Cheap electric cars and large scale fracking of tight oil are two of the most interesting developments in recent history for oil markets.
First some context from the Energy Information Agency (EIA). The EIA projects that U.S. liquid fuels production is set to grow substantially in the coming decades. The EIA AEO2016 includes several possible cases, but all have the shares of tight oil and natural gas continuing to grow significantly for decades.
The EIA also provides a large amount of data useful in determining where oil prices might eventually go with five cases serving as possible paths to 2040 prices from $50 a barrel to over $200 a barrel.
In the case of high prices, the EIA expects increased energy efficiency, conservation, and fuel switching will reduce projected consumption. For the low price case, quantity demanded is relatively high on the lower prices.
In the resource and technology cases, the estimated recovery and rates of technological improvement in the United States are 50% higher or 50% lower than in the Reference case.
What the EIA does not currently have is a case considering widespread adoption of electric cars by 2025 as is expected by Bloomberg New Energy Finance (BNEF).
Note that the U.S. currently has about 250 million cars on the road, and BNEF is forecasting cumulative sales of electric cars to exceed that amount as soon as 2035. Transportation sector demand accounts for over 60% of global consumption of oil. If the BNEF forecast is correct, then demand for oil is set for total collapse within two decades at most and will see steep declines every year from 2025 on.
I say total collapse because the loss of transportation sector demand due to electric cars would not just force some companies out of business. The substitution would have oil permanently lose its role as the main motive fuel source. Such a loss would devastate oil companies similar to how cheap, plentiful natural gas is devastating coal (since 2011, the value of publicly traded coal companies is down over 90% resulting in the bankruptcy of many, including coal giant Peabody Energy). A large majority of oil companies cannot survive in a world where U.S. cars run on electricity instead of gasoline and over half the demand for their product vanishes.
Another issue is of low oil prices brought on by the fracking revolution. Tight oil reserves unlocked by fracking represent a significant buffer to prices rising back above $50 a barrel. The break-even point for shale drillers is already somewhere around the low-$50 range with a turnaround time for new projects measured in months rather than the years that conventional wells take to get operational. So long the shale drillers exist, they will continue to put downward pressure on prices in a fraction of the time conventional drillers used to.
Strangely enough, electric cars may make the issue of the “new normal” moot.
Look below at the EIA graph that was shown at the beginning of this post.
The graph clearly shows tight oil making up a majority of the increase in U.S. production. As marginal producers with break-even points below the oil price points the EIA expects, those producers would do well up through 2040 and beyond in the EIA reference case. Yet, they are also the most vulnerable to the widespread adoption of electric cars, which the EIA does not account for.
For all the talk about the fracking revolution unlocking shale oil, it is still a relatively expensive source of crude. Though fast and requiring less capital to start up compared to conventional wells, shale drilling operations cannot compete with rigs that can make a profit when oil prices fall below $40 a barrel. So when those millions of cars start running on electricity and demand for crude starts to dry up, shale drillers will disappear first, just as they have for the last few months of the glut.