New technology and consumer trends in transport may challenge long-term oil demand

The sharp oil price rise since 2003 has revived interest in oil. Oil companies are jostling to secure access to new reserves in Africa, Asia and Latin America. Protectionism and political unrest have curbed investment activity in many areas with cheap, producible, conventional oil reserves.

This, coupled with high oil prices, has triggered the innovation of new technology, turning unconventional reserves previously seen as unprofitable into financially viable fields. So far oil companies have concentrated on shale oil/tight oil production in the US, tight oil/oil sands in Canada, pre-salt oil from Brazil and heavy oil from Venezuela.

The most ground-breaking development within unconventional oil production is no doubt the shale oil revolution in the US. Production has seen an impressive trend since the modest start in 2005 with only a few thousand barrels a day to around 700k barrels a day in 2012 (CGES) – and there is considerable growth potential. We believe that US tight oil production can rise to around 3m b/d in 2020.

Many oil exporters now fear that this sharp increase in new production capacity worldwide may outmatch new and more expensive oil production projects in areas such as the Norwegian continental shelf, Russia, Artic areas and ultra-deepwater projects. A large expansion of cheaper onshore tight oil production can curb the activity level in the offshore oil industry, reduce revenues to the offshore oil sector and state revenues for oil exporters such as Norway and Russia.

But is intensified competition on the supply side really what Norwegian oil producers and other net oil exporters should be most worried about in the long run? Are the changes in consumers’ choice of energy source that have been triggered by the high oil prices not at least as challenging?


The strong oil price growth from 2003 to date combined with increased focus on the environment has triggered a process of changes on the demand side as well as the supply side; these changes may entail major challenges for the oil industry in the long run.

Higher oil prices have triggered the development of new technology that makes it possible to use other types of energy in areas that have previously been dominated by oil.

This is particularly important in the transport sector, which accounts for more than half of the global oil consumption and where oil-based fuels have been almost without competition. Lack of infrastructure such as filling stations and distribution systems for non-oil-based fuels, subsidised petrol and diesel prices in many countries and the absence of technologically competitive solutions for using non-oil-based fuels have made it difficult for non-oil-based fuels to penetrate the market. This has also meant only moderate changes in fuel consumption patterns, despite the sharp oil price rise.

But the oil market’s last defence may soon fall. Recent years’ strong oil price growth and growing focus on the environment have also forced the transport sector to develop more efficient fuel types and fuel solutions. Once a new competitive technology that uses other energy sources than oil has been developed, the sheltered position of oil in the transport market will be threatened. Technological advances cannot be reversed and this will affect the outlook for oil demand in the long term.

Of course, it will take time until the production and availability of new fuel types has any major impact on the fuel market. The more that prices of oil-based fuel are compared to other energy types, the more the innovation of new fuel types and engines will accelerate.

Global biofuel production has tripled since 2005, airlines are researching the possibility of using algae fuel, while competitive prices of natural gas, rising production of unconventional gas and an expansion of LNG capacity have boosted interest in gas also on the transport side.

Since 2009 natural gas prices have increased at a slower pace compared with oil prices, driven by growing production of non-conventional gas, such as shale gas/tight gas in North America, tight gas in Asia and coal-bed methane (CBM) in Australia. With the large, non-conventional gas reserves around the world and a significant rise in the number of LNG terminals, we expect that natural gas will capture a larger share of the total energy mix long term.

In January President Obama announced an initiative to upgrade the country’s truck fleet from diesel to natural gas. According to NGV Global the number of natural gas vehicles worldwide has more than tripled since 2005 (the last six years), albeit from very low levels. In 2011 this vehicle type accounted for only 1.2% of the global vehicle/car fleet.

Growth in number of Natural Gas Vehicles (NGV) in the world from 1991 to 2011

Source: NGV Global (Figures from December 2011)

Norway has been in the forefront of developing the technology and putting LNG-fuelled ships into operation. According to Det Norske Veritas (DNV) a total of 29 natural gas vessels have been added to the fleet in Norway since 2000, and 28 new LNG vessels are expected before 2014. Now both the US and Canada are now picking up the trend. DNV expects 1,000 newbuildings to be fuelled by LNG within the next nine years if LNG prices remain low compared to oil prices.

LNG fuelled ships in operation worldwide (blue) and confirmed newbuilds (light blue)

Source: Det Norske Veritas (DNV) and Nordea Markets

Price trends for oil compared with other energy sources and the world’s focus on the environment will determine the pace at which oil will be challenged, also on the transport side. The development of new technology and new fuel types cannot be reversed – but a significant breakthrough in the international fuel market will depend on the price of competing products, environmental/transport policies, infrastructure expansion and economic trends.

In our view, new advances on the transport side may also be a more serious challenge for the oil sector and oil prices in the long term than harsher competition caused by an expansion of global production capacity. Increased production capacity and slightly lower oil prices will probably slow the pace and innovation of new fuel types on the transport side.



Latest research

Swedish Morning Briefing - Thursday 17 April

• Separatists in Donetsk plan for a local referendum • A summit in Geneva to discuss the crisis in Ukraine

FI Eye-Opener: Easter bunnies to boost bonds today

Yields edged higher yesterday – long positions with potential today. Equities rebound, but more weakness likely ahead. Euro-zone core inflation back to record-lows. Italy taps retail investors for huge amounts again. Big US banks boosting their lending to companies – Euro-zone doing much worse. Philly Fed, jobless claims and LTRO repayment announcement. New French 2-year benchmark and US auctions ahead.

US Rates - Market in doubt

• It has been a bumpy ride for US rates in 2014. A two month rally started the year and recently the Fed has added substantial volatility with their somewhat wobbly way of commenting on future policy. • Further, the last NFP on April 4th was quite a disappointment. • In this note we look into the market perception (through futures and options) of all this, and in particular find indications towards a loss of faith (on rising rates) on behalf of the option market.

Swedish Morning Briefing - Wednesday 16 April

• Putin urges UN to condemn Ukraine’s intervention • Chinese growth at weakest level for six quarters

FI Eye-Opener: No support can survive constant pounding

German 10-year yield finally broke important support – mood remains bullish. A correction higher in yields still looks likely today. US equities recover after early losses. Q1 effect hits Chinese GDP numbers again. Ukraine’s military starting to use force US core inflation bottomed out? Euro-zone inflation and US housing market data ahead – Germany to sell 10-year bonds.

China: The impossible duality

China’s Q1 GDP growth of 7.4% was marginally higher than market consensus. It was caused by a combination of cyclical slowdown and structural shift away from the traditional growth drivers. Beijing is likely to continue the fine-tuning policies and stays away from large-scaled stimulus.

Euro Rates Update

The latest Euro Rates Update is now available

Swedish Morning Briefing - Tuesday 15 April

• Obama warns Putin • Ukraine raises policy rate

Competitiveness of the Nordics

Financial crisis and subsequent Euro crisis have cast doubts on the future prosperity of the Nordic countries. This report takes a closer look at the competitive position of the Nordics over past ten years and aims at answering how worried these countriesshould be.

FI Eye-Opener: Still going lower

Bond yields rebound, but bonds with more performance potential left. Intra-Euro-zone spreads narrow. Equities rise – more downside potential in the near term. US retail sales beat expectations. Eyes on US CPI and Yellen’s speech.

EM FX: Ukraine takes the headlines again

The Ukrainian President's deadline for rebels occupying state buildings in Eastern Ukraine to lay down their weapons have passed. Markets are awaiting news. EM FX is slightly weaker this morning, especially the RUB, the PLN and the TRY, but it seems that markets are becoming more resilient to headline news from Ukraine.

Swedish Morning Briefing - Monday 14 April

• Brighter outlook for global growth • Swedish finance minister worried about inflation

FI Eye-Opener: Please stop strengthening, we are asking nicely

Bonds with more gains on Friday – German 10-year yield to break lower today. Finnish bonds feeling some pressure after a negative outlook by S&P. Correction lower in equities has further to run. ECB fights the stronger currency with words – and talks further about QE. LTRO payments continue coming in – ECB more concerned about the rising euro. US retail sales & inflation, Chinese GDP and corporate earnings ahead. New French 2-year benchmark out this week.

Week Ahead: 12 - 25 April 2014

We cover two weeks in this Easter edition of Week Ahead. Important data prints from China, US inflation, PMI's, German Ifo and more...

Global FX Strategy: QE-nomics

Despite the QE-rumours, we still believe that the EUR has some upside left versus the USD short term. Find out why in this edition of our flagship FX publication, alongside views on NOK, SEK, JPY, AUD, CAD, NZD and Emerging Markets currencies. Enjoy!

European FI Strategy: Mad about QE

Euro zone QE talks all over the place, but there is still room for curve flattening and demand continues to be strong, also for Scandies. Find out what we favor in this month's edition of European FI Strategy.

Swedish Morning Briefing - Friday 11 April

• Finland – S&P affirms AAA but lowers outlook to negative • Nasdaq sees largest decline since November 2011

Finland: King of ratings no more

The credit rating agency Standard & Poor’s surprisingly changed its outlook for the AAA rating of Finland from stable to negative, the first major rating agency to do so. The action puts more pressure on the already shaky government and will deliver a hit to Finnish bonds, very dependent on the highest ratings.

FI Eye-Opener: Bye, bye, Finnish AAA?

Bonds with a big rally yesterday – curves bull-flatten. German 10-year yield gathering momentum to break lower – a correction higher in yields still likely today. Finnish credit rating starting to feel pressure – more pressure for the shaky government. Huge demand for the new Greek benchmark. US consumer confidence and IMF Spring meetings ahead. Italian auctions concluding a busy supply week.

Northern Lights: Goldilocks?

Following this morning’s CPI figures, the Riksbank is widely expected to cut rates. But how can you trade SEK and Swedish Rates in this environment? Find out more on that, alongside updated views from our macroeconomists and strategists across the Nordic region. Northern Light gives you everything you need on Scandinavian Macro, FX and Fixed Income. Enjoy!