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Oil will be left in the ground, as gas gains energy market share

Oil markets
By Paul Hodges on 25-Jun-2014

BP energy Jun14aThe annual BP Energy Statistics publication is a treasure trove of information for anyone interested in global energy markets.  One key area is the impact of today’s higher oil prices on consumption growth, as highlighted in the chart:

  • It starts from 1965, and shows consumption growth for oil (red line), gas (blue) and total energy (green)
  • Oil’s growth matched that of gas until the second oil crisis in 1979-85, after a wobble during the 1973-4 crisis
  • Gas continued to grow at a steady rate, but oil never regained the growth lost due to these price rises
  • Since 2005, oil has become steadily less competitive, due to its historically high price

This highlights the very long timelines which operate in the energy markets.  Once capacity has been installed, it tends to continue to operate.  Thus conversion to other forms of energy takes a long time to develop.  As former Shell CEO Peter Voser noted in April 2010, it takes 30 years for a new energy source to gain 1% of global markets:

Thus biofuels is only now reaching its 1% market share, after starting in 1980.  Wind, which began in Denmark and the USA in the mid-1980′s, is also on track to reach 1% by 2015.  Similarly nuclear power took from 1950-80 to become established”.

Producers can therefore be tempted to maximise pricing in the short-term, as there seem to be few immediate consequences.  However, this overlooks the fact that consumers do have choices.  And when they are coming to install new supply, or replacing old supply, they will look back over history when making their decisions.

The US school bus fleet is one market where such change is now taking place.  The Environmental Protection Agency is encouraging school districts to upgrade their fleet, highlighting the health risks for students from older, more polluting diesel vehicles. A Carnegie Mellon University study highlights that:

Taxis, school buses, transit buses and heavy-duty trucks all likely would save money by converting before the end of a vehicle’s lifespan, even when considering the high capital costs of conversion.”

Similarly, ExxonMobil’s Energy Outlook sees gas gaining market share in the US long-haul truck fleet:

Long-haul trucks may favor liquefied natural gas because of its ability to travel up to 750 miles between fill-ups while pulling heavy loads. Fuel cost savings could recoup the higher investment costs ($70k – $90k versus diesel) within about three years.

The past decade’s history of high oil prices is therefore likely to accelerate demand for gas versus oil:

  • Oil demand has only grown around 50% from 61m barrels/day in 1965 to 91mb/day last year
  • Natural gas demand has more than doubled from 129bn cubic feet/day to 320bn cf/day in 2013

Natural gas’s share of the total energy market is thus likely to rise from today.  It already had nearly a quarter of the market in 2013, whilst oil’s share has fallen to around 1/3rd.

Thus BP note,oil is expected to be the slowest growing of the major fuels to 2035“, with growth averaging only 0.8%/year.  Even coal use is expected to grow by 1.1%/year.  Gas, on the other hand “is expected to be the fastest growing of the fossil fuels, with demand rising at 1.9%/year”. 

And these estimates for oil may well turn out to be on the high side, as they do not factor in the impact of aging populations driving less.

All in all, as one major company CEO said to the blog some time ago, “the world thought it would run out of coal, but has ended up leaving most of it in the ground.  The same will probably happen to oil, as gas and renewables capture an increasing proportion of the world’s energy markets”.