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Wells, Wires, and Wheels – EROCI and the Tough Road Ahead for Oil

New research, led by Mark Lewis, our Global Head of our Sustainability Research, shows that oil needs a long-term breakeven price of USD 10 - 20/barrel to remain competitive in mobility.

New research, led by Mark Lewis, our Global Head of our Sustainability Research, shows that oil needs a long-term breakeven price of USD 10 - 20/barrel to remain competitive in mobility.

  • The economics of renewables are impossible for oil to compete with when looked at over the cycle
  • Renewable electricity has a short-run marginal cost of zero, is cleaner environmentally, could readily replace up to 40% of global oil demand
  • The oil industry should remember the fate of utilities

In a white paper, published this week, Mark introduces the concept of the Energy Return on Capital Invested (EROCI), focusing on the energy return on a USD 100 bn outlay on oil and renewables where the energy is being used to power cars and other light-duty vehicles (LDVs).

For a given capital outlay on oil and renewables, how much useful energy at the wheel do we get?

Our analysis indicates that for the same capital outlay today, new wind and solar-energy projects in tandem with battery electric vehicles will produce 6x - 7x more useful energy at the wheels than will oil at USD 60/barrel for gasoline powered light-duty vehicles, and 3x - 4x more than will oil at USD 60/barrel for light-duty vehicles running on diesel.

Accordingly, the research calculates that the long-term break-even oil price for gasoline to remain competitive as a source of mobility is USD 9 - 10/barrel, and for diesel USD 17 - 19/barrel.

Oil has a massive flow-rate advantage, but this is time limited

The oil industry is so massive that the amounts available for purchase on the spot market can provide very large and effectively instantaneous flows of energy. By contrast, new wind and solar projects deliver their energy over a 25-year operating life. Nonetheless, we think the economics of renewables are impossible for oil to compete with when looked at over the cycle.

Economic and environmental benefits set to make renewables in tandem with EVs irresistible

The clear conclusion of our analysis is that if we were building out the global energy system from scratch today, economics alone would dictate that at a minimum the road-transportation infrastructure would be built up around EVs powered by wind- and solar-generated electricity

The tough road ahead for oil

With 36% of demand for crude oil today accounted for by light-duty vehicles and other vehicle categories susceptible to electrification, and a further 5% by power generation, the oil industry has never before in its history faced the kind of threat that renewable electricity in tandem with electric vehicles poses to its business model: a competing energy source that:

  1. has a short-run marginal cost of zero,
  2. is much cleaner environmentally,
  3. is much easier to transport, and
  4. could readily replace up to 40% of global oil demand if it had the necessary scale.
We conclude that the economics of oil for gasoline and diesel vehicles versus wind- and solar-powered EVs are now in relentless and irreversible decline, with far-reaching implications for both policymakers and the oil majors.

A warning from the European utility sector

If all of this sounds far-fetched, then the speed with which the competitive landscape of the European utility industry has been reshaped over the last decade by the rollout of wind and solar power – and the billions of euros of fossil-fuel generation assets that this has stranded – should be a flashing red light on the oil industry’s dashboard.


Click here to access the full version of the white paper 'Wells, Wires, and Wheels... - EROCI and the Tough Road Ahead for Oil'


To discover our funds and select the ones that meet your requirements, click here > Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.

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