Oil investing types.
Within the last month, Saudi Arabia’s state oil giant Aramco has announced the sale of a minority—but large—stake in its pipeline business, the possibility to sell another 1 percent of its stock, and intentions to put up for sale stakes in some oil fields.
Neighbor, ally, and fellow OPEC member UAE in the meantime, has announced plans to list its state oil firm’s drilling business and has launched its own oil futures in a bid to change the face of Middle Eastern oil.
There is a certain feeling that both Saudi Arabia and the UAE are in a rush to make the most of their oil, with both Aramco and Adnoc also making public their intentions to boost their oil production capacity.
On the face of it, the reason for the divestments and capacity boosts is obvious enough: all Gulf economies depend on their oil revenues to keep going, and all of them have been hit hard by the demand destruction that the pandemic caused last year. Yet there is also something else—Gulf economies are wary of oil demand peak forecasts. Besides stake sells, listings, and plans to pump more oil, they are also trying to diversify their economies away from oil. For that, they need as much oil money as they can make.
Goldman Sachs recently said that global oil demand could peak by 2026, joining a host of various entities seeing a grim future for the world’s most traded commodity.
“Government policies driving higher efficiency gains and lower emissions have had the strongest bearing on road transport demand,” Goldman analysts said in a report. “Petrochemicals will become the new baseload for oil demand, driven by economic growth and rising consumption, especially in emerging markets.”
Norwegian energy consultancy Rystad Energy also foresees peak oil demand in 2026, citing the rapid adoption of electric vehicles as the probable cause of its revised forecast, which earlier saw oil demand peaking in 2028.
Basically, the long-term outlook for oil-dependent economies is not particularly good.
A recent Energy Intelligence overview on the topic cited, in addition to the stake sales, the production expansion plans of Saudi Arabia, the UAE, and Qatar, which represent a reversal of the long-standing policy of saving oil and gas reserves for future generations. Indeed, this seems like the clearest sign yet that the oil-dependent Gulf economies are worried there may be no need to save their oil and gas reserves for future generations.
Perhaps Qatar is a different case, however. The tiny Gulf nation recently announced plans to substantially boost its LNG production capacity. It should be noted, however, that this is happening in a market where demand is set to grow for quite some time, even as the world moves from fossil fuels to a post-fossil fuel era. At the same time, competition is intensifying, so to retain its spot as lead exporter, Qatar needs to do whatever it can, including boosting production.
Of course, nothing is set in stone, including the mass adoption of EVs. A recent study from the University of California, for instance, found that close to a fifth of EV drivers switched back to a gasoline car in the period between 2012 and 2018. The reason was that charging was too much hassle. Charging times haven’t shortened much since 2018, so the problem remains. Related: OPEC Continues To See Strong Oil Demand Recovery In 2021
In the meantime, growing Asian economies are building new coal-powered generation capacity, led by China, which is also the leader in new renewable power capacity.
“Because renewable energy (sources such as) wind and solar power are intermittent and unstable, we must rely on a stable power source,” says Su Wei, Deputy Secretary-General of the National Development and Reform Commission, as quoted by CNBC. “We have no other choice. For a period of time, we may need to use coal power as a point of flexible adjustment.”
The statement of the Chinese government official echoes what some Big Oil chiefs have said recently. Despite their ambitious energy transition plans, both the CEOs of Shell and BP have said on separate occasions that until there is demand for their main product, they will continue producing it, and there is still demand for their main product.
Be that as it may, Gulf producers are doing the only smart thing they can: the future is uncertain, and the pendulum could swing either way. Still, it’s best to be on the safe side and make do with the resources they have while demand is still robust. The idea of peak oil supply has been refuted, anyway, so even if the energy transition plans of so many governments fail, there will still be oil and gas for future generations.
If those plans materialize, however, the Gulf oil nations would do well to prepare for a time when their oil production will need to fall to reflect much smaller demand driven by the continuing need for petrochemicals and plastics, which will continue to be popular over the long term, too.
Upstream oil investment.