Oil is terminally ill, but this time, unlike the previous recoveries in oil prices, the structural factors are solidly against any lasting revival. What can Nigeria do without oil? Nothing. We presently literarily eat, drink, breathe and live oil. When oil price sneezes, our economy and livelihoods catch cold. Although, the impact an oil price on life-support will have on the entity called Nigeria is better left unimagined, unfortunately, this reality is closer than we think.
The policy by the Organization of the Petroleum Exporting Countries (OPEC) to flood the market, with the expectation that this will flush out the high cost producers, particularly, the US shale, turned out to be a great miscalculation. It only increased the OPEC market share by a meagre 1%, while succeeding in bankrupting at least one of its member countries, with few others well on their way. With hundreds of billion of dollars lost, and aim not achieved, OPEC was left with no other choice than to backtrack and introduce production limitations.
Shale production, which was the main target of the OPEC policy, rather than caving in, has become reinvigorated. Production growth in US shale fields has increased the country’s overall crude output by about 10% since September 2016. Now that oil price is stabilizing above $40 per barrel, shale drilling has become increasingly profitable, and US shale explorers have responded by boosting drilling budgets 10 times faster than the rest of the world in order to quickly harvest their profits. Other shale producing countries like Argentina are also recording significant investments in a bid to replicate the US success story. Shale, rather than see its relevance whittle, is now becoming the swing producer.
The next structural factor sounding the death knell on solid oil price recovery is the climate change and air pollution mix. On climate change, there are two extremities. On the one hand are those that believe fossil fuel has nothing to do with climate change, and on the other are those that are championing leaving all the fossil fuels in the ground if we are to keep the temperature at reasonable level. My guess is, in-between both extremities lies the truth, as the effect of changing global climate is becoming increasingly evident. Although there is also no consensus on the effect of air pollution, the air quality is much easier to measure. It is estimated that pollution kills about 2.2 million people annually in China and India alone (1.1 million people in each country), and as their populace become wealthier, they are pressuring their governments to take action.
To this end, both countries have embarked on ambitious measures to alter their energy landscape. According to Bloomberg, clean energy installations broke new records globally in 2016, with wind and solar energy seeing twice as much funding as fossil fuels. This is attributable to the fact that prices of alternative energy continue to fall, with solar power, for the first time, becoming the cheapest form of new electricity in the world. After more than four decades of heavy dependence on subsidies, the renewable energy industry is now signalling its intent to be self-reliant. Energy storage costs are also falling at comparable speeds to wind and solar. This suggests that in the near future, battery storage will become so competitive that it will no longer make sense to invest in traditional electricity generation.
The final nail in the fossil fuel coffin will most likely be driven by the coming of age of the electric and autonomous cars. Bloomberg New Energy Finance estimates that by 2025 (8 years from now) electric vehicles (EVs) will be cheaper to buy than conventional cars in the US and Europe. It is also projected that cost of batteries, which currently accounts for about half the cost of EVs and their prices, will fall by about 77% between now and 2030. Maintenance cost and needs are also expected to half, resulting in a longer life cycle. The autonomous driving revolution is also expected to reduce oil demand as it increases the capacity of existing roads, reducing congestion. A simulation by University of Texas researchers suggests each shared autonomous vehicle could replace 11 conventional ones, resulting in 200 million fewer cars globally.
All the above-enumerated dynamics point to the inevitable transition away from fossil fuels, and by 2025, give or take a few years, the finiteness of oil as a resource will be most apparent. As a nation, we need to start situating ourselves in this future reality, and begin to make decisions and investments that will cushion the likely impact. The future competition will be less about commodities and more about knowledge and intangibles, and if we are going to survive and play in this global industry, now is the time to set the wheels in motion.
Olugbenga A. Olufeagba