Big Oil in Big Trouble

The future is not looking bright for oil, according to a new report that claims the commodity would have to be priced at $10-$20 a barrel to remain competitive as a transport fuel.

The new research, from BNP Paribas, says that the economics of renewable energy make it impossible for oil to compete at current prices. The author of the report, global head of sustainability Mark Lewis, says that “renewable electricity has a short-run marginal cost of zero, is cleaner environmentally, much easier to transport and could readily replace up to 40% of global oil demand”.

As a result, the report says, the long-term break-even oil price for gasoline to remain competitive as a source of mobility is $9-$10 per barrel, and for diesel $17-$19 a barrel

More and more analysts, industry insiders, and business/economics journalists are beginning to see the looming iceberg the oil industry is sailing toward with no awareness of their peril.

The current “oil boom” brought about by fracking was the result of new technology, and huge sums of borrowed money. The oil industry has always had a “boom/bust” cycle where the rising price of oil causes more rigs to be built, resulting in a glut of oil, which then drives down the price, bankrupting the late arrivals and the early players who didn’t have enough sense to get out before the prices collapsed. This then resulted in a contraction of the oil supply, causing the prices to rise again.

Rinse and repeat every decade since Titusville.

The new variable in this economic see-saw, is the rise of EVs and global warming. At some point, society is going to impose restrictions on oil extraction, which would limit supply and drive up the price. This would normally be welcomed by the oil industry, as consumers and industry must have oil for transport. But, unlike times past, there is an alternative to internal combustion engines powered by oil byproducts, electrically powered vehicles. Cheaper, cleaner, and with less impact of the environment.

So, as the price of oil rises, consumers are driven to EVs, which are cheaper to fuel, operate and maintain. The more people who switch, the lower the demand for oil, which drives the most expensive producers to bankruptcy, which reduces the supply of oil, keeping the price high.

“For the oil majors, the challenge is on a scale that they have never faced before, and business-as-usual is simply not an option,” the bank says, with any projects with break-even costs of $20 a barrel or higher facing the possibility that up to 40% of their output at below the cost of production.”