BofA Sees Prices Rising but Others See New Tech Wiping Out Oil Demand in a Decade

Crude demand could be wiped out in a decade. File Image / Pixabay

As news headlines focus on U.S. president Donald Trump's impending decision about whether or not to scrap the Iran nuclear deal and reimpose sanctions against the Islamic republic, Monday saw the unsurprising appearance of analysts trying to determine what will happen to the crude market in the near term - and as far as one respected expert is concerned, things could get ugly in a hurry.

Francisco Blanch, head of global commodities for Bank of America Merrill Lynch, told Bloomberg that he believes the primary driver behind the rallying crude prices "is coming from Venezuela: Venezuelan production has come off by around 700,000 barrels per day in the last 12 months, and obviously the Iran deal would add to those numbers if we started losing exports from [that country].

"This is I think going to exacerbate the problem, and it's only partially priced in: i think there is room for prices to move higher depending on what president Trump decides to do with the Iran deal."

Blanch, who noted "a lot of tightness" in the global market, added that "I think we are going to $80 per barrel regardless of what happens to Iran, and the Iranian situation will just make things worse" - but he didn't predict exactly how high prices could climb.

Blanch went on to remark that despite the growing liaison between Saudi Arabia and Russia, he was unsure if both countries would increase production down the road to make up for reduced supply from Venezuela or Iran.

But in taking the long view, Geoffrey Heal, a Chazen senior scholar at Columbia Business School, echoed what many academics think is the ultimate fate for crude, namely, that demand and prices will drop dramatically as alternative energy source gain prominence.

In an opinion piece for CNBC, Heal wrote that in the next 10 years the energy industry will see more change than it has in the past 100, and that "the recent and rapid decline in prices of alternative energy sources like wind and solar, and the plunging cost to store them, presage a very different future on the horizon – one in which fossil fuels go the way of the dinosaurs."

He pointed out that solar energy, "which has become steadily more competitive as its scale has grown, has gone from producing electric power at $179 per megawatt hour (mWh) in 2009, to $50 per mWh in 2017.

"At this rate, solar energy has already undercut gas ($60 per mWh), coal ($102 per mWh), and nuclear energy ($148 per mWh) in cost."

Heal added that similar strides have been made in the wind energy sector, "with onshore wind costing $40 per mWh and offshore wind sources in 2017 priced at $60."

Heal predicted that oil and gas will still have a market "in supplying feedstock to the petrochemical industry for making plastics, and in air and sea transportation, where renewables or batteries are unlikely to be competitive; the drop in demand for oil and gas will, therefore, lower prices and drive out high-cost producers, including most deep-water wells and tar sands."

While Heal's prediction of alternative energy sources gaining dominance is persuasive, his timelines seem to clash with those of other prognosticators who believe oil will still dominate the global market for years to come; in fact, Pierre Andurant, founder of Andurant Capital Management, is of the opinion that a lack of investment in projects with long lead times due to the impact of electric cars could cause crude prices to jump to $300 within a few years.