Resilience is needed in the oil and gas sector’s current ‘lower for longer’ marketplace as short-term volatility in prices and ‘out of left field’ impacts reshape the world energy market.
But that’s not all. It’s also vital to consider ‘disruptive’ demand factors in the sector; and they may not be what you expect.
Much has been made of the recent price volatility following an 18 month swing in oil prices from over USD100 a barrel to a low of below USD30 in early 2016. But the reality is that for a 35+ year period (1935 – 1972), prices were relatively stable and mostly stayed within one standard deviation of the mean.
So the current price trends are not dissimilar to what we have experienced over the last couple of decades. It just feels different as we have succumbed to the notion that USD100 had become the new “USD20 / barrel” benchmark.
It’s hard to pick the trend and say where prices will go and for how long they will remain up or down. Indeed a KPMG Survey in May 2014 showed more than 90 percent of US CEO’s had predicted the price would stay above USD100 on average through the whole of 2014.
Sadly we were wrong. Industry optimism around a price rebound occurring in 2015 has diminished and now there is a more bearish view in the marketplace about oil prices. At the petrol pump, those of us driving conventional engine cars are certainly downstream end users of oil and so we are affected by volatility too. But our changing transportation habits are just one of the disruptive factors global energy markets will be affected by in the future.
The disruption comes in to play on the demand side where there are some interesting trends that could have long-term implications for fuel demand.
As a population, we are getting older and with more people over 80 there are less people driving their own motor vehicles. The US, Western Europe and Japan make up 54 percent of the auto market today, by 2025 they are projected to only make up 45 percent.
An aging population accelerates the trend of urbanisation with more people moving in to cities and becoming more reliant on public transport.
Another trend is the rise of the millennials, those born between 1981 and 2000. Millennials are projected to represent 50 percent of the workforce by 2020. More are living longer with their parents delaying the formation of their own households and they prefer spending money on ‘experiences’ over ‘things’; they want access not ownership. In fact, a recent study found that only 15 percent of them thought buying a car was extremely important. For them, the mobile phone is the definition of freedom.
Another demand trend that could impact fuel consumption is electric vehicle sales. Many of us have heard about and want an electric car, and whilst the sales have grown strongly the overall ownership of EVs is currently extremely low. But with improvement in batteries and charging infrastructure there is potential for this market to grow.
Then there is the long-term impact of the ride-sharing phenomenon. Today, an average car is only used 5 percent of the time. With the increase of what’s known as “mobility on demand,” it is predicted that while car ownership may decline there will be a rise in fleet owned vehicles with each car better utilised.
In almost every scenario, vehicles travel distance increases through better utilisation of vehicles through driverless cars, ride sharing and mobility on demand.
Scenarios range from two to five trillion miles driven in the US alone by 2050. So, provided that EV usage doesn’t dramatically surge in the next few decades to offset the internal combustion engine, gasoline seems like a safe bet through 2050.
But beware, in disruptive times there are three key messages that need consideration for companies to remain resilient in a time of oil price volatility and the disruptive trends in vehicle usage?
- Companies will need to fundamentally change their operating models in order to compete
- The adoption of electric vehicles and new ride sharing models can potentially alter the future demand projections
- The demographic and social impacts on future demand remain to be seen…