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Electric mobility as a threat to the oil industry – open source lab
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  • Photo by Francesco Boncompagni on Unsplash
  • Photo by Andreas Gücklhorn on Unsplash

The oil price must fall permanently below 20 US dollars per barrel in order to be able to compete with renewable energies. Last year, the large French bank BNP Paribas published a very interesting study, which I would like to present to you, dear readers. As we all know the current developments of the oil price…

Wells, Wires and Wheels

Today I would like to report on a very interesting study from last August, which came to my mind very presently because of the news last week. It is a study by Mark Lewis, Global Head of Sustainability Research at BNP Paribas Asset Management, entitled “Wells, Wires and Wheels – EROCI and the tough Road ahead for Oil”.

As part of the study, which is aimed at professional investors, Mark Lewis compares investment opportunities in oil and renewables in terms of the energy they produce and use, at a given capital cost. The abbreviation EROCI therefore stands for “Energy Return on Capital Invested”. Lewis refers to current investment options and changes in the energy sector.

 Now… to begin with, one might ask: For a given capital outlay in oil and renewables, how much useful energy do we get in the wheels?”(EROCI).

“Oil needs long-term break-evens of $10-$20/bbl to remain competitive in mobility”

As “Capital Invested”, the study is based on 100 billion US dollars. The result is clear: for the same capital investment, electric cars powered by renewable energy sources put six to seven times more energy on the road than gasoline engines. Diesel engines are slightly better, but here too the factor is still three to four.

The core statement made by Mark Lewis in his study is therefore: “Oil needs long-term break-evens of $10-$20/bbl to remain competitive in mobility”. The economics of renewable energies clearly beat those of oil, the fuel is simply too expensive. Up to 36 percent of the global demand for oil is for mobility, and another five percent for power generation. This is the first time in its history that the oil industry is facing a serious threat to its business model.

Mark Lewis describes the threat posed by the tandem of renewable energies and electromobility with four attributes: “It has a short-run marginal cost of zero, it is much cleaner environmentally, it is much easier to transport, and could readily replace 40 percent of the global oil demand if it had the necessary scale.” The oil industry still enjoys a considerable advantage of scale over wind and solar energy. However, electric cars are more expensive than conventional internal combustion engines, but prices could have converged by 2024.

The current oil price

When the study was published, the oil price was around USD 60 per barrel, clearly above the break-even point of USD 20 per barrel set by Mark Lewis. At that time, however, nobody could have guessed what recession the world economy would experience due to the coronavirus and what development the crude oil market would take as a result.

On Monday last week, the price of a barrel of US WTI crude collapsed heavily to a minus of about 37 USD per barrel. This largest daily loss of all times is not only due to the connection between supply and demand, but also to the worldwide dwindling storage capacities. The Monday in question was the last day for an order that will be delivered in May. The June contract has been active since Tuesday, which led to an immediate price recovery. WTI ended the week at USD 17.18 per barrel, with the higher quality European reference-grade Brent subscribing USD 21.80.

Does it have a long-term influence?

In order to make a long-term forecast, we must look at the causes of current developments. The oil price has not collapsed because the competition from renewable energies has become too strong. The basic situation on the oil market is characterized by a far too high supply with a sharp drop in demand. The Corona crisis is causing a global economic slump, resulting in declining demand for oil, petrol, and diesel.

 For some nations, oil exports are the basis of the national economy, so it is difficult to agree to global production cuts to balance supply and demand. Such agreements have now been made and the price is recovering the longer the supply is in the future, experts call this super-contango.dr

 In the long term, Mark Lewis will be right, perhaps the current recession will delay the price alignment between electric cars and conventional combustion engines, but his predictions will be inevitable. If only because the OPEC nations cannot afford such low oil prices as we are experiencing at the moment, it will not be possible in the long term.