I'd like your opinion on the following scenarioI'm interested in your opinion on the price of oil over the next 20+ years. The very long term: 20 - 30 years and even longer.
What would you guess the probability that oil remains "permanently" high over many decades (with the exception for the years during the odd recession) based on the scenario that is outlined below. I'll define high as being $80 or more for WTI.
First know these facts:
1) 40% of oil use is from every day, non transportation living and therefore demand is based on population size. Population will grow by 2 billion people (United Nations estimate) over next 25 years. The bulk of the population growth will be from poor countries and not using oil currently (or very little).
2) 60% of oil use is transportation related but will take anywhere from 1 to 2 decades to make a dent in oil demand depending on whether it is for cars or trucks or airplanes and then demand will come down slowly once it reaches the tipping point. Currently there are 1.2 - 1.3 billion internal combustion cars to displace and this will take time to be replaced by electric vehicles. Also, there must be enough fueling stations to service billions of EV's. This takes time - decades.
A possible scenario I see and the one I ask your probability estimate of occuring is the following:
Oil companies know that oil demand will eventually fall and don't want to increase production in any meaningful way (I'm not talking about the current oil situation or the one over the next few years. I'm talking the very long-term of 20+ years) and cause an oil glut. No country or company wants to oversupply the market if you are constantly told your "demise is coming".
Oil companies, as a result of being flush with cash start to buy other oil companies (while also paying dividends and buying back stock) as they see this as a good use of funds, due to oil stocks being very cheap as a result of people not wanting to be associated with fossil fuels in any meaningful way and not bidding up oil stock prices. Some investors want to own these stocks but the average person does not want to be associated with them and be stigmatized.
Over time, these merger and acquisitions will lead to fewer oil companies remaining and those surviving companies will be much larger and have lower break even prices (although those break even prices will slowly rise as demand continues to fall). These fewer but larger oil companies lower production levels to take into account reduced demand and to maintain a high $80 oil price. Even though they sell less oil, their lower break even prices (relative to pre M&A) and high oil selling price of $80 results in increased profitability.
Over time M&A really picks up and it is now M&A mania resulting in a very small number of oil companies remaining but highly profitable ones These remaining companies start to buy back their stock as there are few takeover targets remaining and so even if profitability starts to fall (due to less oil being sold and incresing break even prices), it increases on a per share basis. If companies don't buy back their stock then astronomical dividends are paid to shareholders.
What would you estimate the chances of this happening?
Ignore any possibility of diversification in the above scenario.
I would be interested in hearing any comments you may have.
I'll be tuning back on Monday.