Oil to the 100 million barrels per day
There is increasing pressure on oil companies due to the climate crisis and the desired energy transition. A judge in The Hague ruled that Shell must reduce emissions in absolute terms by 45 percent by 2030. ExxonMobil shareholders voted to appoint board members nominated by ESG activist Engine No. 1. A Net-Zero Banking Alliance has also been formed, calling for the carbon emissions of its loan portfolio to be reduced to zero. Now even the International Energy Agency (IEA) is calling on oil companies to stop investing in new oil and gas fields. The energy transition is talked about everywhere, but it is not yet visible in the daily statistics. In April, the world’s oil consumption was only 1 percent lower than in April 2019. Consumption in China was 5 percent higher than in April 2019, which means that demand in the rest of the world has fallen more than 1 percent. This means that we will soon pass the magic mark of 100 million barrels per day again. The driving season in the United States has begun and many Americans have a strong post-Corona need to get out and about. Europeans, too, are itching to go on holiday. Everyone seems to assume that business travellers will avoid air travel for the time being, but history teaches otherwise. Eighteen months after SARS, planes to Hong Kong were fuller than ever. More and more people are saying that doing business is not the same as video calling. Moreover, as in many other parts of the economy, there is a lot of pent-up demand.
It seems a matter of time before the demand for oil exceeds the supply. The big oil companies produce about half of the oil worldwide. The rest is supplied by governments. If the oil companies actually stop investing, the supply will shrink. Capital discipline is already quite high; in that respect, the extremely low oil prices of a year ago are still fresh in the memory. The mantra at the big oil companies is shifting from more production to a focus on returns and generating higher free cash flow. This can be achieved by not investing. It is also much harder for oil companies to finance themselves with loan capital. Central bankers even warn that commercial banks must be extremely cautious in financing fossil fuels. On top of this, there is strongly increased social pressure. Oil companies are finding that the cash flows they generate are valued much lower by investors than those generated by alternative energy. The temptation to give in to this is growing. The consequence, however, is that the oil price can continue to rise. This is good news for the energy transition; a higher oil price is an excellent means to accelerate the energy transition. Of course, there is still some spare capacity available in terms of oil. A deal with Iran may lead to fewer restrictions and more Iranian oil, but it is uncertain whether this will be enough to meet the extra demand from the monetary stimulus and the large infrastructure investments.
Oil and gas are also important input factors for other commodities. At present, food prices are through the roof, which means that farmers are getting more money to buy fertiliser. Most fertilisers are made from petroleum. Agriculture is energy-intensive anyway. Mining also consumes energy. An aluminium smelter consumes about 15 kilowatt hours for one kilo of aluminium and the price for one kilo of aluminium was 1.94 euros in April. This amounts to 13 cents per kilowatt hour, not to mention the energy required to excavate and transport bauxite. Of course, an aluminium smelter pays much less than the average private person for electricity, but that is also going to change. The times when large energy-consuming companies were subsidised are over. Higher CO2 taxes and internalising the high environmental costs will inevitably lead to higher prices there too.
Those 100 million barrels a day are going to come in the third quarter and the likelihood of the oil price going to 100 dollars a barrel is also increasing. This will happen faster if the US dollar continues to fall. The EIA assumed in mid-May an average oil price of around $62 a barrel in 2021 and an average oil price of $60 a barrel in 2020 for this year, but those forecasts are strikingly close to the oil price at the time. The chance that the demand for oil will be disappointing is small, but the chance of insufficient supply is high. Then the hundred quickly comes into the picture.