Oil futures prices are tumbling. They are down from $105 today to $87 next March. Indeed, oil prices are set for a longer-term fall as the switch away from oil-powered vehicles gathers pace.
Of course this is counter-intuitive if you just look at the surface talk about sanctions on Russian oil. But the recent spikes in oil and other commodity prices look more like a rebound from the drop in demand during the pandemic. There really is not a great deal more to see here. Yes, sure, the West has sanctioned Russian oil, but this has little bearing on world oil supply because the Russians are simply shipping their oil to places like India instead of the West, albeit at a modest discount. Natural gas, of course, is a different story
But what we will see is a long term drift away from oil driven cars, mainly by a switch to electric cars. Bloomberg published an article saying that the next oil crisis will be a fall in oil prices as increasing numbers of electric vehicles replace oil-fired ones. According to the author, Tom Randall ‘We found that electric vehicles could displace oil demand of 2 million barrels a day as early as 2023. That would create a glut…’
That puts into perspective the billions poured into giving oil companies tax breaks for North Sea oil and gas drilling. If oil prices are set for a long term decline it will be the lowest cost producers, especially in the Middle East who will maintain production the longest, not high cost offshore operations. It is not as if producing more oil and gas in the North Sea is reserved for British consumers anyway. The oil industry just flogs it on what is a globalised world market for hydrocarbons. The money could be much better spent on energy efficiency measures or on helping city communities reduce their dependence on cars.
Alas, the same bear market predictions do not apply to natural gas, in the short term at least. That’s partly because Russian gas supplies to Europe cannot easily be repurposed for sale elsewhere. So supply is being effectively destroyed. But again, producing more domestic natural gas does little for anyone except the oil and gas industry itself as it will be sold on the (tight) regional and global gas markets rather than reserved for the UK. Clearly we need to reduce demand for natural gas as well as reforming contracting for renewable energy to obtain the full benefit of cheap renewables (see previous blog post).
By David Toke
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