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KAOBOY MUSINGS and its associated podcast KAOS THEORY focus on the intersection of Financial Markets, Macroeconomics and Geopolitics. I've spent 30+ years as a trader/hedge fund manager and now manage money for my family office across many asset classes.

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Re: Crude Oil-When Will EV Adoption Cause Peak Oil Demand?

Although this will eventually happen, to paraphrase Mark Twain, "The reports of the death of hydrocarbons are greatly exaggerated."

Michael Kao

Apr 21, 2021

First, the short-term picture for oil demand. Pre-COVID, we were at ~100 mmbpd. Currently, we're at 95 mm bpd. YE21 we will be at ~98 mm bpd; YE22 we will be at 102 mm bpd.

Here are some predictions for global EV penetration, courtesy of Capital One: 5.8% for '23, 11% for '25, 26% for '30, 57% for '40. EV unlikely to materially impact gasoline demand until 2025-2030.

China leads the world in EV penetration, but even they have fallen short of expectations. China will likely be at 6% by YE21 vs. previous expectations of 8%. China expects to be at 18% by '25.

OPEC+ understands that it needs to maintain a delicate balance between revenue maximization without runaway oil prices that will only accelerate the substitution trend. BUT they can do this only insofar as they have spare capacity.

At current demand levels of 95 mmbpd and current OPEC+ spare capacity levels of 10 mmbpd, OPEC+ runs out of spare capacity when world demand hits 105 mmbpd. This is likely to happen by '24.

Shale is going to have a hard time bridging the gap this time around, given the confluence of 1) higher breakevens due to best inventory gone, 2) antagonistic regulation, 3) still fragmented industry, 4) capital scarcity/discipline.

Pre-COVID, US production peaked at 13 mmbpd. Even at $70 WTI, US Shale will be struggling to breach 12 mmbpd (1 mmbpd below Jan’20 peak).

Given current decline rates, the US needs to replenish a Permian basin's worth of production EVERY YEAR just to stay even on the treadmill.

Meanwhile, Non-OPEC+/Non-US supply has flatlined. These sources of supply are typically long-cycle, with 4-7 year gestation periods.

Remember those precious few milliseconds of "US Energy Independence"? Cherish them well, because I think we may have seen the nadir.

Correction: the WORLD needs the equivalent of a Permian Basin’s worth of production every year just to stay even with decline.