By Guest Blogger Ryan Lewenza
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Contrary to what Green Party leader, Elizabeth May recently said, oil is not dead! Mrs. May was quite frank in her outlook for oil and the Canadian energy sector, recently stating, “My heart bleeds for people who believe the sector is going to come back. It’s not.” And in her view, “Oil is dead.”
This flippant and in my opinion, silly thing to say, shows little compassion and support to the nearly 300,000 Canadians directly employed within the sector and the countless more indirectly benefitting. Nor does it recognize that oil and gas (O&G) represents our largest export at $132 billion (2018), that it contributes 10% to our total GDP and the $14 billion in annual revenues to the Canadian government. May’s comments really struck a chord with me, so today I provide my rebuttal to this doomsday view of oil and why Canada should continue to develop our estimated 170 billion barrels of oil reserves rather than letting the sector wither and die as May proposes.
Let me preface today’s blog post by stating that I am believer in climate change, that human activity through the consumption of fossil fuels is contributing to global warming, and that we should try to minimize the impacts of O&G exploration on our environment and planet through government regulations and new technologies. While this may seem incongruent with my earlier statements, at the end of the day I’m a pragmatist and realist, so I believe there should be a balance to both energy production and the environment. Let me explain.
First, I believe May and other environmentalists focus too much on supply (i.e., production) and not enough on demand. The simple fact is the world consumes roughly 95 million barrels per day (bls/day) of oil alone and this is forecasted to rise to 105 mln bls/day by 2030, according to the IEA. Yes the IEA then expects oil consumption to plateau around that time and then decline, but it will be gradual, likely taking decades.
Whether we like it or not, oil and other petroleum products are an integral part of our lives and economy. This includes transportation fuels like gasoline and jet fuel, heating oil and electricity generation, the petrochemical industry where petroleum is used as a raw material for thousands of different household products like clothing, electronics, and agricultural products. To get off oil quickly would have devastating impacts on our economy, our standard of living and overall way of life.
Not sure about you but I like traveling, the freedom from driving my car (Note: not a Porsche!), ripping golf balls down the fairway, buying some new duds and upgrading to the latest iPhone so I can more quickly respond to blog comments. Well, the last part’s a lie but you get my drift.
Oil and petroleum products are ubiquitous and an absolute necessity in our daily lives. This is critically why the death of oil has been greatly exaggerated by May and other environmentalists.
Global Oil Demand Continues to Rise
Source: Bloomberg, Turner Investments
Second, May and others believe that oil and fossil fuels will be replaced by renewables like solar, wind and geo-thermal. While these areas will continue to see robust growth and over time will play a bigger role in our energy consumption, it will likely take decades before oil is largely replaced by these new energy sources.
British Petroleum (BP) publishes an annual report on world energy trends and it’s clear from this report how prominent fossil fuels are in meeting our global energy needs. Currently, fossil fuels (oil, natural gas and coal) make up 85% of our total energy consumption, with nuclear, hydroelectric and renewables making up 4%, 6.5%, and 5%, respectively. So renewables make up only 11% of our total energy consumption. Looking at just wind and solar, they represent a paltry 2% and 0.7%, respectively.
I’m from Windsor, ON and when I drive home to see the folks I see hundreds of wind turbines across Essex County, which personally I think is a great thing (despite the way it was handled by our previous Ontario governments). But it’s clear from these statistics that renewable sources make up a small percentage of our energy consumption and while these areas will see the highest growth, it will still take decades before these sources replace fossil fuels.
World Energy Consumption by Fuel Type
Source: BP 2018 Statistical Review of World Energy 2018
What about electric vehicles (EV)?
While Tesla shares continue to rally to new dizzying heights, electric vehicles currently make up a minuscule amount of global car sales. Last year global electric vehicle sales rose to 2.1 million units, which represents just 2.6% of global auto sales. There are a number of different forecasts for EV sales but even the most aggressive ones have EV sales at 20% of global auto sales by 2030. Sure the growth is phenomenal, but EV sales will continue to represent a small fraction of global sales in large part due to their higher upfront costs (EVs average selling price is $55,000 versus $36,000 for a regular gas powered car).
The other huge obstacle to EVs and them getting a wider adoption are the batteries, which requires massive mining of nickel, cobalt and lithium. While EVs cut carbon emissions, they are not without other environmental consequences. For example, it is estimated that for every ton of lithium produced, an equivalent ton of carbon dioxide is created. And nickel is ranked as the eight worst metal to mine in terms of pollution and global warming.
Lastly, a huge reason why we’ve become a fossil fueled planet, which will likely continue for some years to come, is the high energy density of oil and natural gas relative to other energy sources. Energy density measures the amount of energy that can be stored in a given mass or volume, and is one way to compare different energy sources output.
Below is an interesting table that puts different energy sources like oil, natural gas, solar and wind on a comparable scale and it shows how much more energy you get from oil or natural gas compared to solar or wind. Essentially, oil and natural gas provide a “bigger bang for your buck” versus other renewable sources at present.
Energy Density
Source: Bradley Layton, A Comparison of Energy Densities
When you put it all together – future oil demand, a low percentage of renewables and electric vehicles, the higher energy density of oil and gas – I fail to see how oil and other fossil fuels will quickly be replaced by renewables and most certainly that oil is far from dead, as May recently proclaimed.
If Canada tomorrow where to put a moratorium on oil production to help combat climate change, the US, OPEC or Russia would just step in and replace those 4 to 5 million barrels. In this case, nothing would change for oil demand and consumption and all we would do is destroy Alberta and our overall economy while doing nothing for addressing climate change. Given all this we should continue to treat that resource as the crown jewel that it is.
Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.