For the last five years, James Karakatsanis has been on the inside of Big Oil, helping to assess new exploration prospects at ExxonMobil.
But now the geoscientist, who has just joined Wilsons as the financial advisory firm’s energy analyst, has delivered a stark warning about what awaits the sector.
Most don’t think twice when we drive the car, or open the fridge to grab food that’s been grown, made and transported with energy-dense processes, but Karakatsanis, says this world could soon face upheaval as the stubborn reality of supply and demand in the oil market sets in.
Global demand for crude oil is more robust today than it was 20 years ago, Karakatsanis argues, as economic development propels non-OECD countries into The $2.1trn reason it’s time to worry about oil Wilsons’ James Karakatsanis says oil demand is as robust is as it was 20 years ago, but the poor outlook for supply risks bad news for economies and good news for investors.
Chanticleer The outlook for oil production is weakening. David Rowe the role of the world’s major oil customers [https://www.afr.com/link/follow-20180101- p5coww], shifting from 45 per cent of global consumption two decades ago to 55 per cent today. Even on the most conservative estimates – assuming no population growth and consumption levels rising towards those seen in the US and Australia – demand from China, India, Indonesia and Brazil (43 per cent of the world’s population) will lift global consumption by 41 per cent from today’s levels.
And Karakatsanis says the evidence of previous price spikes suggests that demand will remain resilient even if prices shoot higher again. The problem is supply, which Karakatsanis says will struggle to match this robust demand picture.
He estimates that underinvestment in supply since 2016 is now $US1.4 trillion ($2.1 trillion) or 27 per cent below what a balanced market needs, for reasons including ESG concerns and a focus by energy majors on returning capital to shareholders.
On top of this, the shale revolution that made the US one of the biggest producers of energy is almost over, with declining reserves and lower investment levels meaning production from that sector is set to plateau and then decline within the next two years. Karakatsanis worries nations could face “energy poverty” because of a combination of a lack of energy weighing on economic growth, higher energy prices hitting consumers and renewable energy delivering lower levels of energy efficiency than hydrocarbons.
”The prevalence and abundance and availability of cheap energy is a fundamental part of our civilisation.
It touches on everything and everything that we see and experience,” he says. The flip side of this for investors and energy producers is that periods of underinvestment have tended to usher in periods of super profits.
Karakatsanis has launched his sector coverage with “overweight” recommendations on Strike Energy and Beach Energy, both of which he says benefit from these macro tailwinds and the tight conditions in Australia’s east coast gas market.
The question, of course, is when oil prices start to reflect the medium-term reality that Karakatsanis sees playing out; Brent crude prices have fallen from about $US105 a barrel a year ago to about $US75 a barrel on fears about weakening economic global growth.
Karakatsanis says the scarcity of long-term forecasts for the oil market reflects inherent uncertainty over the supply/demand picture, but even short-term forecasts from the US government’s Energy Information Administration point to markets getting tight in the latter stages of calendar 2024 and staying that way until the end of 2024.
Karakatsanis’ analysis is a reminder that hoping the world can wean itself off fossil fuels in the way the planet needs will not simply make it so.
While sluggish economic growth will weigh on oil prices in the short term, the medium-term collision of robust demand from developing nations and weakening supply does look inevitable – and potentially painful.
