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Viewpoint - Pricing matters

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Chris Bird MEI, Managing Director, P3L Fusion, ponders the questions: ‘Why is the oil price higher than other energy sources? And where next?

‘Why’ is one of those strange words that can make people very uncomfortable, especially if asked several times in a row. I remember when my son was young, he would ask: ‘Why… Daddy?’ hundreds of times, which is hard and frustrating when you may not know the answers. However, it is only by asking ‘why’ that we can gain better insights into things and helps think how we can navigate the future.


So, looking at the question: ‘Why is the oil price higher than other energy sources?’ I think there are six key factors at play:

  • The standard oil price based on other energy sources using a metric of $/MWh.
  • The amount of proven reserves on a global basis.
  • The amount storage in stock tanks along with an estimate of inflow or outflow.
  • The supply and demand curve.
  • Short term impacts.
  • Longer term risks – threats and opportunities.

If the equation today guesstimates an oil price around the $50–$60/b mark, then why did the oil price rise to $72/b recently? Perhaps there is a more appropriate question: Why is oil one of the more expensive energy commodities on an energy index

We know that energy prices are very volatile. Just look at recent oil and gas prices and the changes in energy costs for solar and wind over the last decade. I have examined all the energy costs and developed a relative index (0 to 100) as follows, where low is cheap cost and high is expensive cost, based on today’s mid-point unit cost estimates: 

  • Geothermal low temperature*            38
  • Hydro power                                       38
  • Onshore wind                                     38
  • Gas CCGT**                                      40
  • Large scale solar***                           49
  • Biomass                                             53
  • Nuclear                                              57
  • Offshore wind***                                63
  • Gas CCGT with CCS****                   67
  • Oil for power generation                   80
  • Super critical coal***                         82
  • Coal gasification****                         91
  • Gas OCGT****                                100

*Although geothermal could provide power for the world forever, it is still relatively new but growing in areas such as the US, Japan and Africa.
**Gas generation is based on gas prices where Henry Hub and National Balancing Point (NBP) prices have diverged substantially, and the economic unit cost spread is wide. This means UK gas CCGT is much less attractive than the equivalent in the US.
***These technologies are growing, and unit costs are still reducing.
****The regulations on hydrocarbon-based power plants are increasing costs to ensure a reduction in greenhouse gas requirements/goals.


The key issue is it is difficult to compare oil with other energy sources. Oil is now less than 5% of total electricity power generated and will continue to be reduced as a primary source for electricity over the next few decades. As a major energy source, oil has also been reduced in industry. In 1973 oil represented 20% of industries’ energy use, whereas in 2017 it represented just 8%.

So, the question remains: Why is there a premium for oil?


If we investigate the use of oil on a global basis since 1973 through to 2017, then the following key metrics apply: 

Use of oil                     1973                2017               Increase/decrease
Volume                       2.2mn toe        3.8mn toe        + 70%
Non-energy use           12%                 16%                 + 75%
Road transport            30%                 50%                 + 290%
Industry                      20%                 8%                   –30%


Therefore, we can deduce that the major increases are due to road transport and petrochemical products, where customers will pay a premium for the convenience of the product or the ability to travel.

Interestingly, if we look at car manufacturing from 1990 to 2017, we can see why the demand for oil has been relentless. Between 1990 and 1999 the world averaged around 40mn car sales per year; between 2000 and 2013 this rose to an average of 53mn car sales per year. However, we started to see a major increase in car sales with 80mn cars and 20mn trucks sold in 2017. It is now predicted that 2018 will see nearly 97mn cars produced; and this trend continuing with an estimated 115mn cars manufactured in 2025. 

World car sales have nearly doubled between 2013 to 2018, with China and the US leading the way. This is huge growth. To put it another way, in 2006 there were 850mn vehicles on the roads globally and this increased to 1.3bn vehicles in 2015. That is a 65% increase in just 10 years.


Conversely, electric vehicles – although deemed the way forward by many – still only represent around 2% of gross car sales, with an estimated 2mn electric/ultra-low emission vehicles sales forecast in 2018. 


Looking at the UK market, between July and September 2012 there were approximately 34mn vehicles on the road, with 681,000 new vehicles registered. In the same period in 2017, there were approximately 39mn vehicles on the UK roads, with 816,000 new vehicles registered – so an increase over the five-year period of around 15%. This was against 14,000 vehicles being registered with ultra-low emissions in 2017, which represents just 1.7% of gross UK car sales.


What insights does the above data provide?

  • Oil cannot be compared on a like-for-like basis with other energy sources. It attracts a convenience fee. So if we take the oil price equation I highlighted above, maybe there is a seventh component.
  • Currently, road transport is still growing and hydrocarbon-fuelled engines are still the primary power source. Longer-term the question is: ‘Can governments meet their promise of no more new petrol and diesel engines cars by 2040?’ That is only 22 years away. It is not just a mind-set, it is a major change in manufacturing and infrastructure.
  • The use of petrochemical products is still growing, although the latest statistics concerning plastics use and the environment is a key concern.
  • Economic communities have a real challenge to move to ultra-low emission vehicles as this still only represents around 2% of total volume on an annual basis.
  • Consumers are prepared to pay a premium/convenience fee for freedom of travel.
  • This issue must cause more tensions between countries trying to drive GDP growth and the need to protect the environment from a sustainability perspective.
  • We have created a world of consumer expectations. But it is now a question of changing mind-sets, behaviours, cultures and business models. This is going to be tough but essential.
  • Oil is here for a very long time, whether we like it or not, unless there are larger catastrophic environmental changes that forces major change. The question is: ‘Can the world economy move from 90mm b/d of oil use down to less than 60mm b/d by 2050? Is it possible?’


We should ask our governments to discuss in detail how they really plan to make the move from hydrocarbon-fuelled cars to a new world of ultra-low emission vehicles. It is not simply about legislation and is highly complex.

Governments have some key factors to consider, including:

  • Climate change, environmental impact and sustainability metrics.
  • GDP/growth of countries to maintain their position in the world economies.
  • Oil production and the major energy companies.
  • Manufacture of vehicles along with substantial supply chains.
  • Pensions funds.
  • Tax payments/government income.
  • Country and community infrastructure for freedom to travel/convenience of travel.
  • The 1.4bn petrol and diesel engine vehicles on our roads today.
  • Impact of changing technologies and other environmental issues.
  • The impact of new legislation and costs to our communities.
  • Changing behaviours, cultures, mind-sets for a sustainable world.
  • Social-economics perspectives.
  • Separating the facts from fiction, politics, populism and one-sided views so we can be objective, balanced and make the right decisions.


Oil will be around for a very long time, but in energy companies there is also the balance of gas and other energy sources. The responsibility on us is how we use it to provide a service today and protect the next generations at the same time.

As they say, the future will always be interesting – it just depends on how you look at it.

Photo: Shutterstock

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