Oil’s Black Swans on the Horizon
Saudi Arabia May Be Targeting Oil Producers, Not Just Rival Producers
By Liam Denning
Feb. 16, 2015 12:33 p.m. ET
Next week sees the one-year anniversary of Uber’s ride-sharing service arriving in Riyadh.
Disruption is creeping up on Saudi Arabia and the global oil market on which it relies. So far, this has centered on supply: North America’s shale boom has upended expectations of ever-increasing dependence on Middle Eastern crude.
But Saudi Arabia’s oil minister, Ali al-Naimi, is also worried about the other side of the equation. At a conference last month, he asked: “Is there a black swan that we don’t know about which will come by 2050 and we will have no demand?”
Against the backdrop of oil’s recent plunge, Mr. al-Naimi was thinking of potentially disruptive trends including new technology and efforts to cut carbon emissions.
This might seem overdone. Last week, the International Energy Agency released medium-term forecasts showing global oil consumption rising by 6.6 million barrels a day by 2020.
Beneath the headline, though, the story is changing. Compared with 2014’s forecast, the agency cut one million barrels a day on average from estimates for the next five years. That may not sound like much, but consider that excess supply weighing heavily on prices now is estimated to be only around 1.5 million barrels a day.
Perhaps more importantly, the mix of demand is changing, too.
Three years ago, the IEA projected global demand would grow by 3.86 million barrels a day between 2015 and 2017. Of that, 79% came from so-called BRIC countries—Brazil, Russia, India and China—and the Middle East. The latest forecast cut that growth estimate and now only 63% is set to come from those regions.
The IEA sees the U.S. playing a bigger role. From 2008 through 2014, its annual medium-term forecasts always projected a five-year decline in U.S. oil consumption. Now, U.S. demand is seen rising by 380,000 barrels a day by 2019.
Disruption is creeping up on Saudi Arabia and the global oil market on which it relies. So far, this has centered on supply: North America’s shale boom has upended expectations of ever-increasing dependence on Middle Eastern crude.
But Saudi Arabia’s oil minister, Ali al-Naimi, is also worried about the other side of the equation. At a conference last month, he asked: “Is there a black swan that we don’t know about which will come by 2050 and we will have no demand?”
Against the backdrop of oil’s recent plunge, Mr. al-Naimi was thinking of potentially disruptive trends including new technology and efforts to cut carbon emissions.
This might seem overdone. Last week, the International Energy Agency released medium-term forecasts showing global oil consumption rising by 6.6 million barrels a day by 2020.
Beneath the headline, though, the story is changing. Compared with 2014’s forecast, the agency cut one million barrels a day on average from estimates for the next five years. That may not sound like much, but consider that excess supply weighing heavily on prices now is estimated to be only around 1.5 million barrels a day.
Perhaps more importantly, the mix of demand is changing, too.
Three years ago, the IEA projected global demand would grow by 3.86 million barrels a day between 2015 and 2017. Of that, 79% came from so-called BRIC countries—Brazil, Russia, India and China—and the Middle East. The latest forecast cut that growth estimate and now only 63% is set to come from those regions.
The IEA sees the U.S. playing a bigger role. From 2008 through 2014, its annual medium-term forecasts always projected a five-year decline in U.S. oil consumption. Now, U.S. demand is seen rising by 380,000 barrels a day by 2019.
This makes sense given a recovering U.S. economy and Americans’ predilection for bigger vehicles when gas is cheaper. Meanwhile, a cooling Chinese economy and the impact of lower oil prices on the economies of oil-producing countries eats into growth from emerging markets.
The shift should worry oil producers. The U.S. response to lower gas prices won’t match that of the late 1980s and 1990s. Then, the prime working- and driving-age population was still growing strongly and hybrid and electric vehicles were largely unavailable.
The IEA still expects U.S. demand to peak in 2019. Oil intensity in terms of barrels per dollar of gross domestic product is set to continue falling in the U.S., and at an even faster pace in China.
At 1.16%, compound annual growth of global demand in the IEA’s latest medium-term forecast is the weakest since 2009.
Big Oil struggles to conceive of a world where demand growth slows to a trickle or stops. Exxon Mobil sees global demand hitting about 117 million barrels a day in 2040. Yet back in 2007 it saw that level being reached in 2030. And even Exxon can be blindsided. Its strategy in this century’s first decade implicitly assumed relatively cheap oil and the U.S. needing ever-rising imports of oil and natural gas. That turned out to be utterly wrong.
Similarly, prevailing assumptions such as improvements in batteries for electric vehicles advancing very slowly or that everyone in emerging markets will own a gas guzzler (rather than, say, using something like Uber) may prove myopic. New technologies, whether mobile phones, flat-screen televisions, or even shale fracking, are nascent until, suddenly, they aren’t and rapidly replace what came before. Multidecade oil projects requiring high break-even prices—such as Canada’s oil sands—look especially vulnerable if demand patterns change.
Oil’s sheer volatility, along with its geopolitical and environmental baggage, provides powerful incentives to use less of it. Saudi Arabia’s current strategy appears aimed at making rival producers sweat. Equally, it may represent a concerted effort to court consumers faced with a small but rapidly growing set of alternative choices.
