The oil-era might be over, but we cannot give up on oil

There is a dramatic transformation on the world’s energy market; a new era is about to begin. However, in the medium term, oil prices tend to rise, rather than fall – says Péter Simon Vargha, chief economist at MOL, and writer at Guruló Hordó blog. In the long term, changes, such as the dethroning of oil will be brought about by the so-called sharing economy gaining ground, which is based on sharing goods and services, electronic mobility, and shale gas becoming more popular along with other alternatives. However, for MOL and other big oil companies this is not necessarily a bad situation. Instead, it offers them opportunities for innovation and change.

Péter Zentai: Investors who anticipate a significant rise – above 100 USD – in oil price on the world market – are they mad or wise?
Péter Simon Vargha: I, for one, would not bet on it, and the forward prices do not support that numerous investors are expecting such price increase either.
While oil supply seemed scarce earlier, the appearance of shale oil on the market has thoroughly rearranged the picture. If the price of oil goes up, the shale oil supply of the USA will grow accordingly and stop prices. Furthermore, the cost of extraction – for both shale and traditional oil – has decreased dramatically in the last one and a half years. However, in the medium term, it will likely to go up from the current 40-50 USD per barrel, because due to the low prices, numerous oil producing investments were delayed (the global energy research and consultancy group, Wood Mckenzie reported more than 1000 billion USD worth of investments delayed), which holds back oil supply, while demand keeps growing from year to year. This way, the current oversupply will end, which leads to new investments, resulting in higher prices.

Other experts can even see the end of the oil era coming within a reasonable time. This seems like a logical prediction, considering the level of automatization, not to mention the electrification of vehicles…
The end of the oil era has been predicted many times already… Of course, it will definitely happen once, but not so suddenly.
Oil is used in many different ways – from transport and traffic to industry and petrochemicals. The chance of its use ‘going extinct’ at the same time in every field is slim. (For example, its role in power generation has been declining for decades; the developed world barely uses it anymore.) Though, it is true that oil could have serious competition even in transporting, which is its main consumer, making up 60% of its demand. Electric cars are getting cheaper; by 2020, they can be even cheaper than their petrol and diesel counterparts. Sharing economy (e.g. the transporting network company Uber) and automatization (self-driving cars) are also going to fundamentally change mobility in 10-20 years.

The current situation on the oil and gas market is rather chaotic. Can it be connected to competition between technologies, geopolitical interests, or the fatal weakening of OPEC?
I think the role of geopolitics is overestimated. This is a global market, and its players individually do not have enough impact to influence the price. Even the group of main exporters, OPEC has lost much of its power; it cannot make a long-standing difference in the prices.
Do not forget that the USA has overtaken Russia and Saudi Arabia and became the greatest producer due to the shale oil revolution. Furthermore, it was not achieved by a single state-owned company, but numerous smaller ones, competitors in their very essence – their actions and production are not defined by the state.
The technological competition has definitely increased; however, its main field is not the oil market, but the renewable energy production, relatively independent from it. Solar and wind energy have become so affordable, that they are now competitive without any support. This is a revolutionary change on the energy market.

It seems nobody is interested in those giant pipeline projects anymore, which draw so much strategical and security policy attention. We are better off without South Stream, Nabucco, and Turkish Stream pipelines…
Indeed, these projects do not seem so relevant today. This could happen because the European (along with the global) gas market went through significant changes. There is plenty of gas – maybe even more than oil – and it reaches European consumers via competitive ways/methods. The crisis in Europe and the slowdown of China’s growth both set back the demand for gas.
Due to the cutting off of the Russian-Ukrainian pipeline, and the increasing tension between the two countries, gas transmission infrastructure has developed across Europe: pipelines connecting neighbouring countries, and liquefied natural gas terminals were built. These allow the transmission of American shale gas, which has already been exported in liquid form. The current situation is: gas market is globalizing, and the era of regionally segmented markets is going to be over. Consumers can only benefit from it; they can buy gas at low price.

The time before us does not favour great oil companies like yours. How do you see it? Do you have any ‘escape’ strategy?
Oil companies – like ours – do realize that they have to make a move. However, this situation does not necessarily threaten the future of oil companies, but rather offers them a chance for improvements. As a reminder: 20-30 years ago, Magyar Telekom was the only major factor on the now-obsolete fixed telephony market. Today, this company is one of the leading mobile network operators.

Do you think that capitalized oil and gas companies – such as MOL – will enter the electro mobility field or even join the hydrogen cell car business? If so, which sector of your field can expect the most interest?
After all, oil companies in a way provide transport services – if people want to use electricity or gas, then oil companies will sell them those.
Pointing out which field in particular can expect the most attention is rather difficult. Mobility market is changing: not only because of electric cars, but because of ‘sharing economy’, which is based on sharing products and services, spreading so quickly. It is not sure that everyone really needs a car that is used only for an hour every day.
For this reason, those oil companies will benefit from these changes that see the opportunities in them, and dare to make bold or even unorthodox moves: they ‘flee forward’ if you will. Of course, it would be too hurried to renounce traditional oil production and processing, which is likely to remain the major segment of oil companies.

Original date of Hungarian publication: June 29, 2016