Tuesday, December 31, 2019

Oil sector may be entering final decade of growth

The spread of electric vehicles could help bring a peak to oil demand in the next decade.
The spread of electric vehicles could help bring a peak to oil demand in the next decade.
Photo: Will Waldron, Staff Photographer / Albany Times Union

If the decade coming to a close will be remembered for a shale drilling revolution that transformed the United States into the world’s biggest oil producer, the oncoming 2020s may well go down in history as the decade when the world’s demand for crude peaked for good.

As concerns about climate change mount, electric vehicles are projected to gain ever-larger shares of auto markets, while the fuel efficiency of internal combustion is only expected to improve — all cutting into the demand for transportation fuels, oil’s primary product.

Virtually everyone agrees peak oil demand is coming. OPEC predicts demand will rise into the 2040s, but the European energy major Royal Dutch Shell and others say global oil demand could peak before 2030. So what will this mean to oil-centric Houston, the reigning energy capital of the world?

“We’re entering a decade that could be the beginning of the end in some ways,” said Jennifer Rowland, an energy analyst with Edward Jones. “You can paint a pretty bearish picture that oil demand is going to plateau before 2030.”

Sour outlook on oil

The debate over peak demand highlights the remarkable shift that global energy markets have made in less than 20 years. As recently as 2008, analysts and investors argued over the timing of a phenomenon known as peak oil — when the world would begin to exhaust its reserves of crude.

Now, concerns are mounting in the oil and gas industry that peak demand is not only coming, but coming faster than anticipated, all as the shale boom begins to slow, companies slash jobs and Wall Street turns its back on the energy sector after years of generating lackluster returns.

While the S&P 500 Index is up more than 25 percent in 2019, Standard and Poor’s index of oil and gas producers has plunged more than 15 percent. The energy sector now represents just 4 percent of the S&P 500 after peaking at 14 percent just over a decade ago.

Earlier this year, Exxon Mobil fell from the ranks of the S&P 500’s 10 biggest companies for the first time, underscoring that investors are hesitant to put money into a mature industry that is barely growing, Rowland said.

“We’re in this vicious negative feedback loop,” she said. “It feeds on itself as the energy sector becomes less relevant.”

Ryan Lance, chief executive of the largest Houston-based oil and gas producer, ConocoPhillips, acknowledges that his company is operating in a mature industry. The solution, he says, is tight spending and steady growth, while consistently returning money through dividends and stock buybacks to shareholders to build loyalty.

“Our industry faces a flight of sponsorship by investors,” Lance said during a recent presentation. “This sector will struggle for relevance unless the industry can create value on a sustained basis.”

Where Houston stands

Houston has worked to diversify its economy, but it’s still an oil town. Crude prices and production reverberate through every facet of the economy.

The industry already is contending with flat U.S. demand for gasoline because of improved vehicle fuel efficiency. Next up: the anticipated wave of electric vehicles.

“That will have a major impact and a bottom-line impact on Houston,” said Praveen Kumar, executive director of the Gutierrez Energy Management Institute at the University of Houston.

For now, the United States is producing record volumes of oil that only continue to rise. The Houston and Corpus Christi areas are evolving into larger export hubs to supply the world with more oil, refined fuels, chemicals and plastics.

“The major story for Houston right now is not a lack of oil supply, but how well it can be exported to prevent a domestic glut,” Kumar said.

Indeed, Houston’s role as an export hub will rise in importance in the years to come, said Sarp Ozkan, director of analytics at the Austin energy research firm Enverus. As global oil demand plateaus, U.S. crude will need to compete intensely for market share worldwide, he said.

“Peak demand is an issue we need to accept as an eventual reality, but that doesn’t mean Houston is going to lose its luster,” Ozkan said. “It really is more of an evolution.”

Most analysts say oil demand will peak, then plateau for a prolonged period before it begins to decline. Few expect a sharp peak and rapid downfall.

Varied global views

For now, there are more questions than answers. Electric vehicles and renewable power are butting up against the need for more energy as global population grows, incomes rise and middle classes expand in developing nations, particularly in Asia.

Oil and other fossil fuels will hold smaller shares of the overall energy mix, but the total energy pie will keep growing for decades, analysts said. Crude oil represents more than 30 percent of global energy demand.

How quickly demand peaks and at what level will depend largely on how governments worldwide respond to global warming. The latest report from the Paris-based International Energy Agency gives a mid-range scenario — governments doing more than they are now without being extremely aggressive — in which oil demand slows to a crawl after 2025, but doesn’t peak until the 2030s at 106 million barrels per day or so.

Under that scenario, global fuel demand for passenger vehicles would peak before 2030, but crude demand would continue to increase from supplying long-distance freight, shipping, aviation and petrochemicals, the IEA said.

That means the oil sector still has decades ahead of it, said Muhammed Ghulam, an energy analyst at Raymond James in Houston. Even global coal demand is growing slightly, he noted, and coal is much easier to displace with natural gas and renewable energy than crude oil, he said.

“Oil demand growth is slowing significantly, but it’s still rising,” Ghulam said. “Energy transformations take a long time.”


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