Revenge of the Oil Economy
By Pratik Patel | December 1, 2022
The past few years have shocked the oil markets. According to a report from the International Energy Association, oil demand for 2023 is expected to reach 101.3mb/d, which is a 10mb/d increase from 2021. Why is this the case? If you remember, this was the year COVID restrictions slowly began to ease. Oil and gas companies around the world faced terrible losses during the COVID-19 pandemic. To put it into perspective, ExxonMobil made $23 billion in profit during 2021, but this was preceded by a $22.4 billion loss in 2019. You may have also recalled that these global oil companies cut production dramatically during COVID to meet demand. Now that COVID restrictions in the United States have fallen since then, people are traveling, driving, working, and partying more than ever. Not only that, we have seen the war in Ukraine cause economic ripples throughout the world. The United States has banned all Russian imports including oil, and Europe is planning to do the same come December 5th. We have seen refinery shortages around the world as well. If you were an oil company, would you do everything in your power to increase supply now? While the Big Oil CEOs believe they have a fiduciary duty to their shareholders, the political figures in our world do not see it that way.
Parts of China are still facing a zero-COVID policy, and you may also believe that we are coming close to a global recession. It is important to note that COVID will not last forever, and recessions do not actually kill demand. Some may like to say it can lead to "demand destruction," but recessions are proven to bring a moderation in growth instead of demand destruction. When we officially come out of a recession and zero-COVID restrictions, oil consumption will continue to rise for years.
Oil and commodities are up 20% YTD, and Big Oil companies are also seeing supply chain issues. Europe is going through a tremendous energy crisis, and is almost guaranteed a recession based on the numbers alone. How did it happen? Europe imports a large portion of their natural gas from Russia. Germany was importing 55% of their natural gas from Russia before the war in Ukraine. Vladimir Putin is planning to cause pain in Europe for their attempt to "price cap" his energy exports. Over the past few months, he has terminated the Nord Stream Pipelines for "maintenance" in order to make Europe suffer a harsh winter. How unfortunate. Fortunately, Europe has taken charge and filled their inventories, so that they can survive the winter. The challenge remains, however, because Europe has never survived a winter without inventories, so they must prepare as early as possible for the upcoming winter.
A few months ago President Biden traveled to Saudi Arabia to increase oil production. OPEC responded with a modest 100,000 b/d increase. A month later however, OPEC released their 2,000,000 b/d production cut. Why did they do this? They felt like the price of oil did not reflect the current fundamentals going around the world. This is a big deal, as OPEC may be hinting at possible manipulation with the oil prices, which is something that they will deal with great force, as I have just described with a 2 million b/d cut. The Biden administration did not take kindly to the cut, and I'm sure that they will enforce their consequences. However, OPEC explains that they are running out of spare capacity, and the world should prepare for an energy crisis. Their actions are purely based on fundamentals. OPEC has also called out the United States on increasing production for political benefit, stating that President Biden had reached out, allowing production cuts only after the midterms. You may also recall that President Biden has called out the major oil companies in the United States for their record breaking profits this year. While it may seem that increasing production is not something these companies are willing to do, the support from their President might make them see things differently.
Why is the jump to "an all electric future" so difficult? You have many supply chain disruptions around the world currently. Shortages include semiconductors, computer chips, Cobalt, and batteries. Oil demand continues to increase, despite recessionary fears. The war in Ukraine only escalated the fact that we are in a global energy crisis. While it may seem we are close, the reality is we will be using oil and gas for some time before the transition occurs. It will take multiple failures, and it will be a long-term goal.
Edited by Thomas Anglim
Sources: IEA (2022), Oil Market Report - October 2022, IEA, Paris https://www.iea.org/reports/oil-market-report-october-2022