China has put the world’s oil cartel into a death spiral

Watch what Saudi Arabia does, not what it says.

Saudi and OPEC officials self-evidently do not believe their own claim that world oil demand will keep growing briskly for another generation as if electric vehicles had never been invented, and there was no such thing as the Paris Accord.

OPEC had to slash output last October in order to shore up prices. It had to cut again in April. The Saudis then stunned traders with a unilateral cut of one million barrels a day (b/d) in June.

All told, the OPEC-Russia cartel has had to take 2m b/d of production off the table at a high point in the economic cycle, after China’s post-COVID reopening and at a time when the US economy has been running hot with a fiscal expansion roughly equal to Roosevelt’s world war budget.

That 2m b/d figure happens to be more or less the amount of crude currently being displaced by EV sales worldwide, according to Bloomberg New Energy Finance.

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Yet the mood was all defiance and plucky insouciance at the 24th World Petroleum Congress in Calgary this month.

Talk of peak oil demand is “withering under scrutiny”, said Saudi Aramco chief, Amin Nasser.

Consumption will ratchet up from 102m b/d to 110m b/d by 2030, and rise further until 2035 before stabilising at a high plateau through to mid-century.

This skips over the awkward detail that EVs are already on track to reach 60 per cent of total car sales in the world’s biggest car market within two years (not a misprint).

The cartel is being hit from two sides. Petrol and diesel cars are becoming more efficient, gradually displacing 1.4 billion vintage models disappearing into the scrap yard. BP says that alone will cut up to a tenth global oil demand by 2040.

With a lag, EVs are now starting to take a material bite, with an S-curve trajectory likely to go parabolic this decade.

China’s EVs sales hit 38 per cent this summer, even though subsidies have mostly been scrapped. This is far ahead of schedule under Beijing’s New Energy Vehicle Industry Development Plan.

China’s Chebai think tank says the emerging consensus is that EV sales will hit 17m or 60 per cent of total Chinese share by 2025, rising to 90 per cent by 2030, assuming that the grid can keep up.

Li Xiang, founder of the booming Chinese carmaker Li Auto, thinks EV sales will reach 80 per cent as soon as 2025. Rival BYD is selling over 50,000 EVs a week, including its workaday Seagull retailing for $US10,200 in the home market.

Could we have some in Britain please.

Vietnam is a few years behind but with similar ambitions. Its EV start-up, VinFast Auto, became the world’s third most valuable carmaker after it launched on Nasdaq last month, briefly worth as much as the German car industry before the share price came back down to earth.

Whether produced by China or regional rivals, cheap mass market EVs will flood southeast Asia and much of the global South, whatever the West does.

OPEC’s central premise has long been that the rise of a billion-strong middle class in emerging Asia will more than offset declining oil use in the OECD bloc. That notion is ‘withering under scrutiny’.

India is not going to rescue OPEC. EV sales have already surpassed one million so far this year, many made in India’s EV capital of Krishnagiri.

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The pace is certain to preempt the official 2030 target of 30 per cent penetration for private cars and 70 per cent for commercial fleets. Ola Electric thinks the huge two-wheeler market could be entirely electric by 2025.

The International Energy Agency (IEA) says global oil demand will peak at 105.5m b/d in 2028 and then flatten for a few years before going into decline. This innocuous forecast prompted a furious anathema from OPEC headquarters.

“It is an extremely risky and impractical narrative to dismiss fossil fuels, or to suggest that they are at the beginning of their end. What makes such predictions so dangerous, is that they are often accompanied by calls to stop investing in new oil and gas projects,” said OPEC chief Haitham al-Ghais.

“Such narratives only set the global energy system up to fail spectacularly. It would lead to energy chaos on a potentially unprecedented scale,” he said.

The IEA pulls its punches. The Rocky Mountain Institute argues in its latest report – End of the ICE Age – that half of global car sales could be EVs by 2026, reaching 86 per cent later this decade.

“By 2030 oil demand for cars will be falling at over 1m b/d every year and the endgame for one quarter of global oil demand will be in sight,” it said.

Prince Abdulaziz bin Salman, Saudi Arabia’s sharp-witted energy minister, likes to cast himself as the Alan Greenspan of world oil, moving crude futures with the lift of his eyebrow.

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This disguises what is already a policy of extracting maximum hydrocarbon rent before the window closes.

The prince justifies withholding 2m b/d of global supply on the grounds that higher prices are needed to foster global investment in new projects, and therefore to ensure an orderly world economy. If you believe that, I can sell you a rain forest in Riyadh.

The Saudis have lifted Brent prices to $US90, helping Vladimir Putin in the process. But the problem with cutting supply is that it yields market share to rivals. “It is easy to cut, but how do you wrestle back share once you have lost it?” said Ole Hansen, commodities chief at Saxo Bank.

America’s shale frackers keep confounding predictions of decline. They have come up with new technology and longer lateral drills. The US Energy Department expects US oil output to reach a fresh record of 13.4m b/d next year, astonishing when you remember that output was 3.8m b/d at the nadir in 2008.

The IEA forecasts that American and non-OPEC production will rise by 5m b/d by 2028, outstripping the rise in global demand and leaving OPEC with a diminishing slice. This suggests that the Saudis are forcing the price too high for their own good.

Brent futures may spike higher this autumn but probably not for long. China has stopped buying for its strategic reserve. The rally looks stretched.

The decline of oil in car and bus transport may be closer than almost anybody imagined.

“If oil goes above $US100 there is going to be a buyers’ strike. Spare capacity is the highest in years and ‘spec shorts’ are the lowest in 12 years, so when this turns there could be a very big move (down),” said Hansen.

Personally, I had assumed that there would be one final supercycle for oil over the early to mid 2020s, with prices hitting $US150 to $US200 as stubborn demand collides with a ten-year drought in upstream investment.

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This has been overtaken by the breathtaking pace of global electrification. The decline of oil in car and bus transport may be closer than almost anybody imagined. OPEC as we know it may be on the cusp of a death spiral.

Telegraph, London

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