Oil Trouble

Oil Trouble, the August issue of TerraJoule.us, confronts the surprising risk that oil demand growth has entered a long term slowdown, and that oil consumption in the future may look a lot like the coal market—a stagnant dependency that lacks the prospect of further market expansion:

Something has clearly gone very wrong for oil prices in the past two years. Let’s make a list:

Stagnant OECD oil demand growth. Construction of global transit, and rail. The marginal growth of EV, and the coming wave of EV friendly policy. Political concern about air pollution in the Non-OECD, and the next wave of climate policy rollouts in the OECD. The current or future sidelining of the automobile through new urban policy in cities from Barcelona to San Diego. The more habitual use of cars for power (load), rather than distance. The migration of GDP to the powergrid. The growing indications among large oil producers, like Saudi Arabia, that oil in the future may be worth less, than it is today. The return of conventional oil supply in the MidEast. The continued learning curve of tight-oil extraction, which places downward pressure on costs. The stagnation that has hit the Oil Services industry. And finally, that no major country, outside of perhaps India, is currently situated in an oil adoption phase—a distinct level of economic development in which GDP and oil demand rise steadily together, rarely diverging, for many years.

All these factors were set to combine much later in this decade. Instead, they have come together already, and the main expression of their effect is in the growth rate of global oil demand. When we look at the price chart of Brent oil, we notice immediately how quickly prices hit bottom in 2009, during the worst of the great recession. That’s how price should behave in a normal market: a spiky extreme, and then a move back to expected price ranges. But no such rebound has occurred since the summer of 2014. Oil is telling you that, absent a black swan event, its dominance and importance which defined so much of the 20thC is now dissipating. Oil dependency remains. But oil based growth is hard to find.

In the continuously updating TerraJoule.us Global Grid Decarb Monitor, the forecast for power generation growth from solar is maintained this month, after upward revisions to the forecast this summer from greater than expected growth of both resources in various markets: namely the US and China.

Finally, The TerraJoule.us Transition Index, composed of 70% ETFs and 30% individual equities, rose to 104.22 in mid-August, having started the new year at a notional value of 100. The Index plays a favored super-theme of TerraJoule.us: that the global economy is transitioning away from liquid fossil fuels, to the powergrid. And, that the costs of fossil fuel extraction and combustion increasingly place the energy-capture technologies of wind and solar power in a favorable position. Industrial names in the index continue to perform well in 2016, while the basket of solar equities continues to underperform.

–Gregor Macdonald, Editor of TerraJoule.us – A Journal of Energy Transition.