CNBC

Oil prices will go up again—are we ready?

 

Jigar Shah, founder of SunEdison / Thursday, 4 Dec 2014 | 1:35 PM ET
 

The price of gas will go back up. I guarantee it.


Saudi Arabia and the members of OPEC decided to take advantage of America and China's
ability to stabilize oil demand in 2014 to allow the supply of oil to exceed demand and drive
down the price of oil. The motive seems to be to shut in arctic oil efforts in Russia, oil shale in
Canada, deep sea oil in Brazil, and tight oil (fracking) in the U.S.


Some folks say that $55 a barrel is the break-even point for oil, while others say once it stays
below $80, the ability of unconventional oil to raise more junk bonds will be severely curtailed.
Either way, one thing is clear to everyone: The age of cheap oil is over.


When I worked at BP from 1999-2003, I remember that we couldn't drill unless we could show a
break-even of around $17 a barrel. Just over a decade later, it seems like every incremental barrel
costs at least $55 a barrel – and nearly $100 a barrel for arctic oil. It looks like no matter how
you slice it, if the world wants to maintain crude-oil production at above 75 million barrels a day,
we are going to need expensive oil – or a plan to destroy oil demand. Just a note, we have been
flat at roughly 74-75 million barrels a day of crude-oil production (including lease condensate)
since 2005. Mature fields are declining by about 3.8 million barrels a day each year and we have
to make that up with more expensive oil or implement straightforward ways to destroy global oil
demand.


In 1999, you were used to paying $1.30 a gallon. Even if the average price of gasoline goes
down to $2.50 a gallon, that's an average increase of over 6 percent a year – far higher than
inflation. Diesel fuel is still stubbornly above $3.00 a gallon; that's an average increase of nearly
8 percent. So, how much more pain would you endure before you start planning to reduce your
oil consumption? AAA said that, in 2013, the average American car owner spent $9,000 a year
to own a car; that's over $750 a month. This is larger than the mortgage or rent for many
American car owners. No wonder most American's don't think their buying power is higher
today -- all of it went to oil.


Now put yourself in the position of your local municipality, Walmart, or UPS. To accommodate
all that cost increase, you had to cut back on essential services or raise prices. But there are lots
of things that you could do to reduce oil consumption. Through software, you could determine
that you could do without 25 percent of those cars and the fuel that they burn by planning better,
as some municipalities have done. If you own a fleet of trucks, you can double the fuel economy
by just doing obvious things like smoothing the air foil so you aren't driving a brick wall through
the air. Walmart has already done this. If you have a large local fleet, you could start switching
to lower cost fuels like electricity and natural gas, like UPS has done.


Time and again, we declare that we have a goal of energy independence but then lose the
courage to follow through because we get sucked back in by temporary drops in the price of
gasoline. But remember the relief is just that – temporary. Oil spiked in the 70s, during the first
Gulf war, in the run up to the second Gulf war, during hurricane Katrina, in June of 2008, and
then shot up to $100 a barrel in 2011 and has been the main source of global economic
headwinds. How many of you see the pattern? It is happening more often and with OPEC down
to 35 percent market share, it's no longer in anyone's control – except ours, the consumer.


In fact, transportation is one of the main areas where American ingenuity has not brought
efficiency increases and competitive choices that drive down the cost for consumers. Big data
can reduce miles and allow supply chains to do more with fewer cars. Better automotive
engineering and President Obama's new CAFE regulations will double fuel economy by 2025 –
matching standards already in place in Europe, China, and Japan. The last piece is fuel choice.


The sad truth is that the technologies necessary to achieve true fuel choice have been around for
20 years, but we seem incapable of deploying them at scale. Six years after the Pickens Plan, our
pathway to converting our heavy truck fleet to natural gas still seems ten years away. If we
finally want to take oil out of the equation, we have stop with all the Ethanol love, and finally put
a serious plan in place.


Just like with electricity, destroying our addiction to coal took diversification and an effective set
of mandates. The U.S. Renewable Fuels Standard requires gas stations to have a particular
percentage of their fuels to be renewable. Today, that standard needs to be updated away from
just Ethanol to an open fuels standard that includes non-biofuels like electricity, natural gas,
ethane, methanol, DME, gas to liquids, hydrogen, and whatever other fuels our great innovators
think of.


Every President since Richard Nixon has been calling for energy independence, but no one has
put a serious plan in place. We finally have the technology to do it -- there is no reason why we
have to make the mistake of losing our resolve again. Let Saudi Arabia play their games. When
we look back from 2025, we should see less cars, efficient transportation, and the fuel-choice
economy that Americans built. It's time we had a choice.


Commentary by Jigar Shah, the founder of solar company SunEdison and the author of
"Creating Climate Wealth: Unlocking the Impact Economy." Follow him on Twitter
@JigarShahDC
.


FUTURES AND OPTIONS TRADING INVOLVE SIGNIFICANT RISK OF LOSS AND
MAY NOT BE SUITABLE FOR EVERYONE. OPTIONS, CASH AND FUTURES
MARKETS ARE SEPARATE AND DISTINCT AND DO NOT NECESSARILY
RESPOND IN THE SAME WAY TO SIMILAR MARKETS STIMULUS. A MOVEMENT
IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE
RELATED FUTURES & OPTIONS CONTRACT BEING OFFERED. SEASONAL
DEMAND AND CURRENT NEWS IN COMMODITIES ARE ALREADY REFLECTED
IN THE PRICE OF THE UNDERLYING FUTURES.