost inflation for major inputs, such as for steel, labor, and fuel (renewables are facing the same problems). 

A 20% rise in capital spending is probably needed this year just to maintain production at the same level as last year.

Further, the low-carbon push and “we don’t need more oil because demand is declining” paradigm has many oil companies switching to investments in renewable power, batteries, hydrogen, carbon capture and storage, etc. 

For example, the supermajors are dominating in offshore wind, and their deep pockets are putting up barriers for smaller firms who have renewables as their core focus to have a real chance in seabed auctions. 

And all of this is happening as Western governments, politicians, and environmental groups continue to brag about their foolish end goal: “let’s put our oil companies out of business, that’ll show em!”

The constant chant of “oil demand will soon peak” is creating great uncertainty and thereby denying investment approvals from the corporate boards of the big oil companies. 

Simply put, they’ve become unwilling to sanction multi-billion dollar upstream projects that take many years to bring more oil online and even more to see project payout.

In turn, especially as environmental activism seeks to blitz them from energy angle, the easiest path forward for the oil industry is to do exactly what it has been doing: paying out dividends, buying back shares, paying down debt, pursuing non-oil opportunities, and quietly and slightly upping production. 

Make no mistake, naturally-occurring oil field declines mean that even high investments can still lead to drops in oil production. 

There is no “standing still” in the oil E&P business, and the Red Queen Effect is especially wrecking for shale because its decline rates are higher and faster.

The scare of peak oil demand is setting up the reality of peak oil supply. 

Decline In OPEC’s Spare Oil Production Capacity

So ultimately, this Western anti-oil push is just handing a still growing oil demand market to OPEC and Russia. 

As we’re seeing today, these rogue nations, with, contradicting the purported goals of ESG, horrific records on human rights are now controlling the market after ceding it to American shale over a decade ago. 

But a bullish problem for oil prices is that aging infrastructure, retiring workforces, corruption, obsolete technologies, and governments siphoning off revenues to fund bloated social programs have made the global “call on OPEC” far more precarious – and all of this being exacerbated by the scourge of the Covid-19 pandemic.

Their statistics are held like state secrets, but the “myth of OPEC+ spare capacity” is becoming more of a mainstream thought. 

There are even signs that mighty Russia could hit peak oil production in 2023. 

And from Ukraine-Russia, Libya, Iran, Nigeria, etc., the geopolitical risk factor premium has stormed back into the oil price conversation. 

For each of the past six months, the OPEC+ production cut bloc has added lower volumes to the oil market than the 0.4 million b/d monthly increase has allowed. 

The loss of OPEC’s spare capacity is a hugely bullish problem because OPEC has generally been the one to help handle supply disruptions – from civil wars, hurricanes, terrorist attacks, etc. 

Our energy advisor because we are a rich nation (i.e., OECD), the International Energy Agency, has warned for decades that the world’s upstream spending on oil needs to be in the many hundreds of billions per year to meet new demand. 

We’re doing nothing close to that, and at some point, if not already, the chickens are bound to come home to roost. 

We’re dangerously setting up an era of structurally higher energy prices and that begins with oil because it’s the input for just about everything that we consume.

I’ve already said it but the anti-oil business today could be installing the next recession tomorrow.

We’ll be trapped in a guessing game of how high gasoline prices could go as our refineries continue to be closed.

With the oil companies this year far outperforming “clean energy” stocks, top experts at the University of Chicago have shown divestment to be a “costly and ineffective” climate strategy – clients suing money managers for such negligence will eventually become a gigantic problem for the anti-oil business.

We’re creeping closer to the edge: “The Dark Side of Big Oil’s Recent Losses to Green Activists? Recession.”

What much of the anti-oil business doesn’t grasp is that high and volatile oil prices are actually a threat to reducing greenhouse gas emissions to fight climate change. 

It will increase the cost of renewables by increasing the costs of their inputs, and it will turn the voting public against The Energy Transition because they won’t accept high costs. 

And, once again contrary to the purported goals of ESG, low-income and communities of color will suffer the most.