The Technology That’s Poised to Leave Crude in the Dust

David Fessler By David Fessler
Energy and Infrastructure Strategist, The Oxford Club

Market Trends

I used to write about the day $100 oil would come back as supply and demand rebalanced. But $100 oil just isn’t in the cards.

Not now… not ever.

In fact, technology has lowered the breakeven prices for extracting oil by more than 50% since 2013.

As my colleague Emerging Trends Strategist Matthew Carr wrote on Monday, “U.S. producers are lean and mean… and way more technologically advanced than our OPEC counterparts.”

Because of this, expensive crude is now a thing of the past.

It’s providing some excellent buy opportunities in the short term. But the bigger story, in my opinion, is what’s ahead…

Investors, take note: Crude oil demand is going to take a serious blow in the next several years. And it’s going to completely disrupt the oil industry.

We could see hundreds of companies filing for bankruptcy.

Think I’m kidding? Just look at what’s happened in the last three years to the deepwater drilling industry…

The list goes on and on…

Why are these stocks down so much? The answer is simple: The era of expensive oil has come and gone. Cheap oil is here to stay.

But the story gets even worse for oil companies…

Starting in the early part of the next decade, the world will gradually start using less oil, not more. And by 2040, we could see 20 million barrels per day of demand permanently disappear.

I came across this chart that helps tell the story…

It’s a bit unusual, so let’s go through it piece by piece.

At the top, you can see where the oil industry, including OPEC, thinks the demand for oil will go. As you can see, it believes the demand will rise for decades to come, with no letup in sight.

The second prediction is from the International Energy Agency. It believes oil demand will slow slightly but still increase.

The “Efficiency” line shows where demand will go, assuming internal combustion engine (ICE) vehicles become much more efficient (not an unreasonable assumption).

The next line is the most important one, and it represents the seismic shift that electric vehicles (EVs) could cause in the global demand for oil. This may seem drastic, but I’ve said it before: EV adoption will happen much faster than anyone realizes it will.

The “Fuel switching” line represents how adding biofuels into our current fuel mix could affect global oil demand.

These changes are coming like a freight train. Remember Fessler’s Second Law of Technology: “When it comes to technology, change happens much faster than anyone expects it will.”

That’s because when new and “better” technology pops up, purchasing the old technology no longer makes sense. One example is the gasoline car in the early 20th century; it replaced the horse and buggy and the steam car.

In the 1970s, it was color TV. Manufacturers soon stopped making black-and-white versions.

In the past decade, smartphones have replaced traditional cellphones. Nearly every new phone made and sold today is a smartphone.

No one can predict these technological shifts. But think of Fessler’s Third Law of Technology: “New technology is almost always disruptive and transformative.”

When these shifts do happen, they have the power to change the world. And now, EVs are poised to do just that.

A lot of non-EV drivers have some common misconceptions about charging time, vehicle cost, speed and range. Once they realize their skepticism is unfounded, they will gradually become adopters.

I believe the period from 2020 to 2030 will be the “Decade of EVs.” Mass adoption will happen when prices are no different from those of ICE-equipped vehicles.

Last year, battery prices for EVs fell 35%. And they are on a downward trajectory that will make EVs as affordable as ICE vehicles within the next six years.

That will signal the mass-market launch for EVs. By 2040, you’ll be able to buy a long-range EV for less than $22,000 (in today’s dollars).

By that time, 35% of all new cars sold worldwide will have a plug. And even though I’ll be in my late 80s, I might live long enough to see it.

Will there still be great investments in the oil and gas sectors? Of course. As Matt pointed out on Monday, technology is already proving to be the driver for these investments.

Regardless, you’ll always need to know what to invest in. You’ll also always need to know when it’s time to get out.

Good investing,