The news this week from one of the largest oil companies in the world may surprise you.
Well, perhaps the word “news” isn’t quite accurate…
I still remember sitting in a chemical engineering heat transfer class in the mid 1980’s. Our professor was an older gentleman who wanted to impart some “big picture” wisdom on this class of graduating seniors. He told us about M. King Hubbert’s paper on peak oil from almost 30 years earlier.
It turns out he was a bit early.
In fairness, the success of horizontal drilling and hydraulic fracturing (or fracking) was beyond anyone’s wildest imagination at time.
In fact, by the early 2000s, “peak oil” was one of the hottest topics on Wall Street and in Big Media.
This was the idea that we were running out of cheap oil to extract, and the rest would be too expensive to use.
The supply of oil, in other words, was about to hit a peak. As you can imagine, that would have been very bad for oil companies.
We all know what happened instead. In a few short years, the shale boom turned America into the largest producer of oil in the world and created a new renaissance for U.S. oil and gas companies.
That was that for the “peak oil” theory.
Or that’s what Big Media would have you think. With egg on their face, they quickly stopped talking about it.
“Peak oil” isn’t just back. It already happened.
And this time, it’s the Big Oil companies themselves that are saying so.
Here’s what you need to know, and how to profit from it…
This is Peak Oil, But Not as You Remember It
The original “peak oil” theory made some sense, in theory.
After all, there’s only so much oil to be found underground, there’s no more of it being made, and we long ago pumped up the easy stuff.
Meanwhile, after staying low for the 1990s, oil prices started climbing fast in 2002, only taking a brief pause when the Great Financial Crisis hit in 2008.
Put those two facts together, and it’s easy to see how some people may have thought we were running out of oil.
What they forgot was a basic tenet of economics: “the best cure for high prices is high prices.”
As oil prices started rising, small oil companies started taking another look at oil deposits that had previously been ignored as too expensive to develop.
After plenty of experimentation, new technology, and innovative solutions, the U.S. shale boom happened. You can see its meteoric rise in light blue in this chart:
The rest, as they say, is history.
By 2011, the U.S. overtook Russia as the largest natural gas producer in the world. By 2018, we passed Saudi Arabia to become the largest producer of crude oil.
In short, we were nowhere near peak oil supply. Higher oil prices meant that oil supplies that used to be too expensive were now worthwhile. Technological advances, cheap debt and competition did the rest to expand well drilling and drove prices down.
High oil prices cured high oil prices.
But peak oil supply is not the only way to understand the “peak oil” phrase.
And BP plc (BP), one of the largest oil and gas companies in the world, thinks a more plausible version of “peak oil” just happened, without any fanfare…
Oil Demand Was Going to Peak Soon Anyway
Last year, world demand for crude oil came in at about 100.1 million barrels a day, the highest ever.
In a report this past Monday, BP now says we’re probably never going to reach that record again.
To be sure, that’s a pretty shocking statement for a company in the business of selling crude oil. But BP isn’t saying we’ll hit peak oil supply.
There’s plenty of oil left to pump, if we want to.
What BP is saying is that we won’t want to anymore. The oil giant is saying 2019 was peak oil demand.
BP had previously been predicting that for some time in the early 2030s. But because of the Covid-19 pandemic, the company is now saying oil demand will never recover. In fact, it will start steadily falling for the first time in living memory.
In its report, BP presents three possible scenarios for global energy policies and what they will mean for the oil industry.
In the first scenario, deemed most likely by BP, the world’s governments implement their international environmental commitments. According to the oil giant, under this scenario, oil demand will fall by 55% from now until 2050.
BP’s second scenario is one where countries do more to limit climate change. This would see oil demand cratering by 80% by 2050.
Even in the third scenario, in which the world continues with the same policies it has now, oil demand will stay pretty much at 2019 levels until 2035. After that, it will start falling too.
Some reasons are no surprise: the falling costs and rising adoption of solar, wind, and hydro power, as well as the growth in electric cars.
But Covid-19 has sped this up…
Covid-19 Turned into a Nightmare for Big Oil
Millions of people are now working from home instead of commuting, lowering oil demand from the transportation sector. That sector alone represents about two-thirds of global oil demand.
Meanwhile, Covid-19 has put a damper on global economic growth, especially in developing countries where oil demand growth comes from.
In developed countries, demand had mostly already stalled. But now that the EU and others are announcing more ambitious environmental policies amid wildfires, droughts, hurricanes, and other natural disasters, oil demand will only fall faster there.
And tighter rules on recycling and single-use materials means that the plastics industry won’t grow as much as the oil industry had been hoping.
In fact, things may move even faster than this. None of BP’s three scenarios include the possibility that governments try to spur a “green recovery” from the Covid-19 crisis, as the EU, New Zealand, and others are considering.
BP forecasts that OPEC will take the biggest hit from falling oil demand, while U.S. shale takes a growing share of the shrinking market. BP itself is trying to increase its green energy investments tenfold by 2030, and more after that.
In short, the future of Big Oil is dim, and BP has seen the writing on the wall.
That’s why we have been buying puts in oil companies in the Dark Edge Project, including the 100% gains we made as Occidental Petroleum (OXY):
But there won’t just be declining prices in energy companies – there will be winners here, too. As BP’s chief economist, Spencer Dale, points out in the company’s report, “In all three of these scenarios the share of renewable energy grows more quickly than any energy fuel ever seen in history.”
While nuclear and hydropower companies are rarely easy to invest in, other alternative energy companies have been much more investor friendly lately. I particularly like Canada Solar (CSIQ). The deal to supply solar produced power to Amazon through their Australian subsidiary earlier this year is the type of marquee deal that brings name recognition – and a much needed non-governmental revenue stream. They are a buy on any pullback to the $28 – $30 zone.
Great trading, stay safe out there, and God bless you,
— D.R. Barton, Jr.
Source: Straight Up Profits