Oil sector facing consolidation, turn towards renewable energy: analysts
After a year of low oil prices and low demand, which have resulted in losses for most of the key oil extraction and processing companies, economists at Allianz Research and Euler Hermes predict another hit to industry profitability to continue in 2021 and 2022, according to a report by the Warsaw Business Journal.
As a consequence, this may result in accelerated market consolidation, entry into renewable energy sources, and new, unexpected alliances with companies outside the sector.
The largest world economies – the United States and China, have directed their development towards clean energy. As a result, an increase in the number of mergers aimed at survival in the oil sector, strategic partnerships allowing development in the area of clean energy, as well as the separation of assets related to renewable energy sources within oil companies, is expected to increase.
Economists from Allianz Research and Euler Hermes estimate that each USD 10 drop in the annual average oil price leads to a 0.80 point drop in profit margin, and each 1 million barrels/day drop in global consumption leads to a 0.65 point drop in profit margin. With oil prices at USD 48 in 2021 and USD 57 in 2022, and assuming consumption will return to 2018 levels by 2022, they forecast profit margins of 2.3% and 4.2% in 2021 and 2022 respectively, which is well below the historical average of 5.7% observed in 2010-2019.
Given global demographic projections and demand factors such as the electric vehicle fleet, oil demand is likely to peak around 2030. With a rapid increase in regulatory pressure, this peak could come even earlier. In addition, fossil fuel subsidies and tax breaks are likely to decline in the future due to increasing political, social, and investor pressures to combat climate change.
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