The threat that will send oil down to $10

By Nick Cunningham of Oilprice.com

Oil prices will need to trade at around $9 to $10 per barrel in the long run if gasoline [petrol] is going to be able to compete with electric vehicles and renewable energy.

That startling conclusion comes from BNP Paribas, which warned in a new report that crude oil is facing an existential and likely mortal threat from renewable energy and EVs.

“We conclude that the economics of oil for gasoline and diesel vehicles versus wind- and solar-powered EVs are now in relentless and irreversible decline, with far-reaching implications for both policymakers and the oil majors,” Mark Lewis, the global head of sustainability research at BNP Paribas Asset Management[,wrote].

There is a crucial problem with crude oil that gets to the core of the challenge – one that all but dooms oil to decline. Mark Lewis argues that oil has an inferior energy return on capital invested (EROCI), which compares the given amount of energy that comes from the same amount of capital spent. In other words, how much useful energy is produced when spending a dollar on different forms of energy?

BNP Paribas estimates that for the same amount of money invested, new wind and solar projects combined with EVs will produce “6x-7x more useful energy at the wheels than will oil at $60/bbl for gasoline powered [light-duty vehicles], and 3x-4x more than oil at $60/bbl for LDVs running on diesel.”

Given that calculation, BNP Paribas says the long-term break-even price for oil needs to be $9-$10 per barrel, if gasoline is going to remain competitive with renewables plus EVs. For diesel, the long-run break-even price is $17-$19.

Oil does have a “massive flow-rate advantage,” the bank said, “but this is time limited.” Oil can provide a huge burst of energy because production is so large and the global supply chain is so big, which makes consumption easy and convenient.

But over a 25-year operating life, wind and solar are much cheaper. “[W]e think the economics of renewables are impossible for oil to compete with when looked at over the cycle,” Lewis wrote in the BNP Paribas report. Even when adding in the cost of building the infrastructure needed to power a network of EVs, “the economics of renewables still crush those of oil,” Lewis concluded.

Or, put more simply, the world would need to spend $25 trillion on gasoline needs for the next 25 years (extrapolating from 2018 levels), “whereas we estimate the cost of new renewables projects complete with the enhanced network infrastructure required to match the 2018 level of mobility provided by gasoline every year for the next 25 years at only $4.6-$5.2trn,” Lewis wrote.

To be clear, BNP Paribas is arguing that renewable energy combined with EVs easily beats crude oil before even factoring in the cost of climate change from fossil fuels. Renewables simply win on price. Full stop. But after adding in the public health toll paid by air pollution, climate change, and other societal costs, the equation becomes that much more lopsided.

The “oil industry has never before in its history faced the kind of threat that renewable electricity in tandem with EVs poses to its business model,” Lewis wrote.

He tallied up the multiple ways that oil falls short. First, renewables have a short-run marginal cost of zero, which refers to the fact that once solar and wind are built, the energy they produce on an ongoing basis is free. Second, renewables have an environmental benefit. Third, electricity is easier to transport than liquid fuels. And fourth, renewables can easily replace roughly 40 percent of global oil demand if and when it reaches scale.

The challenge for renewables is the massive incumbency advantage that fossil fuels currently enjoy. The global supply chain for oil and gas will be hard to overcome in the short run. However, because oil projects suffer from decline, new dollars invested going forward have to compete with new wind and solar. These new investments will be in the spotlight, and scrutiny is going to grow ever-more intense, “especially those with a break-even of >$20/bbl,” Mark Lewis wrote in the BNP Paribas report.

Ultimately, the risk of stranded assets is huge, and grows with each additional oil project given a greenlight. But the risk is more acute for projects with long lead times, long production profiles and/or large price tags.

It may be easy to dismiss such predictions, especially given that renewables and EVs make up a small fraction of the capacity of the global oil industry. But as Mark Lewis points out, a century ago oil was the upstart, and few would have predicted its dominance.

But a more relevant example could be that of the utility sector in Europe, which demonstrates how quickly the fortunes of an incumbent can change. Utilities have written off billions of dollars of assets because of the surge of wind and solar in recent years.

“[I]f all of this sounds far-fetched, then the speed with which the competitive landscape of the European utility industry has been reshaped over the last decade by the rollout of wind and solar power – and the billions of euros of fossil-fuel generation assets that this has stranded – should be a flashing red light on the oil majors’ dashboard,” Mark Lewis concluded in the BNP Paribas report.