Era of $100 a barrel and Big Oil gone for good warns EU and UK energy adviser
"I usually put a £5 bet on the oil price - and I'm collecting," says Professor Dieter Helm.
It's not difficult to imagine his tally of modest wagers adding up. The highly regarded Oxford University economics professor is a long-time industry observer. During the week he was in London after taking meetings with major oil executives. He is also a familiar face in Whitehall and Brussels, where he advises - both formally and informally - on the trends reshaping global energy markets.
Still, his stakes will be trillions of dollars lower than the energy leaders he advises.
If Helm is to be believed the oil market downturn is only getting started. The latest collapse is the harbinger of a global energy revolution which could spell the end-game for fossil fuels. These theories were laughable less than a decade ago when oil prices grazed highs of more than $140 a barrel. But the burn out of the oil industry is approaching quicker than was first thought, and the most senior leaders within the industry are beginning to take note.
In the past, the International Energy Agency (IEA) has faced down criticism that its global energy market forecasts have overestimated the role of oil and underplayed the boom in renewable energy sources.
But last month the tone changed. The agency warned oil and gas companies that failing to adapt to the climate policy shift away from fossil fuels and towards cleaner energy would leave a total of $1 trillion in oil assets and $300bn in natural gas assets stranded.
For oil companies who heed Helm's advice, the route ahead is a ruthless harvest-and-exit strategy. This would mean an aggressive slashing of capital expenditure, pumping of remaining oil reserves while keeping costs to the floor and paying out very high dividends.
"They'd never do it because no company board would contemplate running a smaller company tomorrow than today. It's not in the zeitgeist of the corporate world we're in, but that's what they should do," Helm says.
BP and Royal Dutch Shell are slowly shifting from oil to gas and making even more tentative steps in the direction of low-carbon energy. But Helm is not entirely convinced that oil giants have grasped the speed with which the industry is undergoing irrevocable change.
"As the oil price fell, at each point, oil executives said that the price would go back up again," says Helm. "What the oil companies did was borrow to pay their dividends on the assumption that this is a temporary problem. It's my view that it is permanent," he adds.
For a start, there is scant precedent for the price highs of recent decades. Between 1900 to the late 1960s oil prices fluctuated in a range between $15 a barrel to just above $30 - even through two world wars, population growth and a revolution in transport and industry.
It was geopolitical events which caused oil prices to surge by more than $100 a barrel following the Middle East oil embargoes of the late 1960s and early 1970s. They collapsed back to $20 by the '80s.
So, what drove oil prices to the heady levels of $140 a barrel just less than 10 years ago?
"China," says Helm, barely missing a beat. "If you look at both the rapid growth in emissions and the rapid growth of oil, fossil fuel and all commodity prices, it was while China was doubling its economy every seven years. This is a phenomenal rate."
The global oil market has managed to cling on to a fragile recovery with prices now between $50 and $55 a barrel, but Helm argues that the economic drive to keep producing even as the industry shifts to a low carbon future means prices may continue to fall - forever.
"As prices come down you'd expect producers to supply less - that's normal economics. On the contrary, in oil as output falls the production goes up. Why? Because the marginal cost of production in the Middle East is around $10 and the marginal cost in Russia is $20. So even at $50 you're making a profit. And if you're an authoritarian regime and you need $100 oil to balance the country's budget while surrounded by radicals and insurgents, then you pump as much as you can," Helm says.
"Even if you're getting less per barrel, you must get the money to keep your budgets going. And that's exactly what has happened," he says of the inevitable price collapse. "Slowly companies have adjusted to the idea that maybe we won't see $100 oil again. Then, maybe not even $80 to $90. Now, even $60 oil seems a bit aspirational. But there is still a dominant zeitgeist within the oil majors that there is one last hoorah to come. I don't think there is."
The two major demand centres for oil are petrochemicals and transport fuel. The theory previously held in the corridors of major oil company headquarters is that increasing affluence in Asia means that soon more and more families will own two cars. As population booms, the number of cars on the road could increase exponentially.
But slowly, the oil companies are beginning to come around to Helm's view that the burgeoning market for electric vehicles may have been underestimated and could radically change the outlook for oil demand.
The global dash for gas is a multi-billion-dollar bet that Shell was happy to take last year, when it defied tumbling oil market prices to snap up BG Group for £40bn. The former British Gas subsidiary is now a global leader in producing and transporting gas that is compressed into liquid form to be carried on tankers and sold on the international market.
After the oil market downturn, Shell says the new BG tie-up will be a springboard to profitability in the near term and will help to "future-proof" the company against diminishing demand for oil.
Helm believes: "Short of a nasty war - which itself would bring a price spike but not a recovery - I can't see any reason for oil prices to go up.
"Curiously, I think many of the people in oil companies agree with me on that. What they don't agree with is the short term." (© Daily Telegraph, London)