Two diametrically opposed views dominate the current debate about where the oil price is heading. On the one hand, there is the view that the price of oil will be “lower for longer”, or even “lower forever”, as the electrification of transport will eat away at oil demand more and more while, at the same time, technological innovation (shale in particular) will greatly increase economically recoverable resources. On the other hand, however, there is the view that the price of oil is set to explode, primarily due to underinvestment in the upkeep of brownfields, development of greenfields, and exploration for new resources.
Our view is that most likely, both will happen. How it is possible for the price of oil to go both up and not up, and what would that mean for the oil industry? We will explain.
Why the price of oil actually isn’t that low
Contrary to general perception, the current price of oil is not very low. In fact, at a little over $50 per barrel, oil is trading slightly higher than its historic, inflation adjusted average of $47 per barrel, which in and off itself calls into the question the “spike” view: If the period 2001 – 2014 was a clear historic abnormality, why should one expect the price to return those levels?
Furthermore, we agree with the people in the lower for longer / forever camp that electric vehicles (EVs) will eventually offer better overall value to consumers than internal combustion engine vehicles (ICEVs) can, and that this will have a big impact on oil demand. (In fact, we have been highlighting this threat to the energy industry in articles since 2015, for example here, here, electrification of transport will eat away at oil demand and here.) However, two important things need to be considered in this regard.
The first is that at present EVs do not yet outperform ICEVs comprehensively. While they offer a smoother ride, more passenger and storage space per square foot, and less noise and environmental pollution at a lower “cost of operation” (fuel and maintenance), in terms of “cost of ownership” EVs can yet compete with ICEVs. Excluding subsidies the difference is said to be about $16,000 in the US, $18,500 in Germany and $13,200 in France, despite Tesla and GM reportedly selling their main EV models at a loss.
