Hard Times Ahead For Black Oil

According to the IEA, Bloomberg New Energy Finance, sector analysts such as Allen & York, Ernst & Young, KPMG, and regional cleantech specialists like Green Purchasing Asia, the combined global total for new investment and subsidies to alternate and renewable energy, in 2011, was probably north of $300 billion, of which around $65 billion was subsidies. We can compare this with IEA figures on state subsidies to fossil fuels, which it estimates as running at about $409 bn a year, in 2011. 
 
These spending amounts can also be compared with global spending on oil and gas exploration and production (E&P), estimated by Citibank to be running at around $275 bn per year as of Q1 2012. The bang for the buck, or barrels oil equivalent for the buck from this fossil - non-fossil spending shows what we might expect. While shale gas is a clear winner, and stranded gas/LNG development may also be highly profitable, both by energy yield and by earnings, oil investment returns trail well behind leading cleantech/green energy opportunities on both these criteria, that is energy and earnings performance.
 
The current trend we have for cleantech-green energy spending, in a sector that is rippling wider all the time shows that since the turn of the year and in Q1 2012, less investment and lower subsidies have cut monthly average spending to the lowest since the recession low-point of 2009. For exposed corporate producers and financial players this is bad news, to be sure, but for buyers and users the good times are here right now, in the shape of prices-per-kilowatt or barrel of oil equivalent output that have fallen to levels forecast for 2015 or later, as recently as midyear 2011.
 
Banruptcy protection now applies to many of the world's biggest producers of solar photovoltaic and wind energy equipment producers - the same way it applies to a string of big name airlines - which keep on flying the same way alternate energy industrialists keep on producing.

Upstream of this, governments in most OECD countries, and in China and India are only lightly taking their feet off the gas pedal, for a host of reasons including simple and straight job creation: a key example is Germany with its 'Energiewende" transformation plan, which has already resulted in "free power Sundays", as in late May. With a combined wind + solar power capacity now above 55 000 MW, and growing, the nation's need for power on a windy and sunny day of low demand, as at weekends in May, is only about 37 000 MW. So the power is free because neighboring countries cannot or will not handle that much cheap supply. But Germany AG keeps on producing the equipment !
  
NOT GOOD FOR OIL
 
At the same time this unexpected, almost unplanned massive surge in renewable energy supply, mostly electric power is taking place in some countries, like Spain, that are in deep recession. The recession driver of falling oil demand is powerful in these countries: across Europe, since 2006, not only the PIIGS but other countries, like the UK, have cut their national oil demand 20% or more. Alternate energy spending in China and India is also in high gear, but unlike the OECD countries this growth (for China the NEA target is 1000% growth of solar power capacity by 2016) can and will shave their growing oil demand. Unlike the OECD countries, oil-fired power production still features in the Emerging economies, and is sometimes a large slab of national capacities: against oil-based power using oil at nearly $100 a barrel, wind, solar and other new and conventional renewables (like hydro) are often so competitive they do not need feed-in tariffs.
 
The next cut in global oil demand's outlook may be just as deep: through energy saving and efficiency raising, and straight fuel substitution using natural gas to power almost all forms and types of transport except airlines. Taking global bulk and container shipping, for example, this sector had more than a decade of 7%-a-year oil demand growth until 2009, racking up global marine oil demand to more than 4.75 million barrels per day, about 15% more than the total oil demand of Japan, the world's third-biggest economy. Gas fuel substitution, and even clean coal fuel substitution for the marine segment is highly possible or even probable. In addition and apart from "slow steaming" to trim the massive oil demand of 100 000 horsepower behemoth container ships, other techniques to slow the sector's oil demand are in progress - even using sail and kite assist, for ships that often now sail at around 18 - 20 mph (15 knots), the same as fast clippers of the 19thC.
 
In the US, still the OECD's most oil swilling economy, higher gasoline prices are today what they were not as recently as 2008: today they trigger car buyers to crowd into car showrooms and buy a new car, always using less fuel, instead of triggering them to give up all intention of buying a car. Forward estimates for the US car fleet's oil need are mostly flat, and may even fall - especially if the fleet dieselizes as has happened en masse in Europe where some leading economies, like Germany and France now have around 75% of their car fleet running on diesel.
 
EVEN WORSE FOR OIL
 
The global energy shift away from oil, on the supply side, not only features runaway growth of alternate and renewable energy, but also the gas boom. To be sure, there are 'historical impediments' to replacing oil with gas, especially for car fleets but as mentioned above this transport energy shift can and likely will start with heavy road transport and possibly marine transport. With the outlook for oil demand growth cut back to fractions of 1%-a-year, unless an unlikely global economy surge happens, the smallest increments of new supply, now including rising perspectives for Brazilian deep offshore, east African output and to be sure US shale oil output can and will place serious limits on oil price growth outside geopolitical crisis windows.
 
The price downside is never too easy to forecast. Market mechanics always swings prices to the extremes each way, but the economic and financial fundamentals of global oil is now itself tilting the big picture towards faster and further decline of Black Oil. Project feasibility in a rising number of key areas like deep offshore oil needs prices north of $75/barrel to see the light of day. Alternate energy, from cheap gas to ever less expensive renewables is operating a pincer on world oil on the supply upstream as well as the demand downstream. If the oil simply isnt produced, folks will find a way of not using it !
 
This process is amplifying and feeding on itself, meaning we can get to $75/b for WTI in relatively short order, on a downswing marked by producers starting to take avoiding action and calling for supply cuts. This however will likely be the floor price unless we get a remake of 2009, which the European debt crisis and Eurozone crisis could hatch - but could also morph into a economic relaunch and recovery process of new government spending, which can only buoy oil prices.