Ed Morse, Citigroup’s top energy economist, has taken a fresh swipe at companies and countries that rely on the global petroleum edifice. With a typically vivid title—“The End is Nigh”—Morse argues in a new report that permanent changes in the ways we produce and consume energy are hollowing out oil demand, with head-spinning ramifications.
The nub of the March 26 report: If the market transformation resembles that which occurred after the 1979 Iranian Revolution (which Morse regards as a possibility), global oil demand would plummet by 18%, to around 74 million barrels a day from the current 90 million. Such a plunge would trigger political and economic havoc in petroleum export-reliant Russia and OPEC. It would shake out the oil industry. And it would happen regardless of what steps the major players took.
Here’s how it could play out. Morse forecasts that weakening demand will make Brent oil prices drop to $80-$90 a barrel by 2020, from today’s $109 a barrel. Many of the world’s oil export-reliant countries need the higher prices to balance their state budget—Russia requires $117-a-barrel oil, for instance, and Oman requires $109 a barrel to break even. So petroleum producers would shut in fields in an attempt to arrest a free-fall in prices. But even if they propped up prices, they’d be selling fewer barrels. So their absolute income would be likely lower.
The result of this for the countries would be intensified Arab Spring-style political volatility, as governments cut back on social spending and other sweeteners to the population. As for industry, some smaller oil companies currently living off the fat of the land would vanish, and Big Oil at best would seriously shrink. Countries like gas-rich Qatar would be winners; Saudi Arabia, reliant on oil, would be in trouble.
What will cause this falling demand for oil? The trends Morse and his team are tracking couple a surge in global energy efficiency with a swing away from oil in transportation and electricity production. The biggest instrument of change is plentiful and (in the US) cheap natural gas, to which whole swathes of the global economy could turn.
In just one sector—road transportation—Morse sees a big hit to the 13 million barrels a day in diesel burned by heavy trucks around the world. He forecasts that by 2020, for instance, 30% of US cargo trucks and 50% of trash trucks will be fueled by compressed natural gas, not oil. In another—the use of oil to produce electricity in the Middle East—Morse forecasts that natural gas could displace 2 million barrels a day of demand by 2020.
Even in a “more restrained” scenario, says Morse, global oil demand could fall by 9.6 million barrels a day. That would cause similar mayhem to energy-producing countries and companies, only on a slightly less devastating scale.