Technology will dictate the future price of oil

Here is a list of years for you: 1914, 1939, 1946, 1951, 1972, 1974 and 2008. What do they all have in common? The answer is that they were all years in which someone publicly panicked about soaring oil prices, sending the global economy into a long-term nightmare of inflationary recession and energy conflict.

In many of these years, I suspect much of the emphasis was on the supply side. Big oil companies aren’t replacing their production with new reserves. We haven’t discovered any new ‘oil provinces’ such as Alaska’s North Slope, or the Gulf of Mexico, or the North Sea. The Saudis don’t have as much oil left as we think they do; that kind of thing.

And much of the reasoning behind the current slide in the price (there’s lots more on that and its impact here) revolves around the rise in US production. But it is actually the part of the demand side of the equation that is really interesting. Slow global growth is part of this.

China is clearly slowing: chemical prices – which are generally a good indicator of global growth trends – are showing us an “unambiguously negative” picture, according to Varient Perception; Europe, which accounts for a sixth of global GDP, is edging closer to deflationary recession; and the US doesn’t have quite as much momentum as you might think.

If that isn’t enough for you to worry about, you might like to let your mind drift to global demographics just for a minute (it’s too scary to stay with for much longer): if the women of the world keep up their determined refusal to devote more than four continuous years of their lives to changing nappies, it is hard to see where the oil-guzzling consumers of the future will come from.

Even this isn’t the real key to thinking about the future of the oil price. For a clue to what is, see if you can dig up a very long-term chart of the price of a basket of commodities. I have one that shows the movement since 1934.

I suspect you think it shows steadily rising prices. After all, the idea of resource scarcity is fundamental to economics. Supply is limited, so as populations and economies grow, so too should the cost of the materials used to create growth.

It seems logical, but it’s also entirely wrong. Adjust for inflation and you will see that they have actually declined relatively steadily. There is a sharp tick up from 2000 to 2007 (China), another in the 1940s (war) and another in the 1970s (rush to real assets as inflation went nuts), but that’s about it. 

What’s going on here? As commodities get scarce we look for ways to produce more of them, to use them more sparingly, or to replace them.

The list of years at the top of the article came from a book titled Smaller Faster Lighter Denser Cheaper: How Innovation Keeps Proving the Catastrophists Wrong by Robert Bryce. There is almost no problem that, given time, entrepreneurial capitalism can’t sort out. And so it is with oil.

Let’s look at the ‘more sparingly’ bit. Most manufacturers find ways to exaggerate the fuel efficiency of their cars (the average new car sold in Europe uses 31% more fuel than claimed by its maker, according to Spiritmonitor), but nonetheless, there is something rather amazing going on. Fund management company RobecoSAM uses the Ford F-150, a bestseller in the US, as an example.

The newest model is 300kg lighter than the previous model. Its engine uses graphite iron and aluminium to cut weight, while its frame uses high-strength steel that is both lighter and more rigid than ordinary steel, and its body is made from aluminium alloys.

That makes it “lighter, stronger and more resistant to dents”. The result is a 30% improvement in fuel efficiency. Ford’s use of all these materials in a mainstream car is something of a breakthrough, but the use of lightweight materials for all sorts of components is on the rise across the industry.

Producers such as BMW are even starting to use carbon fibre in cars that people can buy today, such as the electric BMW i3. According to RobecoSAM, the proportion of lightweight material used in the automotive sector will double by 2030. That’s a lot of fuel efficiency.

Something similar has been happening in aviation, where rising carbon fibre use is cutting fuel costs by up to 25%. The use of 3D printing to manufacture aeroplane parts, which cuts the need for bolts and screws, has been a great leap forward too. Airbus reckons that it will be able to produce a plane 30% lighter than today’s models.

Then you need to look at substitution. In Madrid, the entire fleet of bin lorries (along with some buses and cranes) runs on compressed natural gas. That’s also the case in much of California, where the gas is captured from landfill sites.

At the same time, renewable energy, and solar in particular, is now so developed that our failure to use it properly is more a matter of “inertia” than practicality, says Professor Stephen Chu of the Energy Research Centre. Who needs oil? Or more realistically, who needs lots of oil?

There is a good case to be made for buying bombed-out oil and mining companies at the moment, but with some forecasts suggesting that the traditional basic resources business will lose 40% of its volume to lightweight materials.

And with the lightweight material sector growing at 8% a year, here’s a final thought for long-term investors among you: only one company has remained in the Dow Jones Industrials Index for the last 100 years. And only 22 have stayed in the FTSE 100 for the past 30 years. What are the odds that the big oil companies will still be there when we look back over the next 30?

If you want to invest in something that reflects the possibility that they won’t be, look at the RobecoSAM Smart Materials Fund which invests, among other things, in the smart materials which are fast cutting the demand for their products. It’s on my maybe list.

I’m also talking to my husband about finding a way to get a Ford F-150. I reckon a new pick-up truck would be better both for the environment and for my school-run look than our decade-old Passat.

• This article was first published in the Financial Times.

Leave a Reply

Your email address will not be published. Required fields are marked *