The Daily Telegraph - Business
America was king of petrol cars, but who will rule the electric age? Ambrose Evans Pritchard
The world’s commentating class has been too quick to write off the US as an economic and strategic hegemon. Over the last week the International Energy Agency and Opec have both capitulated on US shale, acknowledging that the US will achieve unparalleled dominance of global oil and gas by the mid-2020s. What they do not acknowledge – the “déformation professionnelle” of the oil culture – is that this will be followed by a Chinese and Indian switch to post-fossil-fuelled transport in the 2030s. The imperatives of climate policy will force this shift to electrification, Trump or no Trump.
This sequence has grim implications for Russia and the hydrocarbon regimes, and for the oil majors with such a heavy weighting on the London Stock Exchange. It means the cyclical recovery of crude prices may be stunted, and painfully slow, before giving way to “peak oil” and irreversible decline as electric vehicles (EVs) reach critical scale.
The IEA’s World Energy Outlook forecasts that US shale will account for 80pc of new global supply by 2025, lifting “tight oil” output from 5m to 13m barrels a day (b/d). Total US production will hit 17m b/d.
The Marcellus gas basin in Appalachia – bigger than Qatar’s North Field – will turn the US into the world’s biggest exporter of liquefied natural gas in the 2020s. “The US will become the undisputed global oil and gas leader for decades to come,” said Fatih Birol, the IEA’s chief. “The growth is unprecedented, exceeding all historical records.”
The US ramp-up vaults past Saudi Arabia’s big moment with the 5.7m b/d Ghawar field in the Seventies, and past the huge gas discoveries of Western Siberia during the Soviet heyday. Combined crude and gas output will plateau “well above” 31m b/d of oil equivalent. The Saudi gamble that sub-$50 oil would wipe out US shale was a misjudgment. Opec has lost the war of attrition. Venezuela has in the meantime gone bankrupt.
Scott Sheffield, the founder of Pioneer and acclaimed “king of the Permian”, told me earlier this year that break-even costs in his prolific zone of West Texas have dropped to $25. Production from each well has jumped by half with digital technology. “As long as crude prices are around $50 to $55, we’re in the sweet spot,” he said. “It took us 40 days to drill a well in 2014. We’re already down to 20 days.”
One can forget that the US was facing an energy crisis in 2008. Crude imports were soaring. Net energy and petrochemical imports were adding 3.5pc of GDP to the US current account deficit.
This promises to be a 2pc surplus by 2025, transforming the outlook for the US dollar and the global strategic balance. America’s LNG exports have helped to break Russia’s lock hold over pipeline gas contracts in Europe. Set against this is a dysfunctional US president who trashes American leadership and threatens to wreck the global multilateral order. My assumption is that he will be swept away briskly, a historical curiosity. US energy primacy will outlast him. By the early 2020s it will be clear that China’s Xi Jinping has failed to grasp the nettle of reform. Growth will slow towards 2pc, leaving the country with a credit hangover, stuck in the middle-income trap with an ageing population. Will the baton really be passing from Washington to Beijing?
For Opec, the US shale shock is a disaster. Frackers rush to lock in the future delivery contracts as soon as crude hits a band of $50 to $55, guaranteeing a surge of short-cycle supply. It is a permanent headwind. Opec oil revenues have fallen from $1.2 trillion a year in the glory days to $400bn (£300bn).
Saudi Arabia has run its cradle-to-grave welfare complex and military machine on assumptions of $120 oil. It has since embraced austerity and slashed its “fiscal break cost” but it is not enough stop the slide in foreign exchange reserves. The acute political stress can no longer be disguised. Any illusion that Saudi Arabia is joining the modern world has been shattered by the absolutist purges of Crown Prince Mohammad bin Salman.
The IEA thinks there is enough global oil demand to go around for everybody. Prices will rise to the low $80s in the early 2020s, despite extra US shale. This will be followed by one last “Indian summer” for the Gulf states. Peak oil will be deferred until 2040. “It’s too early to write the obituary of oil,” Birol said.
Opec predicts that fossil fuels will continue to meet 75pc of world energy needs in 2040, much as now. This is to treat the Paris climate agreement as a scrap of paper. It puts the world on a frightening path and will not be tolerated by the younger generations. Technology has already moved ahead in any case.
The IEA embraces electric vehicles, but cannot seem to consummate. It thinks the EV share will be no more than 280m of the 2bn passenger fleet by 2040, trimming oil use by just 2.5m b/d. It mysteriously supposes that trucks will stick to diesel, even though eTrucks are about to hit the market. For years the IEA misjudged the trajectory of solar. It is repeating the error with EVs. Whether capital cost parity comes in 2022 or 2024, it is coming and it will have the disruptive force of a tornado.
Great power politics will intrude in any case. China is mandating a zero-emission quota of 10pc by 2019 for new cars, calculating that it can exploit its lead in lithium battery output to dominate the EV era and leapfrog Western carmakers tied to combustion engines. By forcing the electrification of the world’s biggest car market they can make it happen.
There will be no oil reprieve for Opec when US shale loses its fizzle in the late 2020s. By then it will be too late. The long-term equilibrium demand for crude is under 70m b/d, chiefly for chemicals, a third less than today.
Energy ascendancy gives the US another quarter of a century of formidable clout. But note, too, that the pioneer of EV disruption is an American company: Tesla. A decade hence EVs will be computers on wheels, a branch of artificial intelligence. The advantage skips to Silicon Valley. It plays into American strength. Never underestimate the ability of the US to endlessly reinvent itself just when you thought decline was setting in.
‘I assume that Trump will be swept away briskly, a historical curiosity. US energy primacy will outlast him’