OPEC is in a downward spiral because of China


Saudi Arabian and OPEC officials do not seem to believe that the world’s oil demand will continue to grow rapidly for another generation, as if there had never been electric cars invented and if the Paris Accord did not exist.

OPEC was forced to cut production in October last year to stabilize prices. In April, it had to reduce again. In June, the Saudis shocked traders by unilaterally cutting one million barrels per day (b/d).

The OPEC/Russia cartel had to remove 2m b/d from the market at a peak in the cycle of the economy, following China’s reopening after the Covid scandal, and during a period when the US was experiencing a strong economic expansion with a budget roughly equal to Roosevelt’s World War II budget.

Bloomberg New Energy Finance reports that the 2m b/d figure is more or less equal to the amount of crude oil currently being replaced by EVs worldwide.

The mood at the 24th World Petroleum Congress, held in Calgary in this month, was one of defiance and plucky smugness.

Amin Nasser, Saudi Aramco’s chief executive officer, said that the talk of peak oil demand has “suffered under scrutiny”.

The consumption will increase from 102m to 110m B/d in 2030 and continue to rise until 2035, before stabilising on a high plateau by mid-century.

This ignores the fact that EVs will already account for 60pc in total sales of cars on the largest car market in the world within two years.

Cartel is under attack from both sides. The efficiency of petrol and diesel vehicles is increasing, which gradually replaces 1.4 billion vintage models that are disappearing to the scrapyard. BP claims that this alone could reduce the global oil demand up to a tenth by 2040.

With a lag EVs now start to make a material impact, and an S-curve is likely to become parabolic in this decade.

China’s EV sales reached 38pc in the summer of 2018, despite subsidies being largely scrapped. Beijing’s New Energy Vehicle Industry Development Plan has achieved this goal far earlier than expected.

The Chebai think-tank in China says that there is a growing consensus that electric vehicle sales will reach 17 million or 60% of the total Chinese market by 2025. This figure would rise to 90% by 2030 if the grid could keep up.

Li Xiang is the founder of Li Auto, a booming Chinese automaker. He believes that EV sales could reach 80 percent by 2025. BYD, a rival, sells over 50,000 electric vehicles a week. This includes the Seagull, a workaday EV that retails for $10,200 on its home market.

Please, could we get some of this in Britain?

Vietnam is behind in terms of technology, but has similar goals. VinFast Auto’s EV startup, launched last month on Nasdaq, was the third-most valuable carmaker in the world. It briefly surpassed the German auto industry, before its share price fell back to earth.

Whatever the West decides, cheap mass-market EVs are going to flood Southeast Asia and the rest of the South.

OPEC has been based on the premise that the growth of a middle class with a population of 1.3 billion in emerging Asia would more than compensate for the declining oil consumption in the OECD. This notion is “withering” under scrutiny.

India will not save OPEC. The number of EVs sold this year has already exceeded one million, with many being made in India’s EV Capital of Krishnagiri.

It is likely that the pace will exceed the official 2030 targets of 30pc penetration in private cars and 70pc in commercial fleets. Ola Electric believes that the two-wheeler industry could be completely electric by 2025.

According to the International Energy Agency (IEA), global oil demand is expected to peak at 105.5m b/d by 2028, then plateau for a few more years before declining. This seemingly innocuous prediction prompted a furious rant from OPEC’s headquarters.

It is a dangerous and unpractical narrative that fossil fuels are on the verge of extinction or have already begun to do so. These predictions are dangerous because they often come with calls to stop funding new oil and natural gas projects, said Haitham Al-Ghais, OPEC’s chief.

Such narratives will only lead to a spectacular failure of the global energy system. He said that it would cause energy chaos of a scale never seen before.

The IEA is not forthcoming. In its End of the ICE Age report, The Rocky Mountain Institute argues that by 2026 half of all global auto sales will be EVs. This figure could reach 86pc in this decade.

The report stated that by 2030, oil demand for automobiles will fall at a rate of over 1m b/d per year. This will mean the endgame is in sight for a quarter of the global oil demand.

Prince Abdulaziz bin Salman is Saudi Arabia’s sharply-witted energy Minister. He likes to portray himself as Alan Greenspan, the world oil market, and moves crude futures by raising his eyebrow.

This is a way to disguise what was already a policy that aims to extract the maximum amount of hydrocarbon rent possible before the window shuts.

The prince justified withholding 2m B/d from global supply by stating that higher prices were needed to encourage global investment in new project and, therefore, to ensure an ordered world economy. If you think that way, I’ll sell you a rainforest in Riyadh.

Saudi Arabia has helped Vladimir Putin by raising Brent prices to $90. The problem with reducing supply is that you lose market share to your competitors. Ole Hansen is the commodities chief at Saxo Bank. He said: “It’s easy to cut but how can you get back market share after you lose it?”

The shale frackers in America continue to defy predictions of decline. They have developed new technology and longer horizontal drills. US Energy Department is expecting US oil production to reach a new record of 13,4m b/d in the next year. This is astonishing, when you consider that US output was only 3.8m at its nadir.

The IEA predicts that American production and non-OPEC’s will increase by 5m b/d in 2028. This is more than the global demand growth and leaves OPEC a smaller share. The Saudis may be forcing prices too high to suit their own interests.

Brent futures could spike higher in the fall, but not for very long. China has ceased purchasing for its strategic reserves. The rally appears stretched.

“If oil rises above $100, there will be a strike by buyers.” Spare capacity has reached its highest level in many years, and “spec shorts” have fallen to their lowest levels in over 12 years. When this trend turns down there could be an extremely large move (down), said Mr Hansen.

Personal, I thought that oil would experience a final supercycle in the early-mid 2020s. Prices could reach $150 to $200, as a combination of stubborn demand and a 10-year drought in investment upstream.

The global electrification has surpassed this in its rapidity. Oil in the car and bus transportation may be more imminent than anyone imagined. OPEC, as we know it, may be in the midst of a death spiral.