2017 comes to an end with an increase in the oil price, further stability from OPEC the Energy industry will be breathing a sigh of relieve. The moment of calm cannot mask the fact that the industry is facing trends which are culminating and creating considerable disruptions to the business models of this 100-year-old mature industry.
To overcome these disruptions the oil industry and countries reliant on oil as the main driver for their economies will need to overcome both the external and the internal challenges.
The range of internal challenges arises from changes in the structure of the oil market; US unconventional shale oil, the inability to predict supply up to 2022 and the lack of capital investment in R&D at the refinery and downstream level.
The apparent impact of electrification of the car industry will over the next 25 years end oil’s monopoly over transportation. Today electrical vehicles account for 1 % of the global automotive fleet this will rise to 33% in 2040. The automotive market is witnessing the convergence of technological, political and economic forces that will impact the way cars are bought, used and powered.
While the biggest challenge will be upgrading national electrical grids to power these vehicles the change is underway. Countries like Singapore and China have signalled the end of the combustion engine, while the EU is looking at higher regulation.
The last four years have been painful for the industry and now is the time for a standard analytical approach to stop the boom and bust cycle of the global oil industry every decade. These sequences send shock waves through the global economy and impact vital investment in R&D for new technology for clean energy, disposing of legacy assets and modernising the industry.
In the short run, several factors — the 2014-2016 downturn in oil prices, pressures to reduce costs, and the demonstrated “reactivity” from US shale oil to meet annual demand growth — are reshaping oil supply/demand balances.
The resulting price signals have led to the lowest levels of Final Investment Decisions (FIDs) on new projects in over a decade. Longer-term prospects of peak oil demand, driven by pressures to reduce CO2 emissions through efficiency improvements and the shift to electric vehicles, pose challenges for oil companies and exporting nations.
In the long-run the although global oil demand will flatten and the energy mix will change. Oil will remain big business, but there will be an increased focus on petrochemicals. The midstream and the distribution sides of the market will change in response to the rise of car sharing phenomena led by the Lyfts and the Ubers.
As the year closes, the industry will be happy to have navigated the last 12 months. However, there are more challenges ahead of both a structural and operational nature which need to be overcome. The market is still unpredictable, and it is hard to see how a return to a price above $80 is tangible in the short-run.