Suppose that the Chinese government decides today to install solar panels throughout the Gobi desert and to allow only electric transport in the cities from now on. In addition to addressing the smog problem, they would also be dealing with the demand for energy. This decision would make a difference of two million barrels of oil production a day and would therefore have an even greater impact on the global economy.
It all sounds a bit like the man in the street thinking out loud, but oil companies might do well to consider the consequences of a shift in economic power toward Asia, the only continent where car use is increasing.
These are challenging times in any event for the oil and gas industry. Falling oil prices and excess supply are resulting in plummeting profits for major companies, which are now opting mainly for short-term solutions. They have announced mass redundancies and have already postponed projects worth more than USD 300 billion. Those facts appear in the PwC publication ‘New energy futures’ about the future of the energy sector.
That publication makes clear that the energy transition is gathering pace and that companies must not focus exclusively on low oil prices. Megatrends are transforming the oil and gas industry at unprecedented speed. This makes finding the way ahead increasingly difficult. Everyone in the industry knows what will happen on the energy market in the next five years. And everyone knows that thanks to new technologies, alternative energy sources such as solar and wind power will be used far more in fifteen years’ time. The period at issue is the ten years in between, which is precisely the period for which major companies must now draw up their investment plans.
But just try doing that given the current turbulence on the markets and the price fluctuations. And let’s not forget a government that is increasingly interfering with the energy supply and consumers who want to make their own choices. At PwC, we have mapped out that uncertainty along two paths, which has yielded the four scenarios presented schematically below.
If I have to make a prediction, I would say that energy users will increasingly determine demand and that demand will mainly be green. Under pressure from society, both individuals and retail companies will wish to reduce their environmental impact. They will increasingly abandon the use of fossil fuels, so the demand for such will therefore be reduced.
The result will be that more expensive oil resources will no longer be needed. Countries that can continue to supply cheap oil – Iran, Iraq and Saudi Arabia – will be the winners and will keep going in the short term. Countries like Canada and Brazil, where oil extraction is far more expensive, will face a tougher future.
That transition will be very gradual rather than sudden. According to current expectations, renewable energy sources and nuclear energy will expand fastest up to 2040 (representing 6.7 and 2.3 percent of the compound annual growth, respectively), but the demand for fossil fuels will still be 75% of the total (as opposed to 80% now). Up until then, gas will increasingly be a transitional fuel.
Depending on the role played by governments, this transformation may be more rapid. If the agreements made by government leaders in December at the climate summit in Paris are actually implemented, the growth of renewable energy sources will accelerate. In that case, I expect more rapid advances in disruptive technologies, particularly as regards traffic and transport.
And if a government decides to allow only electric vehicles in major cities in the future, the demand for oil may fall very quickly.
Jan Willem Velthuijsen is managing partner of PwC Strategy & Economics in Amsterdam since 1999 – specialised in macroeconomics, finance, strategy & risk, market and demand analysis, competition & regulation economics, econometrics, modelling and complex valuations. In 2013 he became Chief Economist of PwC Europe. In that function he is responsible for PwC’s thought leadership and research. Beside his work at PwC je is professor of Economics at the Rijksuniversiteit Groningen and director of the international Executive Masters Finance & Control for the Energy Industry, running modules in Groningen, Doha, Houston, Moscow and Rio de Janeiro.