For my generation turning 16 meant a race to the Department of Motor Vehicles to get the coveted driver’s license. That paper represented freedom, social status and, hopefully, responsibility.
However, I am increasingly hearing that the teenagers of today are in no such rush. Driving and car ownership is no longer a priority for many of North America’s youth. Schroders Asset Management produced a paper last year validating that observation. In 1983 over 80 per cent of 18 year olds had a driving license by 2010 that number had fallen below 60 per cent.
There are several trends that explain why. First, there has been a drift away from suburbs and towards inner city living. Second, there are innovative new services such as car sharing and Uber that make owning a car less of a necessity. These, combined with increased fuel efficiency in automobiles, have already moderated demand growth for refined petroleum product in North America.
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In fact the U.S’s Energy Information Administration reports that U.S. oil consumption remains below the 2004 high of almost 21 million barrels per day and has been trending a staggering 25 per cent below the predictions made just over a decade ago. Similarly, global oil consumption is underperforming earlier expectations.
However what will be truly disruptive to the automotive and ultimately the oil industry is the advancement and adoption of autonomous electric vehicles. Some brilliant minds are already at work improving the technology necessary to make this a commercial reality. It is conceivable that a child born in 2016 may never own nor drive a car in their lifetime.
According to consultancy McKinsey & Company we are now in the first of three eras of the “self-driving revolution”.
Autonomous vehicles are currently being introduced for industrial applications such as mining and agriculture. Before 2030 they are expected to become readily available and adopted by consumers. Will this technology make two cars in a family unnecessary?
Today cars are parked at home, work and sports facilities at least 90 per cent of the time. Perhaps a combination of Uber, car-sharing and driverless car services will make owning a second family vehicle unnecessary.
Moreover, if just 25 per cent of these new modes of transport were powered by electricity, the impact on oil demand and prices would be momentous. It is this prospect that has caused me to re-evaluate the longevity and future of the oil industry.
The public has pressured many endowments and investment funds to divest of oil and gas holdings. Traditional consumers such as airlines and the military are investing in alternative fuel research and rapid advances in solar efficiency with improved energy storage are all colluding with a small number of visionaries who are bringing electric vehicles to the mass market. My world-view is changing. It seems we may already be in the eighth or ninth inning of the oil era.
This is not to suggest that society will immediately cease to use oil. The momentum of the hydrocarbon economy is too great for that. But it appears that oil demand forecasts will need to continue to be revised down.
Conceivably peak oil demand may be just another five million away at 100 million bpd within the next five years and then begin to decline. If that’s the case has industry already identified sufficient reserves to see us through to the end of the era?
Why fund high-risk exploratory wells when Canada and Venezuela have almost 500 billion barrels of reserves between them? Add in U.S. and select international shale plays to existing conventional fields and one has to wonder if there is a need to find more.
We had a tremendous boom in the oilpatch from 2004-2014 where prices skyrocketed and investment was increasing at double-digit rates year after year.
There is likely another boom of sorts in front of us but evidence suggests it will be short-lived
The price of oil peaked in 2008 at US$145 per barrel and subsequently dropped to US$36 during the global financial crisis. The recovery brought prices back to almost US$120 in 2011, a noticeably lower high, before falling to US$28 earlier this year, a lower low.
We are now in a recovery of sorts but few, if any experts, believe we will see prices approach US$100 per barrel. In fact many surmise that we will roll over from peaks over US$75 and fall back in to the US$20s or lower. Again lower highs and lower lows.
There is likely another boom of sorts in front of us but evidence suggests it will be short-lived compared to the last one.
We are in a new era. Exploration and production companies that had previously eschewed hedging would be wise to explore risk mitigation strategies and I am certain their lenders and shareholders would be appreciative. Oilfield suppliers may wish to focus on technologies that lower operating costs and be cautious on investing in exploratory technology that may not be needed.
And workers, many of us have to take an inventory of our skills and interests and ask ‘what else can I be doing?’ For those of us who had been privileged to be part of the oil and gas industry, our world is changing and most of us are only now waking up to the reality.
David A. McLellan is an energy economist and strategic advisor to VOLT EP of Cypress, Texas. His previous experience includes oilfield services and upstream sector in both Canada and the USA where he worked on energy policy, intellectual property, investor relations and project economics.