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A world without crude oil is almost unthinkable. And yet, there are indications that such a transition is happening. OPEC is jockeying for market share. Russia is increasing production and US tight oil producers as well as their Canadian oil sands counterparts have found themselves priced out of the market.

So what is going on?

As humans, we tend to like to place things in neat little boxes. So we look at coal and natural gas and think electricity generation. We look at crude oil and think transportation sector. And all this is correct. But trends are emerging that are likely to turn this on its head. For instance, on shore wind and solar are gaining traction as viable energy production means. Costs are falling rapidly and Lazard now estimates that onshore wind is the cheapest provider of electricity on a levelized cost basis. Solar is not far behind due to a rapid and precipitous drop in costs and is expected to compete with onshore wind as soon as 2018. This means that coal and natural gas will then be the higher cost producers and almost certainly lose market share for electricity generation. Investment going into new capacity additions is already hinting at this trajectory in that investment in renewable capacity has outpaced hydrocarbons each year since 2011. This is occurring globally. Michael Liebreich, founder of BNEF, recently stated:

“The electricity system is shifting to clean. Despite the change in oil and gas prices there is going to be a substantial buildout of renewable energy that is likely to be an order of magnitude larger than the buildout of coal and gas.”

And 2015 started strong right out of the gate. According to FERC, total new generating capacity additions in January and February amounted to 89% renewables, 11% natural gas. March was even stronger with about 94% of new capacity coming from renewables.

Now you may be wondering what this has to do with crude oil. In a word, everything.

It used to be that nothing could compare to crude oil for transportation use. And yet that is changing now. Electric vehicles (EVs) are already cheaper to run than internal combustion engine (ICE) automobiles. The U.S. Department of Energy, using data from the Idaho National Laboratory, estimates that the cost to run an ICE car is just under 16 cents/mile whereas the cost to run an EV is about 3 cents/mile. And EVs are not anywhere near scale so we can reasonably assume that these costs could fall further.

Now suppose that wind and solar continue to gain market share and costs continue to plunge. Those cost savings will be translated into cheaper electricity costs which in turn makes running an EV that much cheaper. And yet EVs are already about five times cheaper than a traditional car. You begin to get the picture. Simple economics tell us that it is in our best interest to buy an EV rather than an ICE automobile. Hence we do not need crude oil to the extent that we have in the past. And crude oil is overwhelmingly used only for transportation.

Automakers like BMW have grasped this reality and have announced that they will no longer make a stand alone ICE automobile by 2022, a mere seven years away. All of their vehicles will be either pure EVs or hybrids.

Interestingly, crude oil consumption in the US has stalled over the past decade. This is attributed to a large degree to greater fuel efficiencies in vehicles worldwide. Demand has essentially flatlined beginning about 2004-2005. At the same time this was happening, shale production began in earnest in the US. As production ramped up in tight oil, supplies flooded into the international market. But this was a market that was already struggling due to lesser demand. With burgeoning supplies, a tipping point was reached last summer and prices began their current plunge.

Perhaps what is most interesting, however, is that the roles played by major actors in this story have changed dramatically in the past six months. OPEC decided to protect market share and not stabilize prices as they had typically done in the past. Indeed for many decades. So why would they choose to change their policy?

The answer is actually quite simple.

If the world is indeed moving away from hydrocarbons then it makes sense if you have abundant hydrocarbon sources, you would want your source to be last to be used.

Tight oil is expensive to produce. So are deep water and oil sands. These are the marginal producers and can fairly easily be removed from the picture with low pricing. We are seeing this happening right now. Interestingly, however, other producers like Russia, which desperately need cash, have stepped up production. According to the Wall Street Journal quoting the IEA:

“…other non-OPEC producers continue to ramp up production. Russia’s output jumped an unexpected 185,000 barrels a day year-on-year in April and Brazilian production was up 17% in the first quarter…Meanwhile, production in China, Vietnam and Malaysia has also shown persistently strong growth. The IEA expects Chinese oil production to increase by 100,000 barrels a day this year to 4.3 million barrels a day.”

This may prove an interesting phenomenon in that producers worldwide are now locked into a battle for market share in a market that may be dying. Only time will tell. But simple economics like cheaper electricity costs speak loudly to consumers. Combine that with cheaper driving costs too and the combination is that much more powerful. And symbiotic.

The days of crude oil’s strangle hold on the transportation market may be coming to an end as incredible as that may seem. Producers appear to be acting like a snake swallowing its tail. They are dumping more and more crude into a market with less and less demand.