This Could Happen: Oil’s Price Could Go To Zero

This Could Happen: Oil’s Price Could Go To Zero
Paul Allison, CFA

about 1 year ago2 mins

At some point in the future, more than 50% of the world’s oil demand could burn away. And that could send its price sliding toward zero. After all, we only have to go back a few years to see what happened to oil’s price when the world – locked down by Covid – stopped driving gas-powered cars: it went negative.

This chart from energy firm UKOG shows that nearly 60% of oil demand in the UK comes from road transportation. And, sure, every county’s a bit different, but vehicles eat the lion’s share of oil demand pretty much everywhere.

Now, if you’ve been outside at all, you might’ve noticed that EVs are quite a big deal these days. Most major carmakers plan to stop making gas-guzzlers by the end of 2040, and some governments plan to ban their sale well before that. The average age of cars on America’s roads is around 12 years (they’re older elsewhere), so fossil-fueled vehicles sold within the next 20 years or so could hang around past the middle of this century, especially in developing nations where EV infrastructure will take longer to build out. But it's not out of the question that by 2060 the vast majority of the cars on the planet will be electric.

Of course, black gold’s bulls will tell you that producers will restrict supply to keep the price propped up. They might also say that oil’s going to continue to be a feedstock for various plastic products way into the future. And all that is probably true. But at some point, if oil's demise becomes apparent, the rational thing for producers sitting on massive reserves might be to pull it from the ground while prices are still reasonable, sell it, and use the cash to invest and diversify. That could mean supply doesn’t remain as disciplined as price bulls hope.

If you think 2060 is too far in the future to think about, then ask yourself: when isn’t too far away? Is it 2050? Or 2040? If this demand decline scenario plays out, then by 2040 it’ll be clear that oil, as we know it, is doomed. And consider this too: economies in the US and Europe are doing pretty well right now, and China (the world’s biggest oil importer) has reopened, yet the price of crude hasn’t budged. So maybe oil's death march has already begun…

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