End-Of-Oil Predictions Don't Match Reality: Tertzakian

By Pat Roche
Published: Daily Oil Bulletin

Headlines imply the end of the oil age is just around the corner. Public opinion surveys show many consumers believe humanity will stop consuming oil entirely within a few years.

Meanwhile, people are buying more vehicles and heavier vehicles, and they’re driving more. So oil consumption continues to rise with no slowdown in sight.

And if electric cars replaced petroleum-powered vehicles at a rate of one million a year (versus the current negligible rate), it would take 1,300 years to replace the existing global fleet of 1.3 billion gasoline- and diesel-powered vehicles.

These are among the insights Peter Tertzakian, chief energy economist and managing director of ARC Financial Corp., delivered during the American Association of Petroleum Geologists’ annual convention and exhibition in Calgary on Tuesday.

Those who casually predict the transportation industry will move entirely to non-carbon fuel sources in a few of years don’t understand the enormity of the logistical challenge, the author of A Thousand Barrels A Second told a sold-out lunch.

1.3 billion vehicles

Tertzakian isn’t disputing that change is occurring, but he said those predicting oil and gas will become stranded assets miss the practical reality of how long this would take.

A geophysicist who began his career in the upstream oil and gas industry, Tertzakian has been following news about electric cars for a quarter century.

“And I have to tell you I believe that for the first time now in my career following energy and electric cars, that I believe that they are going to take root and make ultimately a meaningful dent in the transportation complex which, of course, has impacts to oil,” he said.

He added: “We shouldn’t be in denial about the emergence of substitutes in any business, and oil and gas is no exception. But equally I would have to say that people who think that the world of our energy complex is changing quickly should not be in denial about the magnitude of the challenge.”

There are 1.3 billion petroleum-powered vehicles in the world today. Every year about 40 million of those vehicles get scrapped and roughly 90 million new vehicles are sold. So every year there’s a net increase of 50 million in the number of active vehicles in the world.

“So it’s 1.3 billion growing by 50 million internal combustion engines per year,” he said. “It’s just a staggering amount of growth. It’s like every Canadian is buying one and a half cars new every year.”

“When you look at some countries—like India, for example—almost [no vehicles] are going to the wrecker and almost all cars are brand new, and they’re largely internal combustion engine powered.”

So what’s the growth outlook for electric cars? Some predict sales of electric vehicles will hit one million a year by 2020 or 2021.

“I don’t dispute that,” Tertzakian said. “It could even be more.”

But all that would mean is the global fleet of petroleum-powered vehicles would grow by roughly 49 million vehicles a year rather than 50 million.

“It’s going to be a long time for this change-out to take place,” he said. “And there’s a lot of people who are writing headlines who are in denial in terms of the magnitude of the energy issues that are facing us [and who] have a tendency to trivialize the importance of our business here.”

To put the prediction of a million electric cars sold per year in perspective, it would take 1,300 years to replace the existing fleet of 1.3 billion petroleum-powered vehicles at that rate.

“But even then, it’s not 1.3 billion,” Tertzakian said in an interview after his presentation, referring to the net annual increase of 50 million active vehicles in the world.

Fuel efficiency gains offset

And that’s only part of the growth story.

While consumers may be predicting oil demand will fall, they’re significantly increasing their own consumption. For several years about half of new consumer vehicles sold in Canada and the United States were cars and half were SUVs and pick-ups.

That’s now shifted to the point where SUVs and pick-ups account for about 60 per cent of new vehicles sold to consumers. In the past six to 12 months, sales of heavier consumer vehicles rose at the fastest rate Tertzakian has seen in the 20-plus years he’s been following such trends.

“It’s absolutely staggering. I’m not moralizing, I’m just telling you the way it is. It is that people are buying heavier and heavier vehicles,” he said.

“And [that] has a tendency to cancel out any gains in vehicle fuel economy. So not only are we driving more, we’re buying bigger vehicles, and those two combined are fuelling the growth in oil consumption going forward.”

So while headline writers may predict an imminent drop in oil demand, consumption trends indicate the exact opposite.

“And even right now, just in the last three or four months, if you look at the numbers they’re really quite staggering,” Tertzakian said, noting the current U.S. summer driving season is breaking all records.

“This is not a United States or North America-only thing, this is a global thing. Oil demand is marching higher.”

He told the Bulletin: “The producers and the people who invest in production are being asked to divest. But the consumers are not divesting. There’s no indication consumers are divesting of anything related to fossil fuels. In fact, it’s going in the opposite direction.”

Megaprojects on hold

While some predict oil markets will reach a supply/demand balance by year’s end, Tertzakian is more bullish: “I actually think we’re going to get there sooner than the end of the year, but we’ll see.”

Since oil prices began falling two years ago, few new oil megaprojects have been sanctioned because of the steep drop in producer cash flow. This will affect global supply next year and in 2018.

So the good news is prices will rise, but the bad news is they will also tend to fall, Tertzakian said, referring to the volatility that is now a feature of the industry.

Given the cloudy outlook for long-term prices, producers will direct capital to projects that can deliver the quickest return, which rules out oilsands and offshore megaprojects that take years to pay out, he said.

Tertzakian’s predictions of increased volatility are based on both the big changes that have occurred within the industry—such as the shale revolution in the U.S.—and external forces such as substitution for petroleum-powered vehicles and environmental, social, geopolitical forces.

Until recently, the only way to bring large volumes of oil on production was through megaprojects. But improvements in horizontal drilling and fracturing technology opened up oil production from U.S. shales, allowing large volumes to be brought on well pad by well pad.

“This new class of oil, which has very different characteristics, is going to create more volatility,” he said. “And now we layer on top of that the demand profile we’re seeing; it creates a mismatch between how fast supply can be brought on, and how fast demand goes up.”

While Tertzakian is bullish over the longer-term, that isn’t the case for his short term outlook for the sanctioning of megaprojects in the oilsands and offshore.

“As the price rises, discretionary cash flow is first going to go to the fast-cycle projects in the United States and in Canada, and that we can expect large offshore megaprojects and oilsands projects ... investments to be dormant, relatively speaking, for quite a while,” he said in an interview.

“And how long is going to depend on how fast prices go up and sustain. Because for those big projects you need sustained [high] prices. And there’s going to be a lot of scepticism about the sustainability of prices when it goes up because of the emergence of electric vehicles and the environmental movement and pressure on fossil fuels. And there’s also going to be resistance to investing in those big megaprojects when you have a choice of the short-cycle project.”

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