Effects of Decarbonization/Environmental Regulation on Prospects for O&G Trading
I've noticed that the conversation in the energy industry over the last couple of years has really started shifting towards decarbonization and sustainability. Regardless of what anybody's personal beliefs are, all of the major O&G companies are facing stiff pressure from shareholders and lawmakers to reduce emissions. In addition, places like New York City, California and many European countries have pledged to be carbon neutral by around 2040. This trend will only continue elsewhere, and if it happens, it seems like demand will decline fairly quickly. I know that in some cases these goals seem unrealistic given current trends and technology. But it's impossible to know where renewables will be in 20-30 years.
My question is how O&G traders will fit into this trend of decarbonization. I can imagine that there may be opportunities from O&G companies trying to optimize their assets in an increasingly complex supply chain with shrinking demand. Is this true, or will there simply be less desk seats as demand goes down?
IMO 2020 is a good example of this, where trading heavy fuel oil seems to be an opportunity after regulations are set:
But how long will this last?
To say the truth most talk about decarbonization & sustainability is not what it is made out to be. Yes, countries have pledged to be carbon neutral by 2040. But in the end its politicians making grand claims.
Decarbonization is a long way away. The fact is the major oil companies are not just dependent on gasoline/diesel sales. Realistically, over the next decade or half we can expect electrification of light vehicles but that still leaves the heavy vehicles on the road/sky/seas. The fuel for them will be provided by the O&G industry.
For demand to truly decline there has to be a seismic shift in human behavior pattern and in development of the necessary infrastructure required to support this revolution. Another thing to consider is the fact that O&G companies are more pervasive in daily life than we think. The EV vehicles in the future will still require coolants and these are basically lubricant provided by the O&G companies, they will require plastic which again is a product of the petrochemical industry whose supplies are provided by O&G companies.
According to a number of studies and forecasts that I have come across oil demand will continue to grow at least until 2040. It is still growing in the developed countries. And the number of developing and under developed countries who will want to make use of fuel to reach a developed status is far larger.
We can illustrate this point better by looking at coal. Coal was the king supreme in the 19th century and gasoline started being used early 20th century. Yet it took about 70 years before it actually began to be phased out in all seriousness in the developed countries and the developing countries such as China & India are still using it 100 years after Oil started becoming the main source of energy.
Anyways, for near future I think Biofuels (FAME & other such stuff) are going to become an increasingly important, if niche, segment. Currently there is a distinct lack of knowledge in the market on this topic and with it being so closely related to laws of different countries and being the main driver of decarbonisation will play an increasingly important role in the future.
I think some people here are underestimating the likelihood of major regulations regarding decarbonization which could impact crude/products and coal big-time. Not saying they will disappear overnight, but we haven't seen anything yet, and the alarm bells on the environment are ringing louder and louder. The backlash from Trump and lowball efforts from COP21-24 are sowing the seeds for a pretty big pendulum swing on the regulatory front.
Massive carbon taxes could change the math on some of the O&G field quite drastically. Good for volatility in the short-term, but 30 years from now you can be pretty sure crude and coal will not be the sexiest desks in commodities.
As far as Canada, I don't know enough about their nat gas economics, but the oil sands are basically the stupidest project in the industry so good riddance.
But yes, long nat gas and the petchem industry, particularly in the Gulf.