Oil price roller coaster

Feb. 18, 2015
Alternative fuels win out over unsustainable oil prices

The dramatic drop in global oil prices is welcome news for those in the transportation sector consuming large volumes of energy. As the global price of oil reached $140/barrel in recent years, this sector has been increasingly moving towards lower-cost advanced technologies and alternative fuels like natural gas, propane autogas, hybrids, and electric drive—which help lower fuel costs as well as emissions. With oil now trading at less than $50/barrel, the nation’s most experienced fleet operators are staying the course with alternative fuels and not being swayed by the recent dip in oil prices. Here’s why.

Forty percent of global oil producers require prices at or above $100/barrel in order to balance their national budgets, with a majority of OPEC nations needing $100 to $130/barrel for their oil. This commodity price point is necessary for countries like Saudi Arabia, Russia, Nigeria, Russia, Venezuela and others to fund the large social programs that subsidize daily living (e.g., housing, energy costs).

Meanwhile, oil is the single largest source of revenue for many of these countries. Oil revenue accounts for 68% of Russian exports and 50% of the country’s federal budget. Likewise, 95% of Venezuelan export income is from oil, and it accounts for 65% of government spending and 25% of the country’s GDP. Economic diversification is simply not an option here.

In the $50/barrel range, reduced government spending is required to balance the budget and social programs are being cut. Given the volatility and instability in many of these regions, reduced social spending is a potential recipe for revolution and uprising. From Russia’s meddling in the Ukraine, to the recent Arab Spring, the Islamic insurgency in Nigeria, or rioting and social strife in Venezuela, most of the world’s leading oil-producing countries are already plagued by political unrest. The escalation of any one of the current crises around the globe will almost certainly drive prices northward.

Unfortunately, North American shale oil is not the answer. As drilling at today’s prices is simply uneconomic, we are already seeing significant reduction in unconventional drilling, a process that will continue in the months to come. With peak production, North America can only produce 8 million to 9 million barrels of oil per day— about 10% of global production. With Russia and the OPEC nations producing more than 50% of the world’s oil, they have tremendous price-setting leverage.

Global oil politics aside, diesel is still expensive—at about $3/gal. With natural gas and propane in the $1.50 to $2/diesel gallon equivalent range (inclusive of taxes and capital amortization), fleets have an opportunity to cut fuel costs by 30 to 50%, in addition to greater budget predictability and reduced emissions.

As most in the transportation sector know, the one certainty is that there is no certainty when it comes to petroleum pricing. Just when we think we have reached a peak or a valley, the price goes shooting in the other direction. It appears we are now at one of those points, with most analysts predicting oil back in the $70 to $80/barrel range this year. Diesel costs will remain high and provide a strong business case for lower cost alternatives. Those with existing or near-term plans to move to alternative fuels recognize this, are staying the course, and will be well positioned for fuel price stability and cost savings over the long haul.

Erik Neandross is CEO of Gladstein, Neandross & Associates (GNA), the clean transportation and energy consulting firm that organizes the Alternative Clean Transportation (ACT) Expo. Learn more at www.gladstein.org and www.actexpo.com.

About the Author

Erik Neandross | Contributing editor

Erik Neandross is CEO of Gladstein, Neandross & Associates (GNA), the clean transportation and energy consulting firm that organizes the Alternative Clean Transportation (ACT) Expo. Learn more at www.gladstein.org and www.actexpo.com.

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