Will “Lower For Longer” Become “Lower Forever”? Well, No.
Ben Van Beurden, the CEO of Royal Dutch Shell, set off a minor media firestorm last week in an interview with Bloomberg TV when he made the following remarks:
“The whole move to electrify the economy, electrify mobility in places like northwest Europe, in the U.S., even in China, is a good thing.”
“We need to be at a much higher degree of electric vehicle penetration — or hydrogen vehicles or gas vehicles — if we want to stay within the 2-degrees Celsius outcome.”
Following the interview, a spokesman for the company told Bloomberg that Mr. Van Beurden plans to purchase an electric car as his next personal automobile. It’s great that a CEO of a major integrated oil company makes enough money to afford a Tesla or one of the other very expensive electric vehicles being turned out by European and U.S. automakers.
We can all hope that, over time, the technology will advance to the point where it is competitive with cars powered by internal combustion engines, and thus become affordable to the masses in the middle- and lower-classes of the developed world. But we’re not there yet. For proof, one only needs to look at the lesson Tesla learned when it tried to market its electric vehicles in Hong Kong, where the government ended its substantial subsidies for EVs in April of this year. There, the company registered zero sales in April, after having sold more than 3,000 of its Model S cars during the first quarter of the year. These subsidies matter, bigly.
Mr. Van Beurden created another minor media dust-up during the week when he announced on an earnings call that Shell has adopted “what we call a lower-forever mindset.” Naturally, some in the energy media portrayed this remark as indicating the company believes that the price for crude oil will never again approach the more robust levels that we saw from 2009 through 2013.
This portrayal is, of course, nonsense. Mr. Van Beurden knows as well as anyone that nothing – literally nothing – is “forever” in the oil and gas industry. Indeed, the history of the oil and gas industry is littered with the bankrupt bodies of individuals and companies who assumed one situation or another would endure forever.
Want some examples?
In a report issued in 2003, the National Petroleum Council projected that the U.S. was in a permanent situation of high prices and shortages of supply of natural gas. In response, companies, including ExxonMobil and Shell, invested billions of dollars in import terminals for Liquefied Natural Gas (LNG). Today, companies cannot export LNG fast enough to keep the NYMEX price for natural gas above $3.00/mmbtu.
Throughout the 1990s, industry experts told us that “all the elephants are gone” and that U.S. oil production was in a permanent state of decline. Today, the EIA currently projects that U.S. oil production will reach an all-time record high at some point in 2018.
No doubt the purveyors of the current faddish “Peak Demand” version of “Peak Oil” theory were excited by the “lower forever” prospect. But, if they paid attention to Mr. Van Beurden’s remarks on the earnings call, he was clear that the company’s current view is that global peak demand for crude oil will not be approached until some point in the 2030s. Give that crude oil demand rose more rapidly during the 2010 thru 2016 time frame than it had in the prior decade, even as investment in renewables rose dramatically, even that projection may prove to be overly optimistic.
Another factor that could cause a sudden rise in crude prices in the next few years is the record two-year slump in global investment in major new exploration projects during 2015 and 2016. The IEA projects that this foregone investment could result in a dramatic tightening of global oil supplies by 2020 as supply growth in the U.S., Canada and other petrostates begins to stall.
What Mr. Van Beurden was most likely conveying to his audience was that he and his management team are taking a very conservative view on commodity prices in their planning efforts for the company, assuming that crude prices will remain low until market factors come about that indicate substantial increases are at hand. In conveying that thought, he no doubt has a great deal of company in the management teams at other major oil companies and independent producers.
After all, it isn’t as if these companies have many other options. Banks and investors are currently demanding that these companies demonstrate they can be profitable at current price levels before more capital can be secured for new drilling projects. Thus, Mr. Van Beurden’s “lower forever” remark, taken in proper context, simply means that Shell’s management team is focused on maximizing shareholder value and profitability at current price levels.
Nothing is forever in the oil and gas business, but Shell’s focus on planning its business as if the current low price environment is a permanent thing is the only responsible thing to do.