Thursday, August 10, 2017

Economics: Opec - Death By Tesla

(Drivebycuriosity) - Opec is dead. They just don`t know it. The cartel is already struggling. Even after several production cuts and noisy announcements oil cost more than 50% less than what we paid in 2014 and Saudi Arabia`s wealth has been shrinking rapidly.

Opec will get destroyed by the technological progress. We are at the ascent of the electrical car. The demand for these vehicles is already high & rising, even that these vehicles are still expensive. Tesla reports that the demand for their electric cars are fast climbing and they expect to produce about 500,000 units next year. Electric cars will get much more popular in the coming years. Traditional automakers, including Volkswagen, Honda, Toyota, Renault, Chevrolet, Mercedes and more, are already offering electric cars as well. And Apple plans to produce electric cars beginning in 2019.

These vehicles will get cheaper in the coming years thanks to technological progress, competition and mass production - and they will become common in the 2020s. Then the new car revolution will  curb the demand for gasoline considerably. Bad for Opec because crude oil is mainly used to produce gasoline. The chart below shows that oil is already irrelevant as power source for electricity production: Just one percent of the US electricity comes from petroleum.

It´s similar with heating (chart below: source Less than 20% of US households use oil for heating, the majority is heating with natural gas and electricity (produced mainly by coal & natural gas).

So, most of the oil - about 70% -  is used for transportation and around 30% for petrochemical products ( energy).

But it will get worse for Opec.  The cartel also has to fight against a rising competition. Technological progress is reducing the cost of oil exploration and is making more of the oil reserves in the ground accessible. The rise of US fracking since around 2006 is just the begin. Today the costs to extract an extra barrel of oil (break even point) in the US vary around $50. The productivity of fracking is rising swiftly which leads to shrinking costs (economics21  oilprice  econbrowser). A study by BP explains that fracking is "a standardized, repeated, manufacturing process" and "manufacturing productivity has led to a trend decline in the prices of goods relative to services" (forbes).

So the break even point for producing oil has been moving lower and will continue to fall in the coming years. Falling costs of fracking also raise the chance that in the coming years the US oil producers will  be accompanied by oil producers from China and other countries. In June 2013, the United States Energy Information Administration (EIA) released a world shale oil and gas reserve assessment that showed 32 countries outside the United States have substantial reserves locked up in 137 different formations - units that can be exploited using Bakken-like technology....The EIA placed China third behind Russia and the U.S. in tight shale (tribune ).

After 2020 oil prices could fall well below $20 thanks to sinking production costs and a shrinking gasoline demand. Saudi Arabia and other big producers, who are sitting on huge oil reserves that should last many decades, would be well advised to sell their oil now. Maybe the advent of electrical cars - in combination with the evolution of fracking - is the real reason for cheap oil and will destroy Opec soon.

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