domenica 4 dicembre 2016

OPEC and the price of oil

The recent OPEC agreement to cut oil production costs to raise its price has achieved its immediate desired effect of an increase of oil prices to 50USD a barrel.

The oil producing countries hope to see the price reach 60 to 70 USD a barrel, however, I don’t believe this will happen, and don’t expect oil prices to exceed 50 USD if not for brief periods of time. In fact, I believe that the 50 USD level is the maximum possible in the medium term and in the long term the price is destined to decrease, whatever OPEC will do.

The collapse of the price of oil in the past two years has been the consequence of US production of “shale oil” that has increased US market share.  Saudi Arabia, which has very low extraction costs, responded by keeping high levels of production to save its world market share and to make prices drop to force many “shale oil” producers out of business.

The significant drop in prices has in fact forced many shale oil wells to close, but it has also caused severe problems to national budgets of less efficient oil producing countries such as Venezuela and to all other world producers.

Unfortunately for Saudi Arabia, but fortunately for the planet and humanity, the price of oil will not rise above 50 USD a barrel and production will be forced to continue to decrease at even lower prices for the following reasons:

  1. Producers of shale oil have learned to reduce costs and at even 50 USD a barrel can make good profits, so if oil prices rise above 50 USD, production of shale oi will increase causing prices to go down.
  2. The energetic efficiency of world GDP is around 1.5 %, while world GDP growth is around 3.5 % on average: this means that in recent years, the demand for world “energy” (including all primary sources, fossil, renewables, and nuclear), has grown by 2% annually on average.  However, GDP energy efficiency continues to increase due to all the existing energy savings and efficiency measurements.  Energy demand is reduced in parallel.
  3. The growth of renewables, driven by technological progress and cost reductions, continues uninterrupted (even in periods of low oil prices). This growth is unstoppable – both due to the reduction of costs as well as for the environmental impacts of fossil fuels, which includes millions of deaths per year worldwide due to pollution and the growing and devastating effects of global warming.  The result is an energetic mix; renewable energies continue to grow at the expense of fossil fuels and nuclear energy.  An increase in oil prices accelerates the progress in energy efficiency measures and the growth of renewables to the detriment of demand for fossil fuels, including oil.
  4. Awareness on collateral damage of fossil fuels (millions of deaths annually due to pollution and global warming), is increasing globally thanks to many nations’ raising of  consciousness with regards to environmental issues (as seen from the Paris Agreement to COP21), to the admonishments of a growing number of authoritative figures (in primis with Pope Francis), to the sensitivity of a growing number of multinationals - I remember with pride that STMicroelectronics was one of the first companies in the world to create its own “Environmental Decalogue” in 1995 with the objective of being carbon neutral by 2012,  a target which unfortunately was eventually not pursued after I retired in 2004 - and especially the spread of environmental awareness and the responsible and virtuous behavior of hundreds of millions of world citizens.  All of this contributes to a decrease in fossil fuels demand despite the support they often receive from Governments conditioned by the fossil fuel lobbies.
  5. The explosion of electric vehicles will revolutionize road transport.  I believe that the entire transport sector (which absorbs one third of global oil production), will change fundamentally in the next 20 years: the growth of car-sharing in major cities, the global growth of public transport on rail, the enormous growth of electric cars, and lastly, the arrival of the driverless car, will cause a decrease in the annual registration of vehicles, and a rapid shift towards electric cars for new registrations.  At the horizon of 2040, oil consumed in transport will be a small fraction of current consumption, accelerating its death.
  6. If, finally, we also begin to generate collective “class-actions”, first against the governments that provide fossil fuels billions of dollars in subsidies (few citizens in the world know that government subsidies for fossil fuels are four times greater than those for renewable energies); and second, legal actions of civil societies for mass deaths caused by pollution against fossil fuel companies – then the death of fossil fuel will happen sooner.
To conclude, I believe we have reached “peak-oil”, meaning the maximum point of oil production and its implacable decline towards its end is irreversible.

It will be up to us as responsible citizens, both via our responsible behavior as well as through our actions of orienting our politicians, to accelerate this process in the interest of our country, of our only planet, and of our quality of life and those of our future generations.

PS. As an additional bonus, the end of oil will also mark the end of Islamic fundamentalism which sources its funding precisely from oil to finance its terrorist activities

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