Back in college, one of my most favourite professors, Derek Kearny, spoke of the Peak Oil Theory, which is a hypothetical point at which the global demand for oil will reach its maximum level, after which the demand for our black gold will start to decline. He used to wonder whether the reason behind reaching this peak will be because we will run out of oil first, or because it will be too useless for us that we’ll simply keep it in the ground.
Prof. Derek, I think you might have your answer.
Long Story Short:
- 94% of our income comes from oil.
- 59% of the crude oil countries buy fuels the transport sector.
- Some of our biggest clients are shifting to Electric Vehicles (slowly).
- The demand for oil hasn’t reached the Peak Oil point yet, but it will in the next decade.
- By 2030 we will still be making the same amount of money from our oil sales.
- Our deficit will keep increasing due to the increase in our costs year on year.
- EV has its own problems (Coming up next).
In a nutshell:
Power Generation Mix: The different types of fuel countries use to produce electricity.
OECD: The Organisation of Economic Co-operation and Development. A club made up mostly of the developed countries you use when you want to say how far behind we are, in comparison to the rest of the world.
LNG: Liquified Natural Gas. After they extract the Natural Gas from the ground, they put it through a process with temperatures below -162 DegC to change it from the gaseous form to liquid form so they can transport it.
LNG Terminal: To import LNG you need to build a terminal with certain technical capabilities to be able to receive the liquid safely at the -162 DegC temperature without it turning again to gas.
Internal Combustion Engine: Your petrol hungry cars & trucks.
Electric Vehicles: Electric Cars, trucks, etc.
PHEV: Plug-in Hybrid Electric Vehicles, they have both an electric engine and an internal combustion engine (Ex: Toyota Prius)
Note: Some of the data I am using is as recent as 2018, because it usually takes the international organisations some time to compile and examine the data submitted by every country in the world, so I am sorry for the lag.
Long Story Long:
The point here is to talk about the reasons why the energy market is changing and how it will affect us, then give an idea about what we might be able to do to overcome this.
Every country has a power generation mix, and it is not set in stone. It changes according to the energy policy and the national security of the country. For example, many EU countries started to phase out the use of coal and oil from their power mix (to generate electricity) over the past decade, due to the dire environmental impacts which accompany the use of these sources. To do so they had to switch to two alternative sources to generate electricity, Natural Gas and Renewable Energy.
At the same time, energy policies depend on the concept of security of supply, i.e. diversifying their sources of the raw materials needed to generate electricity, a.k.a don’t put all your eggs in one basket. For example, most of the EU gets their Natural Gas from Russia, Qatar, Norway, and other countries, for many reasons, which we will talk about later.
Something To Know:
There is something to note though, the increase in energy consumption (whether for power generation or for transport) indicates the growth of a country’s economy, because it means that the population is getting bigger and there is more work getting done in that country to produce something, whether to export or to use locally.
Over the past 3 decades renewable energy’s share of the power generation mix, in the OECD countries, has more than doubled (by 224% to be exact according to the International Energy Agency). This is because most of these countries want to curb their emissions and become more sustainable.
This is important to us because the OECD comprises some of our biggest fossil fuel customers. Which is bad news because these guys are going to continue to cut their emissions down the road, by either phasing out internal combustion engines (your normal car) or making it even simpler and cheaper for you to buy and drive an electric vehicle. At the same time, companies like Tesla are pioneering the technologies needed to make electric vehicles go faster and further than our wildest dreams.
To put things into perspective, in 2010, there were a total of 17,000 electrical vehicles on all the roads in the world. In 2019, the number became 7.2 million with nearly half of them in China!!
Battery costs have declined from $650/kWh earlier in the last decade to approximately $100/kWh at the moment.
EV charging station technology advancement has reduced the time needed to recharge a car down to 8 minutes for a 200km range.
Why is this relevant? First of all, the transportation sector uses 59% of the total liquid fuels in the world. So the primary consumer of our oil is the transportation sector.
Second of all, have a look at the chart below of Kuwait’s Oil export destinations between 2016 and 2018:
2016 – Total Crude Oil Exports: 7.9 Billion KD
2017 – Total Crude Oil Exports: 9.6 Billion KD
2018 – Total Crude Oil Exports: 14 Billion KD
South Korea & China accounted for 45% of the total demand in that period, while the rest of our clientele consisted mainly of OECD countries (incl. South Korea).
Our Clients Have Hopes & Dreams
South Korea
By 2030 the country aims to replace a third of the ICE cars on the road with EVs and Hydrogen Cell-powered vehicles.
They have also decided to dedicate $900 million for EV and HC vehicles subsidies, and their infrastructure (Charging stations).
China:
The country has increased the installation of public chargers (fast & slow) to 200,000 charging points. In addition, the country aims to hold 10% of the EV market share by 2030.
China has increased the electrification of its public transport sector by adding nearly a quarter of a million electric busses to service.
However, the slashing of subsidies in China, starting from 2019, has decreased the registration of new electric busses, but how would this affect their EV (private cars) market?
Electric Demand from EVs:
The IEA has two scenarios, one where the world sticks to their sustainability plans, and another one that is more hopeful, as in the demand becomes higher than what the governments are hoping for.
So the more EVs people buy, the more electricity a country has to generate. And according to the IEA the world demand for electricity will increase to 580TWh or nearly a 1000 TWh by the EVs alone in 2030 (Kuwait’s annual electricity demand is 44TWh, to put things into perspective)
How is this going to affect Oil Demand?
Best case scenario EVs will reduce the international oil demand by 2.5 million barrels, and worst case scenario, they will reduce it by 4.2 million barrels.
What is the point?
The current oil demand stands at 96.9 million barrels per day(we produced around 2.5 million of these), and it is expected to increase to a maximum of 105 million barrels by 2030. How is this an issue? Well, before 2019 we believed that the demand for oil will keep increasing by 1 million barrel a year, so instead of it increasing by 10 million barrels, it will be much less, which means that there will be more oil on the market, which means that the oil prices will not increase back to the $100/barrel prices, to the levels before 2014, and will most probably stay around the current levels.
This also means that there will be less demand to compete for between all of the oil producers (OPEC, USA, Russia, etc.), and we all know what happens when too many people try to sell the exact same thing to the same customer…
As a result of all of this we will still be stuck trying to sell the same amount of oil (if we are lucky) every year and making the exact same profits, but down the line, our oil sales will not cover our costs and our deficit will simply keep increasing, and increasing, and increasing.
That was the scary part
OECD are not the only economic players. The economies of Asia and Africa are expected to increase in size as the population grows and their demand for oil will, as a result, compensate for some of the demand lost by the EU and some of the OECD countries and China.
There are also some challenges for EV market.
Natural Gas is the new Oil
If you look back at the first chart you will see that Renewable Energy isn’t the only fuel source that is on the rise, the demand for Natural Gas is increasing too.
How come though? Well, how do you think we are going to recharge all of these Electric Vehicles? Surely not from the renewable energy sources alone.
Remember how I was talking about the need for the conventional power suppliers to be kept on the grid? This is their time to shine, and these bad boys run on Natural Gas, preferably, since they emit less CO2.
This as a result keeps the countries with enough Natural Gas resources relevant to the international energy markets. Unfortunately, in Kuwait we still are not producing enough Natural Gas. In fact, we just signed a deal with Qatar who will supply us with our NG needs for the next 15 years, despite the fact that we have the Durra field right there (PS: we share it with Saudi, and Iran is claiming a piece, so….awkward..).
More on this in the coming post. Stay tuned, or not, honestly I am enjoying this way too much to care.