Richard Branson made headlines this week after commenting that every car on our roads could be electric inside the next 15 years. It’s an optimistic timeframe, but even so, it’s clear a corner has been turned and electric cars are set to become a ubiquitous presence in the years ahead. What does it all mean for the oil and gas industry, however?
Doug Edman is director of Investments and a senior analyst at Brandes Investment Partners, but in a former life was a project engineer at Chevron. He subsequently brought that expertise to Wall Street before arriving at Brandes in 1995 and the energy sector remains a key focus of his today.
So, speaking as someone who has studied the oil and gas industry meticulously for decades, what lies in store for fossil fuels now that cars are going green?
“For electric cars, you have to ask what is generating that power,” says Edman. “Most electricity in North America is still driven off a carbon base. To say we are going to be totally weened of coal, oil and natural gas in 15 years is unrealistic. If electric cars replace diesel or petrol cars, that doesn’t mean oil isn’t going to be part of the energy matrix.”
Which is good news for Canada, a country that still relies heavily on the sector for overall domestic growth. Nowhere is that more apparent than Alberta – the Fort McMurray fires just the latest calamity to scar the province where oil is king. The silver lining of the collapse in oil since 2014, at least from an investor’s perspective, is that value has been much easier to find.
“Typically we find investment ideas when there are dark clouds over an industry,” says Edman. “With the oil price collapse, the entire sector was downgraded and that meant there were opportunities across the full energy space – upstream exploration companies, downstream refining companies, drillers, oilfield services, pretty much everything was trading at a discount.”
While the current price of $46 a barrel is way below what most Canadian producers would deem sustainable, oil has in fact rebounded greatly since its early-2016 lows when the supply/demand dichotomy was particularly skewed.
“North America ramped up production and Saudi Aramco did not want to lose market share,” says Edman. “Their reaction is really what caused prices to collapse. We have not viewed this as a demand problem. As a rule of thumb, demand has grown by a million barrels per day over the past 40 years. In recent years it is even more than that – in 2016 it’s predicted that demand will be 1.3 million barrels per day higher than last year.”
That demand also means that ultimately the price of oil will climb as the divestment of recent years limits the supply glut. “In free markets where commodity prices are allowed to move based on supply and demand, when prices are low operators will invest much less,” he says. “That means eventually you see a supply response, and you can see that is already happening.”
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