For the first time in roughly a century, oil’s dominance as a transportation fuel is under threat. Electric vehicles have become cheaper, and consumers are buying more of them. At the same time, climate policies are becoming more stringent and more global. It’s now plausible to consider a world where oil demand falls to zero, or at least near zero, by the end of the century. If oil producers were to anticipate such a long-run decline in demand for oil, how would they respond?
Many have long believed oil producers would quickly move to extract as much as they could before the demand, and prices, fall. But Harris Public Policy’s Ryan Kellogg found the opposite is likely true. Producers make fewer long-term investments—reducing their initial rate of investment by 2 percent, despite no initial change in oil demand. Over time, the anticipation of a decline in oil demand pushes them to reduce oil production by 4.8 percent more than what would have been reduced if they had not anticipated the decline. Over a 75-year period in which oil demand gradually falls to zero, the oil industry would reduce its investments by 35 percent overall, reducing production by 27 percent in total. This results in fewer emissions.
OPEC+ members outside of Kuwait, Saudi Arabia and the United Arab Emirates, as well as non-OPEC producers such as those engaged in deepwater drilling reduce their investments the most because their extraction involves investments with long time horizons. The core OPEC members—Kuwait, Saudi Arabia and the United Arab Emirates—do not follow this trend. Instead, they increase their investments in response to the anticipated demand decline because their low costs and high reserve valuations induce them to extract before demand falls too far. Shale producers tend not to respond to anticipated demand changes because their investments have short time horizons.
For the first time in roughly a century, oil’s dominance as a transportation fuel is under threat. Electric vehicles have become cheaper, and consumers are buying more of them. At the same time, climate policies are becoming more stringent and more global. It’s now plausible to consider a world where oil demand falls to zero, or at least near zero, by the end of the century. If oil producers were to anticipate such a long-run decline in demand for oil, how would they respond?
Many have long believed oil producers would quickly move to extract as much as they could before the demand, and prices, fall. But Harris Public Policy’s Ryan Kellogg found the opposite is likely true. Producers make fewer long-term investments—reducing their initial rate of investment by 2 percent, despite no initial change in oil demand. Over time, the anticipation of a decline in oil demand pushes them to reduce oil production by 4.8 percent more than what would have been reduced if they had not anticipated the decline. Over a 75-year period in which oil demand gradually falls to zero, the oil industry would reduce its investments by 35 percent overall, reducing production by 27 percent in total. This results in fewer emissions.
OPEC+ members outside of Kuwait, Saudi Arabia and the United Arab Emirates, as well as non-OPEC producers such as those engaged in deepwater drilling reduce their investments the most because their extraction involves investments with long time horizons. The core OPEC members—Kuwait, Saudi Arabia and the United Arab Emirates—do not follow this trend. Instead, they increase their investments in response to the anticipated demand decline because their low costs and high reserve valuations induce them to extract before demand falls too far. Shale producers tend not to respond to anticipated demand changes because their investments have short time horizons.
Short: The rise of EVs and more stringent climate policies has made it plausible that oil demand could fall to at least near zero by the end of the century. If oil producers were to anticipate such a decline, many think they will quickly move to extract as much as they can. But Harris Public Policy’s Ryan Kellogg found the opposite. Producers make fewer long-term investments, and over time they produce 4.8 percent less than they would have if they had not anticipated the decline. OPEC+ and non-OPEC producers reduce their investments the most because their extraction involves investments with long time horizons. The core OPEC members instead increase their investments because their low costs and high reserve valuations induce them to extract before demand falls too far. Shale producers tend not to respond to anticipated demand changes because their investments have short time horizons.
Read more: https://kelloggryan.com/Papers/EndOfOil.pdf
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