‘Changing Investor Perceptions’ Point Toward Falling Demand for Oil
The latest round of oil price increases is prompting predictions that fossil fuel markets are heading toward another decline, with both the usually staid Forbes magazine and the often edgier Institute for Energy Economics and Financial Analysis (IEEFA) both suggesting reasons to expect a peak in oil demand in the not-too-distant future.
On Forbes, cleantech raconteur Felicia Jackson reports skepticism over oil’s longer-term prospects on a couple of different dimensions. The International Energy Agency has cut its 2018 demand forecast by 1.4 million barrels per day on the expectation that recent higher prices will cut into demand. “But there are a growing number of analysts who believe that the fundamental drivers of oil demand are undergoing a massive shift,” for reasons unrelated to simple price.
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“A key concern is international geopolitics, as for example when Total announced it is withdrawing from its Iranian projects, following the U.S. withdrawal from the Iranian nuclear deal,” Jackson writes. “Another issue is that many importers of oil are cutting end-user fuel subsidies.”
So “it’s not as simple as high prices curbing demand,” she adds. “The oil majors seem to be undergoing a reassessment of exactly what the future holds, and how far oil extraction and exploitation will continue to be the dominant paradigm. What’s driving this is changing investor perception of the future.”
“Oil demand is likely to peak in the next few years, well ahead of many companies’ expectations,” said Ceres Senior Fellow Mark Fulton, co-author of the organization’s Clean Trillion report. That’s partly because “clean energy technologies such as wind and solar have de-risked and become a central competitive threat to fossil fuels and nuclear power, even as incentives decline.”
In line with that momentum, Ceres sees “a significant shift in available mechanisms for investors to get involved in alternatives to fossil fuels,” Jackson writes. Those options range from infrastructure and private equity investment, to direct project investment, to bond purchases, green building investments, and direct funding to corporate developers.
Much of the change, she adds, is driven by the reality that “institutional investors’ fiduciary obligations demand consideration of climate-related risks and climate solution opportunities across investment portfolios.”
Jackson cites France’s Total and Spain’s Repsol as two of the latest major fossils to give renewables a more prominent place in their future planning, and notes that United Arab Emirates Energy Minister Shual Al Mazroui is thinking along similar lines. “We are trying to move subsidies from oil and gas to new forms of energy,” he said in January. “There’s enough energy potential in our region to export to Europe and Africa, too.”
At IEEFA, meanwhile, Finance Director Tom Sanzillo and guest columnist Kathy Hipple see the volatility underlying the current price hike sowing the seeds of the oil market’s undoing, and affordable renewables as the available solution to price disruption.
“The impact of changes in the flow of oil from Iran, and the responses of other nations to any sanctions, remains to be seen,” they write. “What’s plain is that the volatility implied in this recent price spike has major implications for world markets—and for the gathering trajectory away from fossil fuels.”
The short-term winners from Trump’s effort to freeze out Iran will include Saudi Arabia, Russia, the UAE, and U.S. fossil producers, all of which will be able to sell their wares at higher prices. “To give a sense of proportion, an increase of US$5 per barrel increases Russia’s annual oil revenues by $20 billion,” they write, “and prices have gone up approximately $37 per barrel since November 2016.” The disadvantages will go to countries like India and Japan, which “have put out recent warning signals on inflation, trade imbalances, fiscal distress, and curtailed estimates of economic growth.” U.S. consumers, as well, have seen gasoline prices rise to $3.00 per gallon, just in time for the summer driving season, and “with a noticeable impact on those who live in rural areas, who drive long distances to work, or who have modest incomes.”
But with prices high, U.S. shale producers could boost their production enough to trigger lower prices, a fraught response from OPEC, and distress for fossil investors who are a bit sensitive after five years of shaky fossil markets.
The ultimate question for governments, Sanzillo and Hipple write, is when fossil price spikes will finally become unacceptable.
“Cobbling together ‘solutions’ that drive up fiscal deficits, weaken currency, increase trade imbalances, and undermine growth is poor public policy,” they state. “More aggressive investment in renewable energy and electric vehicles can lower costs and lift economies. The rapid rise of renewable energy in China, India, the U.S., and Brazil shows how renewables can serve as national security tools and as a bulwark against job losses during normal down cycles of fossil fuels.”
[Editor’s note: We’ve been following this topic closely, but more quietly than usual, during the recent round of price increases. Watch for a deeper dive in a future edition of The Mix.]