“The Stone Age did not end for lack of stone, and the Oil Age will end long before the world runs out of oil”, observed Sheik Zaki Yamani, a former oil minister in Saudi Arabia. Oil prices, which just about a year ago were sky high, are now in the dumps. The world today is awash in oil and prices are below $30 a barrel. So what does the future look like? Are oil prices going to stay low? Do electric vehicles have a future?
International Oil Markets
Let’s explore these questions in some detail. We need to understand why the price of oil has slid to such low levels. When oil was $80 and $100 a barrel, huge investments were made in the US in oil exploration and new drilling technologies. One of the biggest innovations was the controversial technique of “fracking”, which involves the extraction of oil from rocky deposits by pumping high pressure water into wells to force the oil out. In addition, offshore oil exploration and better well exploitation technologies have dramatically increased capacity in the U.S.
The entry of players like Russia and the former Soviet republics into the global oil market has meant more oil availability. Initially, this increased oil output went to slake the virtually unquenchable thirst of emerging economies like India and China and so, for a while, the prices stayed high. However, the recent weakening of growth in China and the reduction in demand from the U.S. has caused a glut in the market. In earlier times, Saudi Arabia kept the other OPEC members in line by using its power as a dominant oil producer to keep prices high.
But now, as prices have dipped, oil producing states needed to pump more oil so that their revenues did not get hit. But this only resulted in more supply and a glut, thus weakening prices further.
So what is the outlook for oil in the near future? While none of us have a crystal ball, the general consensus is that oil prices will continue to stay low on account of many factors. China will still need to deal with its internal problems of high debt levels and stagnant domestic consumption. India too is facing a leveling off of growth and lower foreign exchange reserves, and needs to manage oil imports tightly.
After the recent nuclear deal, Iran will enter the market with a significant capacity. Given the Shia-Sunni animosity that is rapidly escalating into a region wide war in the Middle East, there will continue to be competition in trying to export oil. States like Russia, Venezuela and Nigeria, which are going through a severe contraction of their economies due to lower oil revenues, will continue to push more oil into the global market, keeping the downward pressure on oil prices.
But Oil is Not Sustainable
While consumers in developed countries rejoice at low gas prices and rush out to buy larger, gas guzzling automobiles, this is not going to be a sustainable trend on account of various factors, the most important being climate change.
Climate change and the damage it can cause is already apparent in countries around the world. Incessant rain and flooding recently hit Chennai, a city of 12 million on the eastern coast of India, causing the loss of hundreds of lives and millions of dollars. The drought in California caused huge damage to agriculture in the western states. Flooding in Britain virtually drowned whole villages and small towns along the swollen rivers. At the recent climate conference in Paris, nations from across the world pledged to reign in fossil fuel use and implement stricter emissions controls.
In the U.S., CAFE standards mandate a virtual doubling of the fuel economy of cars over the next decade. Manufacturers are therefore scrambling to meet these goals. Electric vehicles are the only viable technology that can help us move our transportation sector off of fossil fuels. Developing countries like China and India have, until recently, been dragging their feet on emissions, but now they too have realized the seriousness of the situation. In New Delhi, the air quality has gotten so horrendous that the government promulgated a law to take 50% of the vehicles off the streets each day. Over the last month In Beijing, there have been two “Red Alert” days where the air quality was so poor that residents were advised not to step out of their homes for three days.
All of this has made these governments realize that air pollution is a problem for them too and that they need to take steps to improve air quality.
Future of Electric Vehicles
Electric vehicles are the only viable technology at this point that can reduce fossil fuel use for transportation. Over the last five years, these vehicles have proven themselves in terms of reliability, quietness and low operating costs. Electric vehicles are therefore poised to take significant strides in the global marketplace.
Battery technology continues to improve both in performance and cost. Two new electric cars with a 200+ mile range and a mass market price are slated to be introduced this year. As these longer range, reasonably priced electric vehicles hit the market, consumers will embrace these offerings in greater numbers, thereby reinforcing the “Virtuous Cycle” of greater volume driving efficiency of scale and driving costs down, leading to increasing volumes. It is anticipated that, by 2018, we will see electric vehicles that are competitively prices compared to combustion engine vehicles, and given the advantages that electric vehicles enjoy, they are poised to replace combustion vehicles at an accelerating pace.