All major stakeholders in the oil industry need oil prices to be higher than the current $60 a barrel Brent Crude to turn profits or balance government budgets.
Yet, in the long term, oil prices at $60 wouldn’t be competitive in the transportation sector because they won’t be able to compete with electric vehicles (EVs), BNP Paribas Asset Management said in a research note last month.
The long-term breakeven oil price needs to be as low as $9 or $10 a barrel so that gasoline cars can remain competitive as a means of transportation in the future, according to the research report, authored by Mark Lewis, Global Head of Sustainability Research at BNP Paribas Asset Management.
Yet, there are two major obstacles for the clean energy to overcome in order to really threaten the internal combustion engine gasoline car: the deeply entrenched oil industry with deep political roots and the insufficient investment in energy storage and energy infrastructure to enable a sweeping mass-scale EV and renewable adoption, BNP Paribas admits in the report.
The report introduces the concept of Energy Return on Capital Invested (EROCI) to measure how much a given capital outlay on oil and renewables translates into useful or propulsive energy at the wheels: “in other words, for a given capital outlay, how much mobility can you buy?”
According to BNP Paribas Asset Management’s analysis, at present, for the same capital investment, wind and solar energy will already produce significantly more useful energy for EVs than oil at $60 a barrel will for cars and other light-duty vehicles (LDVs).
Major oil producing countries dependent on oil revenues need oil prices higher than the current $60 a barrel level to balance budgets and boost government income. U.S. shale also needs at least $50-60 a barrel of oil to profitably drill new wells. The oil majors, despite all the cost cuts and streamlining, also need oil at some $50 to turn a good profit and keep or increase dividends. Related: Can This Multi-Billionaire Revive Alaska’s Oil Industry?
But the advance of renewables and the growing global sales of electric vehicles (EV) have started to disrupt the energy sector. Renewables and battery costs continue to drop, and the share of renewables in major developed markets such as Europe is constantly growing.
“What you have here is an energy source that’s got a zero short run marginal cost and the capital costs are plummeting, so now is the time to invest in energy storage,” BNP Paribas’s Lewis told CNBC last week, commenting on the findings of the report.
“Ten years ago – even five years ago – putting capital into that didn’t really make sense because renewables themselves were still expensive and still needed subsidies. They don’t need subsidies anymore,” Lewis added.
Last year, energy storage deployment around the world reached a record level, nearly doubling from 2017, the International Energy Agency (IEA) says.
“Technology costs for battery storage continue to drop quickly, largely owing to the rapid scale-up of battery manufacturing for electric vehicles (EVs), stimulating deployment in the power sector,” the IEA said, but noted that energy storage continues to be strongly dependent on supportive policies, meaning that progress varies greatly from one country or region to another.
In the longer term, however, continuously falling battery costs and rising capacity and usage of clean energy are set to result in booming global stationary energy storage over the next two decades, BloombergNEF (BNEF) said in a recent report.
Energy storage installations across the world are expected to soar to 1,095GW, or 2,850GWh, by 2040, compared to a modest deployment of just 9GW/17GWh as of 2018, according to BNEF’s latest forecasts. Unsurprisingly, the key driver of the energy storage installation boom will be additionally plunging costs of lithium-ion batteries, which will give financial rationale to additional uses of storage and surging installations of stationary energy storage.
Oil majors should be worried about how long they will have the advantage of scale over renewables, EVs, and stationary energy storage. According to BNP Paribas’s report “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.”
However, energy storage and energy infrastructure will need a lot of capital outlays to become the threat that will drive oil majors out of profitability range.
By Tsvetana Paraskova for Oilprice.com