As our energy-environment discussion marches on amid the pandemic, one of our biggest concerns must be that temporary fallen demand and extreme lower prices discourage investments in new oil and natural gas supply. Worse, there is also a loudening mantra that COVID-19 somehow signals the “the end” of oil and gas so new investments are not warranted.
The reality, however, is that there is no evidence that the fall in oil and gas demand is nothing more than a short-term blip. Yes, this year is likely to prove an exceptional one, but oil and gas usage has been on a decidedly upward trend for many decades. Any prediction of an absolute reduction in oil and gas demand (not just a decline in growth) even over the mid- and long-term is still speculation and assumption.
While America’s oil and gas companies would surely be well advised to not overinvest or overproduce right now, buoyantly very high domestic oil needs amid our surging gas demand necessitate more domestic investment. In addition, our energy advisor the International Energy Agency has encouraged us on our journey to becoming the world’s largest exporter of these essential fuels.
Policymakers and the oil and gas industry itself must see beyond the clouds today to the time when energy markets collect themselves. Too many of “our experts” regularly forget our most basic energy premise: irreplaceability means that oil demand has no choice but to rebound from the pandemic.
We continue to see just how quickly April predictions of doom and gloom were proven so utterly wrong: “Rebound in oil is just a ‘breather’ and crude prices will likely turn negative again, analysts say.” Not exactly: unsurprisingly so, oil prices were up nearly 90% in May – for their “best month on record.”
Our reality is that oil and gas demand is generally linked to economic growth – something that all nations are constantly pursuing. This “more money means more oil and gas” drumbeat is fundamental. These fuels constitute over 60% of the energy that enables the $20 trillion U.S. economy and the $85 trillion global economy.
Since 2000, global GDP has risen $35 trillion (a 70% increase). Real shocker: annual global oil consumption has been rising by an average of 1.2 million b/d, with annual gas use up 8-9 Bcf/d (see Figures below).
Naturally, our adversaries really hope that we do foolishly extrapolate seeing short-term problems as long-term trends. Our rapidly expanding export complex threatens their goals of oil and gas hegemony. Russia, for instance, deploys oil and gas exports for “about 45% of federal government revenues.” To me, still the most telling of all headlines: “Putin’s Other American Propaganda Effort: Anti-Fracking News” (and from Bloomberg mind you).
To illustrate, our International Energy Agency tells us that $11 trillion is needed in oil investment from 2018 to 2040 to meet rising demand. Making current investments that much more difficult, lower prices today could easily mean much higher prices in the near future. “IEA: Low Oil Prices Will Take Demand Beyond Pre-Crisis Highs.”
Looking forward, population growth and economic expansion are the driving forces behind the constant need for more energy, which obviously includes our core fuels: oil and natural gas.
It really is not a hard thing: “Oil powers almost all transportation – and Covid-19 will only intensify its dominance.” And natural gas is increasingly the go-to fuel because it has lower greenhouse gas emissions and the flexibility to backup intermittent wind and solar power.
The anti-investment groups seek to punish America’s oil and gas industry by forcing producers to somehow move away from producing indispensable commodities essential to our way of life. “With Over 6,000 products and counting, petroleum continues to be a crucial requirement for all consumers.”
This will not only hurt Americans by installing higher costs and the requirement for energy imports (right as the shale oil and gas revolution is making us a net exporter) but also hurt the environment and our geopolitical standing. Those opposing oil and gas investment in America are benefitting suppliers that have less stringent environmental regulations (if any at all) and/or are leveraged by risky governments seeking to control growing global energy markets.
As the market recovers, the continual need to invest becomes obvious again. The bullish signs for oil, for instance, are returning back into view, with some even predicting “a massively under- supplied market — to the tune of 5 million barrels a day — by 2025.” Talk about a potential price shock: that is an oil shortage of about 5% of the 2019 global market – more than Texas’ Permian basin, the largest oil field in the world, produces in total.
Indeed, the more oil and gas demand reality is ultimately the biggest problem with the loudening divestment movement here in the West. Absolutely lowering oil and gas consumption ridiculously depends on economic freefall – like COVID-19 wrought.
Importantly, divestment involves no strategy to, you know, actually lower demand. Mostly, it does not even offer a plan to advance other energy options (which in any case are more aptly “supplemental” than “alternative;” e.g. as strictly sources of electricity, wind and solar do nothing to displace oil). These chasms are so immense that they invalidate the seriousness of the divestment movement itself.
The oil and gas sector is way too integral and diverse for managers not to incorporate it into portfolios. Just a few recent highlights from academia:
- A 2018 study from the University of Massachusetts-Amherst (Pollin & Hansen) concluded that fossil fuel divestment campaigns are “are not capable of serving as a major force to directly drive down global CO2 emissions.”
- A 2017 study by Prof. Daniel Fischel of the University of Chicago Law School called fossil fuel divestment “a costly and ineffective investment strategy,” as a divested fund would lose up to a combined $4.9 trillion over 50 years.
- A 2015 study by Prof. Bradford Cornell of the California Institute of Technology (Caltech) found that “divestment advocates might actually accomplish exactly the opposite of what they hope to achieve.”