Turns out Van Beurden’s comment was less a forecast and more directed at
describing Shell’s new culture of thrift. The company does not want to
depend on higher oil prices to boost profits.
To state the obvious, this is a different set of conditions than the heady
days of triple-digit oil prices. In 2013 alone, Shell’s capital
expenditures peaked at $40 billion. Today, the world is literally swimming
in a supply glut with capex budgets slashed across the world.
The longer-term picture may be even more bleak. BP recently pointed out in
its long-term energy outlook that oil reserves already discovered around
the world far exceed the amount of oil that will ever be consumed, with
twice as much technically recoverable oil available than the world needs
between now and 2050.
Pricing pressure is coming from both the supply and demand side – from
strong growth in U.S. shale oil and from the relentless rise of renewable
energy, led by Silicon Valley’s innovation engine and China, the largest
maker and seller of electric cars in the world (and, for now at least,
buyers of more GM-branded cars than America).
So much for “peak oil.” However, do expect wide volatility. In the period
from 1985 to 2004, the oil price frequently doubled or halved in the course
of a few months.
We remain steadfast that oil and commodities are in a “lower for longer”
phase. Yes, stability may have arrived, and global cyclical upturn may help
boost prices. However, a renewed bull market is unlikely any time soon.
Prices went through a very typical secular phase – rising demand amidst
constrained supply in the early 2000s was met with an enormous surge in
capital spending. This increase in supply will keep a ceiling on prices for
Looking ahead, global investors should learn to love low oil prices. Cheap
oil is a very powerful stimulant for world growth. A tectonic wealth
transfer is now underway. Because the world burns 34 billion barrels of oil
every year, a US$10 per barrel fall in the oil price shifts roughly US$340
billion from oil producers to consumers. Thus, the enormous price decline
since August 2014 will easily redistribute more than $2 trillion annually
to oil consumers, providing a bigger income boost than the combined U.S.
and Chinese fiscal stimulus in 2009.
This will become more apparent as the positive impact on global
consumption, investment, and liquidity materializes over time. Falling oil
prices have never correctly predicted an economic downturn. On all recent
occasions when the oil price has at least halved, faster global growth
Conversely, every global recession in the past 50 years has been preceded
by a sharp increase in oil prices.
Tyler Mordy, CFA, is President and CIO for
Forstrong Global Asset Management Inc., engaged in top-down strategy, investment policy, and securities
selection. He specializes in global investment strategy and ETF trends.
This article first appeared in
Forstrong’s Gobal Thinking feature. Used with permission. You can reach Tyler by phone at Forstrong
Global, toll-free 1-888-419-6715, or by email at
. Follow Tyler on Twitter at
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