Speaker 1: Welcome to zero. I'm Akshatrati. This week peaks Politics and Predictions.
Speaker 1: Today we are going to talk about oil. Whether you
Speaker 1: love it or hate it, you cannot deny that the
Speaker 1: world needs it, at least right now. And if you
Speaker 1: care about tackling climate change, then you also need to
Speaker 1: care about what happens to the demand for oil over
Speaker 1: the coming decades. Growth in oil demand has so far
Speaker 1: been a close proxy for economic growth. While it's clear
Speaker 1: some of that economic growth and the energy that powered
Speaker 1: it has been responsible for climate change, it has also
Speaker 1: pulled hundreds of millions of people out of poverty. As
Speaker 1: we transition to clean energy, there is now a real
Speaker 1: prospect of breaking that linkage.
Speaker 2: If you're talking about structural decline in oil demand. Until
Speaker 2: very recently you were talking about structural decline in the
Speaker 2: global economy. I don't think we are talking about that
Speaker 2: now because we do have these quite effective substitutes, and
Speaker 2: they're becoming more effective by the year.
Speaker 1: That's David Fickling, a columnist for Bloomberg Opinion and my
Speaker 1: guest today. He's joining me to talk about peak oil.
Speaker 1: In a matter of mere decades, the world has gone
Speaker 1: from the specter of running out of oil to soon
Speaker 1: being able to choose not to extract every last job,
Speaker 1: Or to put it another way, the world has gone
Speaker 1: from watching for the day that oil supply peaks to
Speaker 1: trying to predict the day when oil demand peaks. All
Speaker 1: this matter is because burning oil contributes about a third
Speaker 1: of global emissions, and getting to net zero will mean
Speaker 1: finding ways to wean the economy of this still essential commodity.
Speaker 1: There's also that tiny matter that oil commands the most
Speaker 1: attention in global geopolitics among all other commodities. What happens
Speaker 1: to the major oil powers once the world starts wanting
Speaker 1: less oil. This week is a good time to talk
Speaker 1: about it because is the fiftieth anniversary of the OPEC
Speaker 1: oil embargo in nineteen seventy three, and those powers showing
Speaker 1: how much of a stranglehold oil can have on the
Speaker 1: global economy.
Speaker 3: The oil producing countries of the Arab world decided to
Speaker 3: use their oil as a political weapon. They will reduce
Speaker 3: oil production by five percent a month until the Israelis
Speaker 3: withdrawal from occupied territories.
Speaker 1: As expected, there was a huge reaction in countries like
Speaker 1: the US.
Speaker 3: This is a pearl harbor again, as far as the
Speaker 3: United States is concerned because of the fact that it
Speaker 3: invasions a whole change in our lifestyle, a whole change
Speaker 3: in the way this country has been built.
Speaker 1: All that happened because Arab countries were opposing Western countries
Speaker 1: support for Israel in the nineteen seventy three Arab Israeli war.
Speaker 1: It's tragic that almost to the date, the region is
Speaker 1: experiencing yet another war and yet another humanitarian crisis. Back
Speaker 1: in nineteen seventy three, oil producing nations could use oil
Speaker 1: as a weapon because supply was an issue. Now David
Speaker 1: predicts that demand is going to be the issue. That
Speaker 1: is the day humanity can say, dear Oil, it's not you,
Speaker 1: it's me is on the horizon. In fact, last year,
Speaker 1: David wrote a column where he said pea coil has
Speaker 1: finally arrived. No really, So I invited David to come
Speaker 1: on the show to help me understand why the world
Speaker 1: cares so much about pea coil, why he still thinks
Speaker 1: his prediction is the right one, and to explore the
Speaker 1: truly wild world we will enter after oil demand peaks. David,
Speaker 1: Welcome to the show. Hey, this is an interesting week
Speaker 1: to talk about what we are going to talk about,
Speaker 1: which is peak oil. It is the fiftieth anniversary of
Speaker 1: a pivotal week in energy history. I'm talking about the
Speaker 1: nineteen seventy three oil crisis, which began on the seventeenth
Speaker 1: of October. So can we just start there as a
Speaker 1: moment in time which changed the world and perhaps bring
Speaker 1: it to a point where you feel peak oil is
Speaker 1: a thing that people started to talk about.
Speaker 2: Absolutely, I think something we're going to talk about throughout
Speaker 2: this conversation is about the interplay between supply and demand.
Speaker 2: The seventy three oil crisis and also the seventy nine
Speaker 2: to one, which in some ways had a more lasting effect,
Speaker 2: which is proked by the revolution in Iran. Obviously, they
Speaker 2: were events in the history of oil supply, but they
Speaker 2: had immense consequences on the history of oil demand. If
Speaker 2: you look at oil demand projections before nineteen seventy three
Speaker 2: through the fifties and sixties, energy demand was increasing at
Speaker 2: a rate that looked almost exponential. You had these very
Speaker 2: dramatic projections about how fast demand energy and in particular oil,
Speaker 2: was going to go up overcoming decades. And that trend
Speaker 2: was broken by nineteen seventy three and it's for very
Speaker 2: obvious reasons. Supply and availability of oil suddenly looked less secure,
Speaker 2: and so consumers had to sort of start rethinking a
Speaker 2: lot of the things that they were doing. So, I mean,
Speaker 2: the most obvious example of this was that in nineteen
Speaker 2: seventy three, about a third of the world's oil went
Speaker 2: into fuel boilers it was producing electricity. That is now
Speaker 2: about seven percent of the world's oil. The world has
Speaker 2: given up on that because essentially after seventy three, European economies,
Speaker 2: a lot of the US, they turned to domestic coal
Speaker 2: reserves instead. France turned to nuclear of course famously, and
Speaker 2: we saw the birth of a lot more investment in renewables,
Speaker 2: although of course at that stage it was far too
Speaker 2: early stage. But what we saw was that when you
Speaker 2: have a supply problem, demand starts to respond. And that's
Speaker 2: been a lesson that continues for decades.
Speaker 1: So in initial days, you know, this is talking from
Speaker 1: the nineteen seventy era, when the term peak oil was used,
Speaker 1: it almost always meant peak oil supply. But today we're
Speaker 1: talking about a very different kind of peak oil.
Speaker 2: Yes, absolutely, I mean, in fact, if you look at
Speaker 2: the projections for peak oil supply, they go back even
Speaker 2: further than that. At one point, I remember looking at
Speaker 2: this in nineteen nineteen, the chief geologist of the US
Speaker 2: Geological Survey said that the US domestic output, this was
Speaker 2: no one was even projecting anything on a global basis
Speaker 2: at that point. They said that within two to five years,
Speaker 2: US oil production was going to start declining. And at
Speaker 2: that point it was about one million barrels per day.
Speaker 2: So it's thirteen million barrels per day now more or less.
Speaker 1: Whether it's in the case of supply or it's in
Speaker 1: the case of demand. We care a lot about pea coil.
Speaker 1: Why is it that we care so much about pea coil?
Speaker 2: If you look around you you can see how important
Speaker 2: to US oil is in all sorts of ways. From
Speaker 2: the consumption point of view, obviously the cars we drive,
Speaker 2: the consumer products that we have. Oil is in a
Speaker 2: vast array of uses. It's not just cars, it's the
Speaker 2: trucks that drive things, the planes that we fly, the
Speaker 2: ships that move things around. Also like the plastics and
Speaker 2: consumer goods, the greases, the asphalt on the roads, it's everywhere.
Speaker 2: Of course, From the climate perspective as well, oil is
Speaker 2: one of the largest contributors to climate change, and that's
Speaker 2: something that we need to reduce. So before we were
Speaker 2: worried about peak oil supply, we were worried, gosh, we're
Speaker 2: not going to be able to have all these useful
Speaker 2: consumer goods that oil provides us. We're less worried about that.
Speaker 2: Now we're more worried about the fact that oil is
Speaker 2: actually destroying the environment around us. We are concerned about
Speaker 2: ways to substitute and reduce substitution is I think the
Speaker 2: thing that's really changed in this area when we're talking
Speaker 2: about peak oil demand. There are alternative ways of doing
Speaker 2: the things that oil does, for instance, electric vehicles, bio
Speaker 2: fuels in conventional vehicles, and alternative feedstocks like hydrogen for
Speaker 2: the chemicals industry. And that's what's changed at the moment.
Speaker 1: So you published a bold article last year which started
Speaker 1: with sort of a trepidation. Yes, it said, I'm going
Speaker 1: to make a bold claim, and I may come to
Speaker 1: regret it, but my bold claim is that peak oil
Speaker 1: demand is here. Twelve months on, tell us why you
Speaker 1: thought peak Alderman is here, and do you think you're
Speaker 1: still right?
Speaker 2: Sure? Yeah, well, yeah, I mean the main reason I
Speaker 2: wrote the column at the time was that it was
Speaker 2: a period of very sharp tightening by the US Federal Reserve,
Speaker 2: and at that point everyone was predicting that the world
Speaker 2: was going to face quite a severe global recession, really
Speaker 2: on the scale of the Volka Recession of the early eighties.
Speaker 2: You know, this was when Paul Volka, the US Federal
Speaker 2: Reserve governor, tried to stamp out inflation in the wake
Speaker 2: of the nineteen seventy nine oil crisis during the Irana
Speaker 2: ark War, and that's one of the most dramatic reductions
Speaker 2: in oil demand that we've seen in history. The argument
Speaker 2: I made at the time was essentially that we saw
Speaker 2: a recession on that scale that was probably going to
Speaker 2: crimp oil demands until the mid twenty twenties, sort of
Speaker 2: twenty twenty five, and at that point we start to
Speaker 2: see some of these long term factors like rising energy
Speaker 2: efficiency in vehicles and the rise of electric vehicles, mean
Speaker 2: that oil is entering a secular decline. Now, there has
Speaker 2: not been a global session. In fact, the global economy
Speaker 2: has grown extremely strongly. We're really sort of above trend growth. However,
Speaker 2: the specific prediction I made was about crude oil.
Speaker 1: Yeah, so let's do that because it is nerdy. Beyond
Speaker 1: the fact that you can make these pronouncements about peak oil,
Speaker 1: oil is not one thing. We kind of think of
Speaker 1: it as a commodity, but it's not one thing. So
Speaker 1: let's just break it down and then explain to us
Speaker 1: where you think we have reached a peak.
Speaker 2: If you think about how you measure oil, it's actually
Speaker 2: quite a difficult thing to measure oil demand. And you
Speaker 2: can go right back to the nineteenth century. You know,
Speaker 2: John d. Rockefeller and standard oil. John d. Rockefeller was
Speaker 2: not controlling oil fields all supply. He controlled refineries, and
Speaker 2: refineries are the bottleneck in the global oil supply chain.
Speaker 2: So if you want to count how much oil is
Speaker 2: being consumed, the best way to do is go to
Speaker 2: the gate of a refinery and measure how much is
Speaker 2: coming out of a refinery. And so generally when you
Speaker 2: hear the OPEC or the International Energy Agency saying like
Speaker 2: what is the level of oil demand, essentially what they're
Speaker 2: saying is how many barrels are coming out of oil refineries.
Speaker 1: David is making an important distinction here when measuring oil consumption,
Speaker 1: organizations like the International Energy Agency and OPEC are not
Speaker 1: counting what's going into the refinery, but what's coming out.
Speaker 1: For much of history, refineries took in pretty much only
Speaker 1: crude oil, so the amount of refined products was a
Speaker 1: good proxy for the amount of oil coming out of
Speaker 1: the ground. That's changed over the past few decades, and
Speaker 1: now refined products come not just from crude oil, but
Speaker 1: also bio fields and natural gas liquids. And because a
Speaker 1: barrel of refined products can be made from more than
Speaker 1: one source, it means there can be a significant difference
Speaker 1: between the amount of crude ole going into a refinery
Speaker 1: and the number of barrels of refined products coming out.
Speaker 2: Global supply of refined products, so things like gasoline and
Speaker 2: diesel and jet field and things like that, that's about one hundred,
Speaker 2: one hundred and one hundred and two million barrels per day.
Speaker 2: Global supply of crude oil, which is what we think
Speaker 2: of as oil black stuff, you know, that will fit
Speaker 2: in a barrel that's subject to opec quotas the stuff
Speaker 2: that's quoted on the news for the price of West
Speaker 2: Texas intoneedit or brent. That's only about eighty three million
Speaker 2: of those one hundred million barrels, probably a little bit
Speaker 2: less than that. At the moment crude ol, which was
Speaker 2: what I made this prediction about. We are still actually
Speaker 2: below twenty eighteens levels of crude oil demand at this point,
Speaker 2: and the International Energy Agency, if you look through their numbers,
Speaker 2: they don't predict that next year we're going to exceed
Speaker 2: twenty eighteen's levels of crude oil demand. So at this point,
Speaker 2: crude ole demand is still below its peak. And there's
Speaker 2: a lot of headlines you'll see about we're seeing record
Speaker 2: old demind but that's actually largely to do with growth
Speaker 2: and biofueld supply and to a similar extent, growth in
Speaker 2: natural gas. Liquid's not actually in crude oil.
Speaker 1: Okay, So what you've just said is basically oil demand,
Speaker 1: as we understand all kinds of product demand is growing
Speaker 1: and is at a new peak, but the black goole
Speaker 1: that is feeding that oil demand has actually peaked. There
Speaker 1: is all this other stuff, some of which is actually biofields,
Speaker 1: which is the fastest growing segment of supply. Why have
Speaker 1: biofields become such a big part of the supply mix?
Speaker 2: Biofields is essentially policy. One of the earliest responses to
Speaker 2: the seventy three oil crisis was Brazil started introducing very
Speaker 2: dramatic biofield mandates from the nineteen eighties. We've added the
Speaker 2: US to that in the two thousands. In the late nineties,
Speaker 2: hardly any US crops went into making fuel. At this point,
Speaker 2: more US crop volume goes into making fuel than goes
Speaker 2: into making food for Americans. It's grown to that extent,
Speaker 2: and we're seeing other countries moving in the same direction.
Speaker 2: Just in the past twelve months, India has doubled its
Speaker 2: biofuel mandate I think, to twenty five percent from ten percent. Indonesia,
Speaker 2: another big source of transport demand growth, has raised its
Speaker 2: bar fuel mandate to twenty five and I think is
Speaker 2: going to fifty percent in the next few years. These
Speaker 2: are quite significant slices of oil demand.
Speaker 1: So if that is the case, and yes, let's assume
Speaker 1: the total demand for oil will continue to grow as
Speaker 1: many predictions say it will. But if biofields also continue
Speaker 1: to grow, why did you feel any trepidation making the
Speaker 1: claim that crude oil demand has beaked.
Speaker 2: I think the reason for that is that every prediction
Speaker 2: anyone has ever made for history has turned out to
Speaker 2: be transted wrong. And this is about a series of
Speaker 2: lines on a chart and the direction that they're moving,
Speaker 2: and I think if I can give common ground that
Speaker 2: really very few people would disagree on the amount of
Speaker 2: liquid fuels demand over the coming decade. The pace of
Speaker 2: growth has clearly slowed. Even oil bulls would agree about that.
Speaker 2: And so we're on about one hundred and two million
Speaker 2: barrels a day of liquid fuels demand. You don't see
Speaker 2: many predictions heading much above, say one hundred and five
Speaker 2: million barrels a day, and maybe some people do predict that,
Speaker 2: but that's over the previous decade. I think I'll supply increase.
Speaker 2: Liquid fueld supply increase by say ten million barrels a day.
Speaker 2: So we're quite close to the peak in that sense.
Speaker 2: And the question is how much of that peak gets
Speaker 2: used up by crude oil, how much gets used up
Speaker 2: by biofuels, how much is natural gas liquids, and how
Speaker 2: much is processing gains. The argument I've made is that biofuels,
Speaker 2: natural gas, liquids, and process and gains, they make up
Speaker 2: all of that increase in supply.
Speaker 1: You might be wondering if having more biofuels in the
Speaker 1: mix is a good thing for the climate. It's really
Speaker 1: complicated to calculate how much carbon saving can be achieved
Speaker 1: with biofuels. What most studies agree on is that biofuels
Speaker 1: aren't carbon neutral. Just because they come from growing food
Speaker 1: that captures carbon dioxiet in the process of growth does
Speaker 1: not mean biofields do not have additional emissions. Processing crops
Speaker 1: into fuel requires energy. Burning biofuels creates air pollution. That's
Speaker 1: why biofuelds for road transport isn't a good solution to
Speaker 1: pursue in the long term. Instead, it's better to focus
Speaker 1: on using biofuels to reduce emissions from aviation.
Speaker 2: There are more people in the world who are buying
Speaker 2: vehicles as incomes rise, there are more trucks moving around,
Speaker 2: people are flying, or there's all those things that are
Speaker 2: increasing top level demand. But also every vehicle in the
Speaker 2: world has been getting more efficient. This is actually not
Speaker 2: as much about the rise of electric vehicles. It's actually
Speaker 2: about fuel efficiency rules that have been implemented for about
Speaker 2: fifteen years Obama era fleet fuel economy rules, similar rules
Speaker 2: in Europe, the same sort of standards in China, in India.
Speaker 2: All of those vehicles from the sort of pre two
Speaker 2: thousand and eight era, they are now being scrapped. They're
Speaker 2: fifteen years old, and they're getting phased out of the fleet,
Speaker 2: and new vehicles are strikingly more efficient. I think if
Speaker 2: you look at some US examples, a current model car
Speaker 2: and just I have the numbers here in front of me, Actually,
Speaker 2: new US cars now travel twice as far per gallon
Speaker 2: as they did at the start of the Obama administration.
Speaker 2: And that's just normal US gasoline cars. So that is
Speaker 2: an incremental reduction in oil demand, and it's nothing to
Speaker 2: do with electric vehicles.
Speaker 1: As we know, there's an explosive growth in the number
Speaker 1: of electric vehicles being sold. The total oil demand destruction
Speaker 1: from all vehicles, not just cars, but buses and two
Speaker 1: wheelers and three wheelers is only about a million barrels
Speaker 1: a day of oil. So much of the game, so
Speaker 1: to speak, from decreasing demand has come from as you say, efficiency.
Speaker 2: Gains absolutely and so you know, if you break down
Speaker 2: the oil barrel, about a quarter of the oil barrow
Speaker 2: goes into gasoline, another thirty percent goes into diesel, and
Speaker 2: then the remainder about eight percent of it is actually
Speaker 2: just a fuel that oil refineries use. About fifteen percent
Speaker 2: is for shipping and for aviation and the rangers, petrochemicals, asphalt,
Speaker 2: that sort of thing. So you know, if you look
Speaker 2: at those different fractions of the barrel, fuel oil demand
Speaker 2: peaked way back in nineteen seventy nine, Gasoline demand according
Speaker 2: to the International Energy Agency, that peaks probably in twenty nineteen,
Speaker 2: and he's already in decline. Road Field demand as a
Speaker 2: whole is going to peak in the next sort of
Speaker 2: four to five years. And of course, the Fatty Birol,
Speaker 2: the head of the IEA, just said last month that
Speaker 2: oil demand and here he means not crude oil, he
Speaker 2: means liquid fuels demand as a whole that is also
Speaker 2: going to peak this decade.
Speaker 1: Just on a sidetrack here, Even as the IEA was
Speaker 1: born out of the fossil fuel era, in recent years
Speaker 1: it's become a lightning rod for all kinds of people,
Speaker 1: first climate people and now oil people, because every pronouncement
Speaker 1: it makes today it makes for massive headlines in energy press.
Speaker 1: And so this prediction that Fati Birol made you use
Speaker 1: this term, which is all fossil fuels will go into
Speaker 1: structural decline in this decade, including of course oil. Why
Speaker 1: is structural decline such an important phrase in there?
Speaker 2: I think that is because we have actually seen periods
Speaker 2: of cyclical oil demand in the past, and this has
Speaker 2: been driven by these economic factors that we talked about.
Speaker 2: I mean, essentially, one of the main reasons that people
Speaker 2: have always been very reluctant to make that call on
Speaker 2: peak oil consumption is that oil and economic growth. If
Speaker 2: you track global economic growth and oil supply, they track
Speaker 2: almost perfect because oil has for so long been the
Speaker 2: best way of producing energy, the best energy carrier. If
Speaker 2: you're predicting peak oil, it's like you're predicting peak economic growth,
Speaker 2: which is obviously a disaster for the world. And historically
Speaker 2: we've not had the substitutes for oil that we have
Speaker 2: right now, and I think that is why it is
Speaker 2: so important if you're talking about structural decline in oil demand.
Speaker 2: Until very recently you were talking about structural decline in
Speaker 2: the global economy. I don't think we are talking about
Speaker 2: that now because we do have these quite effective substitutes,
Speaker 2: and they're becoming more effective by the year. But that's
Speaker 2: the difference. We have seen these cyclical declines in oil demand.
Speaker 2: We saw it in the early eighties, when you had
Speaker 2: the nineteen seventy nine oil crisis. You had the Iuranarak War,
Speaker 2: you had the Vulka tightening at the federal reserve. We
Speaker 2: did actually see oil demand decline, but then that decline reversed.
Speaker 2: If you remember the old nineteen eighties American soap opera Dallas,
Speaker 2: Dallas was set in a period of oil decline, it's
Speaker 2: all about that, the sort of crises in the Texas
Speaker 2: oil fields, and it covers that turning point actually when
Speaker 2: the oil market started to reverse and demand started to
Speaker 2: grow again. Those are the sort of cyclical declines we've seen.
Speaker 2: We've not seen a structural one, and of course, if
Speaker 2: you're talking about heading to net zero, a structural decline
Speaker 2: is the one that you need. You don't want a
Speaker 2: temporary blit. You actually need decline to decline forever.
Speaker 1: One other thing that came out of the nineteen seventy
Speaker 1: three oil crisis was the International Energy Agency. If you
Speaker 1: want to learn more about it, you can listen to
Speaker 1: an interview with the current head, Fatty Birole, in our archives.
Speaker 1: There's a link in the show notes. After the break,
Speaker 1: Humanity says to Oil, it's not you, it's me, in
Speaker 1: response to the IA's prediction about structural decline in oil demand.
Speaker 1: OPEK had an interesting response. It said, it is an
Speaker 1: extremely risky and impractical narrative to dismiss fossil fuels or
Speaker 1: to suggest that they are at the beginning of their end.
Speaker 1: In past decades, there were often calls of peak supply
Speaker 1: and in more recent ones, peak demand. But evidently neither
Speaker 1: has materialized, and those are all facts. And yet the
Speaker 1: tone is an interesting one, a tone that I'd like
Speaker 1: to explore by just trying to understand what happens after
Speaker 1: we reach peak oil. Because maybe you're right that we
Speaker 1: have reached pea coil. Maybe you're wrong, maybe crude oil
Speaker 1: demand actually does peak later in the century. However, what
Speaker 1: is I think no longer a question of contention, is
Speaker 1: that eventually the demand for oil will peak. What is
Speaker 1: more interesting is what happens after.
Speaker 2: I think the first thing I would say is what
Speaker 2: does the liquid fuels sector look like after peak crude
Speaker 2: oil consumption. A crucial part of that is, of course,
Speaker 2: how fast do liquid fuels decline? And I think the
Speaker 2: best answer is probably not as fast as we would
Speaker 2: like them to be declining, because of course you are
Speaker 2: going to see this decline in transport fuels, which is
Speaker 2: fifty fifty five percent of the barrel road fuels. Rather,
Speaker 2: that's going to accelerate as electric cars penetrate and as
Speaker 2: the old vehicles get more efficient. But of course you've
Speaker 2: also got this other forty five percent of the barrel,
Speaker 2: which is shipping fuel.
Speaker 1: And aviation fuel, which we are hearing about in the background.
Speaker 2: Yes, right over my house, but yes, you know, forty
Speaker 2: five percent of the oil barrel, fifteen percent of it
Speaker 2: is shipping an aviation fuel. Shipping fuel is actually quite
Speaker 2: an interesting one. We're seeing quite a rapid change in
Speaker 2: the engines of ships being built with alternative fuels, which
Speaker 2: is the biggest change in shipping since essentially since Winston
Speaker 2: Churchill turned the British fleet to oil in nineteen ten
Speaker 2: nineteen twelve. So that's a dramatic chain. That's only about
Speaker 2: eight percent of the old barrel. Seven percent goes to
Speaker 2: aviation fuel. There is a lot of talk in the
Speaker 2: industry about the growth of sustainable aviation fuel from biofuels.
Speaker 2: I'm quite skeptical about that. I think we are likely
Speaker 2: to see aviation fuel increase quite a bit. Plastics is
Speaker 2: the other thing. I think we'll probably see plastics increase
Speaker 2: quite a bit. So really what we're talking about is
Speaker 2: the decline of the road transport fuel bit of the barrel.
Speaker 2: I think there's a fairly straightforward path to getting rid
Speaker 2: of about fifty percent of oil demand. Beyond that it
Speaker 2: gets quite a bit more challenging. And of course we've
Speaker 2: seen with the energy transition that the world is quite
Speaker 2: good at coming up with solutions for the next sort
Speaker 2: of slice of emissions that we need to reduce.
Speaker 1: And so we really haven't started thinking about the forty
Speaker 1: five percent of the barrel and how to tackle it.
Speaker 1: And there is hope given when we come to a problem,
Speaker 1: we typically do find solutions. It's starting to happen in
Speaker 1: the cement sector, in the steel sector, but it leaves
Speaker 1: behind a very crucial question about what happens after, which
Speaker 1: is to do with geopolitics. And that would mean only
Speaker 1: the places that can produce a low cost barrel of oil,
Speaker 1: which is typically Middle Eastern producers, will be the producers
Speaker 1: producing most of the oil. That means, as a share
Speaker 1: of the global supply, their weight becomes bigger and they
Speaker 1: can use it as a geopolitical weapon. How do you
Speaker 1: think about the Middle Eastern countries in an era of
Speaker 1: peak oil demand.
Speaker 2: I think that is right. I think if you look
Speaker 2: at things like cost curves, which is what the industry
Speaker 2: uses to work out who's most profitable, as you say,
Speaker 2: the Middle East is at the bottom of the cost curve,
Speaker 2: it's the most efficient. So I think a lot of
Speaker 2: projections I've seen OPEC increases its share to about fifty
Speaker 2: percent over the coming decades, which is at this stage
Speaker 2: it's about thirty percent, so it's quite a significant increase.
Speaker 2: One thing I'd say, though about geopolitics is that the
Speaker 2: real power of OPEK in the Middle East within geopolitics
Speaker 2: is about gasoline and the crucial importance of gasoline as
Speaker 2: a consumer product that affects people's feeling of well being
Speaker 2: and their political views and whether Joe Biden is going
Speaker 2: to win the twenty twenty four election and all sorts
Speaker 2: of factors like that.
Speaker 1: Oh, that's very interesting. So you are saying, in a
Speaker 1: world where oil demand peaks and gasoline it's not the
Speaker 1: hot topic that a US president won't get elected if
Speaker 1: the price of a gallon is at five dollars versus
Speaker 1: four dollars. In that world, a barrel could be two
Speaker 1: hundred dollars a barrel and would still not make a difference.
Speaker 2: Well, absolutely, I think it depends on the share of
Speaker 2: the population and the sort of pivotal political importance of
Speaker 2: that share of the population who are using gasoline cars.
Speaker 2: But I think if you look at a couple of
Speaker 2: other countries, China, for instance, is an unusually non oil
Speaker 2: dependent economy today.
Speaker 1: It wasn't the case five to ten years ago.
Speaker 2: Yes, but actually compared to the US, China is much
Speaker 2: more dependent on oil imports, which you would think would
Speaker 2: make it very vulnerable to this. But of course China
Speaker 2: also doesn't have to worry about democratic elections and the
Speaker 2: effect of that. But certainly there is not a sort
Speaker 2: of sense of impending crisis that the government needs to
Speaker 2: repair when oil prices go up, because most people are
Speaker 2: much less exposed to oil prices than they are in
Speaker 2: the US. One area that the US is quite unique
Speaker 2: is that the consumer is unusually exposed to OPEC decisions. Basically,
Speaker 2: so most of the world is not as exposed to
Speaker 2: the volatility and oil prices as US consumers are.
Speaker 1: Right, how do you think geopolitics will play out in
Speaker 1: an era where demand for oil has beaked and the
Speaker 1: political connections of gasoline prices in the US are broken.
Speaker 2: I think as a subject that affects political outcomes to voters,
Speaker 2: I think it will clearly that. But I think one
Speaker 2: area that where we'll see the geopolitics being surprisingly resilient
Speaker 2: is actually about US involvement in the Middle East. And
Speaker 2: obviously we're quite aware of this right now because we
Speaker 2: have a war going on in the Middle East, and
Speaker 2: I think there is a tendency and you see this
Speaker 2: in US politics, particularly in this era when Saudi Arabia
Speaker 2: is becoming much less friendly to the US. You see
Speaker 2: a lot of people in America going, why are we
Speaker 2: so invested in the Middle East? Why are we so
Speaker 2: involved in the Middle East? They don't share our interests.
Speaker 2: Most of the oil from the Gulf goes East, goes
Speaker 2: to China, and our navy is basically providing the security
Speaker 2: detail for China's oil. Why don't we get China to
Speaker 2: do it itself? And this is a growing groundswell of opinion.
Speaker 2: We see this, and I think, actually, if you think
Speaker 2: about it, it's quite easy to see why the US
Speaker 2: is probably going to want to maintain that geopolitical setup
Speaker 2: in the long term. They do not want China to
Speaker 2: be providing the security detail to Gulf oil heading EA
Speaker 2: because regardless of what happens with transport fuel road fuel,
Speaker 2: oil is also going to remain a pretty crucial war
Speaker 2: fuel for a long time to come. The military is
Speaker 2: going to be one of the last to give up
Speaker 2: oil as a transport fuel. Now, if China is providing
Speaker 2: a security detail for oil heading to Asia, that's going
Speaker 2: to have implications for all the other big oil consumers
Speaker 2: in Asia. That's going to have implications for Japan, for
Speaker 2: South Korea, for Taiwan, for all these other allies, and
Speaker 2: that's going to upset them a great deal as a result.
Speaker 2: I think if you look in the long geopolitics of oil,
Speaker 2: control of these sea lines of communication is a very
Speaker 2: important geopolitical tool. The US appreciates that a real crucial
Speaker 2: battleground is going to be the Indian ocean. Who is
Speaker 2: going to be the naval hedgemon there? Is it going
Speaker 2: to be the US who has been that naval hedgemon
Speaker 2: for decades? Is it going to be China, which is
Speaker 2: where most of the oil are going, or of course,
Speaker 2: is it going to be India itself, which you would
Speaker 2: argue is the natural hedgemon in that region. It's got
Speaker 2: the land based to maintain that, and that's actually really
Speaker 2: going to be a very important factor throughout the coming century.
Speaker 2: Even as Olgamander.
Speaker 1: Clients sticking with the idea that the price of oil
Speaker 1: will be low in a world of peak oil demand,
Speaker 1: you could also imagine that, given prices will be low,
Speaker 1: that the transition may slow down in certain parts. India
Speaker 1: may think we still don't have enough battery metals, we
Speaker 1: don't have enough lithiuman battery factories, and so we're not
Speaker 1: going to be able to make as many electric cars.
Speaker 1: Oil is pretty cheap. Now, let's just keep burning gasoline
Speaker 1: for longer. How do you think about cheap oil in
Speaker 1: a world where we will still need to reach net
Speaker 1: zero targets and actually cut oil consumption, but the incentives
Speaker 1: to cut oil consumption from a financial perspective will not
Speaker 1: quite be.
Speaker 2: There as it happens. I would actually sort of challenge
Speaker 2: the premise a little bit of that. I think like
Speaker 2: economists generally assume that in a world of declining demand
Speaker 2: for a commodity, the price of that commodity will naturally
Speaker 2: be lower. But I think actually if you think about
Speaker 2: a little bit more. The prices don't come that. They're
Speaker 2: not a direct outcome of demand. They're an outcome of
Speaker 2: the interplay between supply and demand, and suppliers get to
Speaker 2: adjust the amount of supply they produce according to the
Speaker 2: demand that they see. And I think the classic example
Speaker 2: of this that you'll see is of course coal coal consumption,
Speaker 2: with what we've seen in China over the past year,
Speaker 2: it's actually creeping up towards its sort of historic peak.
Speaker 2: But coal consumption more or les peaked in twenty fifteen,
Speaker 2: and coal prices have not been structurally drastically low since then.
Speaker 2: In fact, coal prices in the trading market have often
Speaker 2: been extremely high. And that's for fairly simple, straightforward reasons.
Speaker 2: If you think about it, If you're a producer of
Speaker 2: a fossil fuel and you see demand declining, then you're
Speaker 2: going to produce less. And of course, right now, if
Speaker 2: you go to any Saudi Aramco earnings presentation, you will
Speaker 2: see Salur Ramco saying the world is not investing enough
Speaker 2: in oil, and in fact you'll actually see the IA
Speaker 2: saying the world it's investing far less in oil historically
Speaker 2: than it has particularly considering the oil price. So the
Speaker 2: supplies of oil are producing less of it, and they're
Speaker 2: doing that because they want to keep prices high. Saudi Arabia,
Speaker 2: Russia clearly want to keep prices high. So I think
Speaker 2: the assumption that the pathnet zero is going to be
Speaker 2: guided by low prices, I think sort of underestimates the
Speaker 2: extent to which the suppliers of these fossil fuels can
Speaker 2: see that the writings on the wall and actually respond accordingly.
Speaker 1: And that also speaks to the point that many of
Speaker 1: the Middle Eastern oil producers balance their books their budgets
Speaker 1: at a much higher oil price. So the Arabia right
Speaker 1: now wants one hundred dollars barrel because it wants to
Speaker 1: spend all this money building neon and other projects, and
Speaker 1: so there is motivation to keep those high oil prices
Speaker 1: even just to be able to keep doing the things
Speaker 1: that they do on a.
Speaker 2: Day to day basis absolutely And I think a really
Speaker 2: striking thing that you see in Saudi Arabia, and it
Speaker 2: goes to this point, is that what are they say
Speaker 2: spending all these profits that you know, oil is immensely
Speaker 2: profitable for Sadu arab at the moment and it's using
Speaker 2: it to buy football teams, it's using it to build
Speaker 2: cities in the desert, it's using it to sort of
Speaker 2: cut back on some of the fiscal consolidation that they've
Speaker 2: done in recent years. What it's not doing is it's
Speaker 2: not using very much of it to produce more oil.
Speaker 2: And historically, when Sadi Ramco is getting the sort of
Speaker 2: profits it's getting right now, they would be investing a
Speaker 2: lot in future oil consumption. But if you actually break
Speaker 2: down what Sadi Ramco is spending on in its capex,
Speaker 2: quite a lot of it is going on natural gas
Speaker 2: for local supply, A surprisingly large amount of it is
Speaker 2: actually going on energy transition projects, on hydrogen and renewables.
Speaker 2: Quite a lot of this is going on chemicals and refining,
Speaker 2: and if you look at the spending that it's doing
Speaker 2: at the moment, a lot of it is investing in
Speaker 2: offshore refineries basically as future consumption for Saudi oil. But
Speaker 2: a really rather small proportion of it is going on
Speaker 2: actually increasing supply of oil. And of course Ramco always
Speaker 2: needs to be increased in supply of oil because it's
Speaker 2: existing oil fields are always declining. And if you're not
Speaker 2: investing in increasing supply, then supplies a whole declines. If
Speaker 2: you look at the behavior of every oil producer in
Speaker 2: the world out there, even there's this big deal in
Speaker 2: the market at the moment Exomobile buying Pioneer, it's buying
Speaker 2: existing production. It's buying a shale oil producer. What it's
Speaker 2: not doing is investing heavily in these big, long term
Speaker 2: offshore new oil fields, some of which in place like
Speaker 2: Guiana have been very successful for Exon. But by doing
Speaker 2: M and A of another company, it's basically buying existing production.
Speaker 2: Is not increasing production.
Speaker 1: We're talking about pic oil demand. But in the moment
Speaker 1: that we sit, there is a spring in the step
Speaker 1: of the fossil fuel industries, especially the oil and gas industry.
Speaker 1: And we will be having COP twenty eight in the
Speaker 1: UEE an oil and gas producer, and that will be
Speaker 1: headed by the president who is also a CEO of
Speaker 1: their national oil company. How do you think that's going
Speaker 1: to affect climate diploma to see ad coptently.
Speaker 2: It Clearly you've seen a shift. As you say, there
Speaker 2: is more of a spring in the step for oil producers.
Speaker 2: There is that sense that they have the wind at
Speaker 2: their back. But again I think if you look at
Speaker 2: actual production, OPEC plus has cut production over the last
Speaker 2: twelve months, if they've introduced about four or five million
Speaker 2: barrels a day of oil production cuts over the last
Speaker 2: twelve months, and the oil price is basically exactly where
Speaker 2: it was twelve months ago. It's moved around over that period,
Speaker 2: but it's actually where it was. So I think the
Speaker 2: thing that I would sort of worry about more with
Speaker 2: the energy transition is actually not really to do with
Speaker 2: the interplay and the energy market at all. It's more
Speaker 2: to do with trade factors. I think that's the real
Speaker 2: threat to the energy transition at the moment. It's actually
Speaker 2: much more the sort of rising levels of protections and
Speaker 2: that we're seeing that a really choking off the market
Speaker 2: in renewables equipment. We're seeing that in the way that
Speaker 2: the US is apply more tariffs to Chinese solar equipment,
Speaker 2: the European Union is investigating Chinese electric vehicles, and that
Speaker 2: sort of thing. That's actually I think the bigger threat,
Speaker 2: because I think the money is actually already moving away
Speaker 2: from oil and towards renewables. I think if you look
Speaker 2: at investment in upstream oil, there's not enough investment going
Speaker 2: into fossil fuels to maintain the demand levels that the
Speaker 2: fossil fuel industry is arguing.
Speaker 1: We're going to say, and so, if on the numbers
Speaker 1: case that you make, and you've made this in a
Speaker 1: number of columns that you've written over the years, oil
Speaker 1: producers are not investing more money into new oil production,
Speaker 1: into significant oil production. Yet on a rhetorical level, they
Speaker 1: keep saying the world is not investing enough in more
Speaker 1: oil production. You say that in between the lines, you're
Speaker 1: reading this as their admission that actually, big oil is
Speaker 1: kind of here, is going to come soon, and we
Speaker 1: just are starting to prepare for the world after. But
Speaker 1: while we do that, we don't really want to tell
Speaker 1: anybody about it.
Speaker 2: I think it's I think it's very curious, and I
Speaker 2: don't have like a conspiratorial theory that they're lying to
Speaker 2: us about what they really think. But there's this concept
Speaker 2: in economics called revealed preference where you'll say to people,
Speaker 2: do you want to eat some healthy food or do
Speaker 2: you want to eat some sugary delights? And people say, oh,
Speaker 2: I believe in eating healthy food, And then you put
Speaker 2: a bunch of food in front of them and they
Speaker 2: just eat all the chocolate, and you call that revealed preference.
Speaker 2: There's the thing that you say that you want, and
Speaker 2: then this is the thing that you actually do. And
Speaker 2: I think you see an example of revealed preference in
Speaker 2: the oil market, because, as I say, the last time
Speaker 2: of prices were over one hundred dollars a barrel, capital
Speaker 2: investment in upstream oil was close to a trillion dollars
Speaker 2: a year, I think, sort of eight hundred to nine
Speaker 2: hundred billion dollars a year. Right now, oil is again
Speaker 2: around one hundred dollars a barrel, and capital investment is
Speaker 2: about five hundred billion dollars a year. It's significantly lower
Speaker 2: if you look at the way that they're investing. They're
Speaker 2: not able to justify the level of investments within their
Speaker 2: own fields to meet this supply, and no one is
Speaker 2: finding the level of investments that they can justify. And
Speaker 2: I think that is an acknowledgment that really oil demand
Speaker 2: is not going to zero, but they're sort of projections
Speaker 2: where it goes from it's sort one hundred million barrels
Speaker 2: a day to sort of eighty million barrels a day
Speaker 2: over the next decade, and further down beyond that. I
Speaker 2: think that that's perfectly credible.
Speaker 1: When you look at the numbers and we've gone through
Speaker 1: so many of them, there's always a case, especially in
Speaker 1: the oil markets, to pick a slice of the numbers
Speaker 1: and make a case that would be completely opposite to
Speaker 1: the one you have made today. But it is fascinating
Speaker 1: that the longer term trends are starting to show up
Speaker 1: in such interesting ways. And so I'm glad you're on
Speaker 1: the Pea Coyle beat and I look forward to your
Speaker 1: future columns. Hopefully you're not wrong, and if you're wrong,
Speaker 1: then you'll tell us why you were wrong, and you'll
Speaker 1: make a new prediction. So thank you for all that insight.
Speaker 2: Thank you, Acsha, thank you.
Speaker 1: In researching my book Climate Capitalism, I kept coming back
Speaker 1: to the years nineteen seventy three and twenty fifteen. That's
Speaker 1: because the OPEC oil embargo in nineteen seventy three kicked
Speaker 1: off a race to develop alternative energy sources such as
Speaker 1: batteries and solar. Decades later, when the world finally agreed
Speaker 1: on a climate goal in Paris in twenty fifteen, those
Speaker 1: green technologies were ready to work at scale. Now, fifty
Speaker 1: years later from that pivotal year and eight years after
Speaker 1: the Paris Agreement, it's clear those clean energy technologies are
Speaker 1: finally eating into the world's addiction to fossil fields. Thank
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Speaker 1: Special Thanks as always to Kira bindram i'm Akshatrati. Back
Speaker 1: next week.