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The HC Commodities Podcast
The Rystad House View and Notes From IE Week, with Claudio Galimberti
00:55:08
Today, we review energy supply and demand and some of the key sentiments coming out of International Energy Week, not only about where both those curves are headed, but also key associated risks to each. Are our assumptions correct about energy demand in the world of AI? Are our assumptions correct around development curves, especially in the Global South? Is there a hydrocarbon glut out there? And what about the long term? All this comes to us from Claudio Galimberti, Chief Economist at Rystad Energy, and their recently published House View. Rystad is an energy consulting and market analytics firm with over 40 offices around the world and headquartered in Oslo.
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Foreign.
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Welcome to the HC Commodities Podcast, a podcast dedicated to the commodities sector and the people within it. I'm your host, Paul Chapman. This podcast is produced by HC Group, a global search firm dedicated to the commodities sector. Today we are talking energy demand and energy supply and some of the sentiments coming out of IE week not only about where both those curves are headed, but also some of the risks associated. Are our assumptions correct about energy demand in the world of AI? Are our assumptions correct around development curves, especially around the Global South? Is there an energy glut out there? And what about the long term? All this comes to us from Claudio Galimberti, chief economist at Rystad and their recently published House View, which I'll put links in the show notes to. Rystad is an energy consulting and market analytics firm with over 40 offices around the world, headquartered out of Oslo. As always, you can really support the show by leaving us a positive review on the platform you're listening on. And as always, I hope you enjoy the episode. Claudio, welcome to the show.
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Thank you. Thank you for inviting me.
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Paul, you've got a tough topic today. So in part this is you just spent the last week at IE Week, International Energy Week in London with multiple meetings and your closed conference for chief economists from various energy and commodity trading firms. So part of it's to sort of get a bit of a sentiment from last week, but then also dive into the picture for 2026 and beyond with actually a bit more of an emphasis on demand than necessarily supply, as that seems to be sor of the harder bit to do. And you've spent your career really zoomed in on the demand piece. Let's start with kind of where we are today. There are an incredible number of risks out there in the world and how they pertain to the energy markets. Can you give us some sense of what were the hot topics last week as we record this at IE week and how are people thinking about and framing those risks?
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Well, absolutely. So the there was a lot of conversation, Paul, around of course, the geopolitics, right? There was a widespread agreement that the oil market, not just the oil markets, but most of the conversation at I week was about oil is over supply in 2026, but it is also a fact that the prices have remained well above $60 per barrel. So the question is what's keeping the prices so so much higher than, let's call it the fair value of of the oil price. And the answer is geopolitics. So the situation in the Middle east, the potential attack of US onto Iran with potential revelation for the Strait of Hormuz, the situation in Ukraine. Of course, these are the reason why we have a high geopolitical risk premium, let's put it this way. So that is the, the starting point of the conversation in at highway. But we also then cast an eye to what's going to happen after the oversupply that we are seeing in the next, in the next couple of, couple of years. And granted, so given that you, you asked the first question, so it's oil, it's not just oil where we see oversupply. So it's all throughout the energy space. We call it the oversupply in the energy for the, for the next couple of years.
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Come back to that oversupply in a minute. Just staying on that. The sort of the risk and the geopolitical risk there. I guess one question I have is, is this same as it ever was or are people sat around the tables at the moment thinking there's just so many angles going on here and it's even hard to pass the which ones are more consequential than another, which ones are more probabilistic? Just to dig it a little bit further into that because yes, there's lots of geopolitical risk out there, but is it underpriced, Is it overpriced, Is it abnormal? Can you give us some sense? Are the different takes on that.
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A lot of discussion was around Iran and of course this is not the first time we have to face the problem. So it's a recurrent issue for the past 30, 40 years. And we had a big kind of, there was a big price spikes about not long ago, right. So last summer when there was the attack of the United States onto the nuclear sites, this time around, the perception is that there could be a regime change. And with that we all recall what happened in a place like Libya. So Libya does not never produce as much as Iran. And still the fall of Libya, the fall of the Gaddafi regime back in 2011 brought about a huge spike in prices that lasted for about three years, if you will recall, from 2011 to 2014. The question that we need to ask ourselves is that with the U.S. navy right now increasing its presence with big air carriers just in front of Iran, what are the scenarios that we are facing? And we drafted, we discussed five of these scenarios from a new nuclear deal, therefore no, no changes in the Iran Iran government all the way down to civil unrest. And the difference there is, can be as big as 1 to 1.2 million barrels per day. Of production. So currently Iran is producing around 3.3 million barrels per day. With civil unrest, we reckon that production can drop within the next two to three months by a million barrels per day. So if that is the case, then what we see is a potential spike in prices that can be as high as 15 to $20 per barrel on top of what we currently have. So we go from 68 to 83.$85 per barrel. And this does not assume that anything about the strait of hormones, which
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as we're recording is stuff going on. So that's quite significant. The other, lest we forget, it's only been a month or so since Venezuela and the events there. What was the sentiment on Venezuela that actually relatively inconsequential to the oil markets and that there's getting production up over the long term is going to be really challenging. What sort of, how was that playing out apart from sort of some of the opportunities in the short term?
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Yeah, yeah. So what we presented is our earlier analysis that we issued just a few days after the changing regime in Venezuela that shows how long term any significant change in Venezuela production are. So what we said is that currently Venezuela produces around 1.1 million barrels per day. In the best of the cases, if we really have a fast rebound, we need to wait until probably 2027, 2028 to be at around 1.4 million barrels per day and we need to wait until the early 2000-30s to be at around 2 million barrels per day. So this was no surprise to the people we share it with. They pretty much share this view that it's a very long term process. The amount of investment needed there is in the order of if we really need to bring production in Venezuela from 1.1 to 3 million barrels per day, our estimate is that the investment should approach 180 billion cumulative. So it's an extremely significant investment. And so we were debating also the famous statement by the Exxon CEO, right, Venezuela currently is not investable.
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Well, especially when next door you have Guyana and Suriname, you know what I mean? The world has moved on significantly and you've got, you know, countries that have much more stable outlooks and you know, offshore production and all the rest, you know, going swimmingly. Right. I mean there's, there's also sort of the, the real world plowing into some of these forecasts as well.
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That's absolutely the case. Specifically, when it comes to these very big IOCs, the ones that typically have the financial muscle to consider investment in Venezuela, it's not automatic. They will be enticed into investment there because they have competing projects. And currently, as you correctly mentioned, Guiana offers very financially rewarding prospects. So in terms of breakeven, in terms of the fiscal regime and also the country is obviously stabilized. So the above the ground risks there are very limited. Well, for Venezuela, the situation is very quickly normalizing. We have to recognize that with the new kind of government there with Rodriguez and with a recent visit by the Secretary of Energy, US Secretary of Energy Chris Wright, the situation appears to be going towards a normalization, a relatively quick normalization. But having said that, there are multiple hurdles that we will need to overcome before starting to think investing in Venezuela. Right. So again the fiscal regime is one and then situation, the above the ground situation, the security needs to be guaranteed and that's still probably too early.
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Well, and it's also importantly not regime change. Right. One figurehead is replaced with another and then one final piece and then I want to move on to this oversupply. And again, it's kind of fascinating to be able to pick your brains on this given, given the circles you traveled in last week and obviously their access and your access to market intelligence and so forth. Having read your presentation, the likelihood, well, Iran presented a more likely risk than there being an end to the Russia Ukraine war in your analysis. You know, can you tell us about that? And then kind of what is the sentiment there? Is it just this is just going to grind on, there's going to be a continued degradation of Russia's refining capacity.
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Yeah.
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Tell us a little bit about the sentiment there and kind of the trajectory. That's the viewpoint at the moment.
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Yes. So the situation in Ukraine is anybody's guess. Right. So there is pessimism around a quick resolution there because. Well, I can tell you that I was in I week last year and the topic was exactly this, what's going to happen to the Russian crude and gas once the war is over? As a matter of fact, probably it was more optimistic the, the sentiment last year because the, the Trump administration just basically taken power and there was a lot of expectation that the US President would be able to to put an end to the war. A year on. The situation has not improved. As a matter of fact, probably you still have the same number of fatalities that you had a year ago, if not more so in our assessment it is very likely that Russia Ukraine war continues for the foreseeable future and this would have significant impact on the trade flows of crude from Russia and therefore the oil price risk premium. So one of the things we discussed is also what are the trade flows currently associated with, with the, with the Russian, with the Russian crude. Right. So most of the crude in Russia has been going to China and India. And the US President is pretty much threatened the Indian government to decrease the purchase of Russian crude oil, almost zero. Right. And so that we, we need to see how India will behave in the next few months. So clearly they have shown a significant decrease in the purchase of crude. They have not gone down to zero. So they keep on, they keep on getting some crude from, from Russia and at the same time Russian crude is, the, the purchase of China by China of Russian crude has increased. So if that trend is confirmed, what's going to happen is that China may become basically the only final destination of Russian crude and that would be not
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good for balance of payments. Russia,
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this hydrocarbon glut, this oversupply and as you pointed out at the top, you know, is actually can be attributed to all forms of energy. This is itself is also questioned. And there's a lot of. And obviously market sentiments can quickly turn a glut into a perceived, you know, into a hole and all the rest of it. But can you just give us some sense of. So there is some debate about this. Where is that glut coming from? Is this just. OPEC could easily turn the taps on and we're actually overflowing in oil in the short term, or is that too simplistic a view?
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Well, I don't think it's too simplistic in the sense that oil supply is growing pretty much everywhere in the world. So you have very significant growth in the Americas specifically, specifically in places like Brazil, Guyana, the United States still grew a little bit last year, Canada still growing. But what really made the difference was the fact that OPEC went from a basically a production of, and I'm talking about OPEC, a production of roughly 34 million barrels per day a year ago to one of close to 37 million barrels per day currently. So they deployed back into the market 3 million barrels per day. And that was the basically the result of them deciding to Unwind the voluntary cuts. So you will recall that back in 2023 they started a successive kind of cut of that was back when in April of 2023 and then again in January 2024. So the, the results of this cut was basically a market that quickly went into a, a backwardation, right? So at some point oil prices were well above $70 per barrel, reaching close to $80 per barrel. But the moment they decided last year, that was in April of last year, to redeploy one of the cuts back into the market, then we knew that the market could quickly become oversupply. The reason for that is not just the fact that typically supply is inelastic. Right? So even if you decrease the price, the supply is in the pipeline. So it's going to continue to come. But the fact that oil demand is not growing that much. So let's say the total year on year growth in supply in oil supply from 2024 to 2025 was 3 million barrels per day. And from 2025 to 2026 is again 3 million barrels per day. Now the oil demand is growing at less than a million barrels per day day. So it's roughly 800,000 barrels per day in 2025 and probably we're going to be close to a million barrels per day in 2026. So there is this mismatch and as a result of that the supply line is sitting something like 3 million barrels per day, between 2 and 3 million barrels per day above the demand for most of 2020. So we are likely to see very significant stock builds for the next 2, 3/4 unless OPEC decides to intervene and basically decide to do some cuts at some point in 2026 to support the market.
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Actually this glut is relatively short term and there's still going to be a lot of investment needed to meet future demand. We'll get there. But in your sort of in the risks. So to date OPEC has proved itself to be very effective at managing oil price to most people's benefits. Right. One of the risks, of course that is in your risk analysis is relatively low but would be high impact would be OPEC falling out with one another and essentially going their own ways. And you know, I sort of just wanted to ask about that because actually when you look within side opec you've got the UAE and the Saudis in kind of proxy battles in Sudan, South Sudan, Sudan and also in in Yemen and stuff. I mean it's not a particularly happy campus. Within that, I mean is that is is OPEC going to hold together into, in your mind, and what, you know, how catastrophic would that be if they didn't for the, for that gluttony?
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Good question, Paul. I think that the likelihood is really low, right. And the reason is that everybody knows within opec, by the way, not just opec, that a market without OPEC would be, would be much more difficult for them to deal with. So I give you an example. The OPEC was formed about nine years ago, and if you look at their production, it was really a regulating force for the market. So it was very high before the pandemic. It was very low during the pandemic. So they managed to decrease production by close to 10 million barrels per day pretty much in a month. Imagine if that had not happened. Right? So imagine if there was no coordination during, during, during the, the pandemic, then they managed to increase it as demand was coming back and, and again they made successive cuts so that the market was balanced in, in a nutshell, they kept the, the market whole, basically liquid. They managed to decrease the volatility significantly. And that is the, that is the major benefit for them as producer, but also for the global economy. I would say what is the likelihood that the OPEC breakdown now we have seen specifically in 2024 and in part in 2025, overproduction by some countries, specifically Kazakhstan. Right. So that was a problem. And I think that one of the reason why Saudi Arabia actually decided to increase production in April was to really kind of discipline some of the oil production that was occurring in Kazakhstan. Of course, there were other objectives, but that was probably one of them. I would be more concerned not so much of a breakdown of opec, but of a breakdown of opec, because the reality is that it's much easier to manage a big market like oil if you have Saudi Arabia, the Middle Eastern country and the former Soviet Union all basically behaving in a coordinating way rather than just the Middle Eastern country. Now, what is the likelihood that OPEC breaks down? Well, that's slightly higher than just opec. And just imagine what happens if, for instance, the oil price continues to decline and Russia finds itself in a tight spot. So Russia currently, of course, their production has not been impacted throughout the war or only marginally impacted. Imagine a situation in which Russia production cannot really increase and Saudi Arabia decides to continuously increase production and bring back the remaining cuts that were, that were made a couple of years ago. This could be a situation in which OPEC actually starts to show some cracks. So that is still very low probability, but it could happen.
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Yeah. And there's also Azerbaijan, Kazakhstan. I mean, there's lots of stuff going on north of Iran relates to Russia and changing relationships and tensions and stuff. So there's a, there's a fair amount there. But all of that is essentially is toward the downside. Right. Okay, let's move on to demand, which is, I guess, you know, where you have spent a good part of your career trying, trying to divine and understand how the energy transition could shape demand. Let's start with the, the big picture, which is in aggregate when you look at all forms of energy, is energy demand. You know, is it, I assume it's increasing around globally and is there any change in that rate of increase in demand per capita as we're seeing all these new technologies come on board and all of us have got more devices on at all point? I mean, what's going on with global energy demand?
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Fascinating the way you put it. For sure, it's very fascinating. The main tagline that I will give you is that yes, energy demand is growing. It's, it's not just about transition. It's definitely about addition. So at least 1% per year is what we are seeing in terms of primary energy demand growth for the next 15 years, 20 years. Now, having said that, there are many things that we need to consider on the demand side of things. The first is that with the current system, the current system of producing the energy which is overwhelmingly based on fossil fuel, you have a lot of energy loss. So the difference between the primary energy demand and the final energy, basically the one that you actually use for useful work, is 50% we produce on an annual, on a yearly level, we produce 650 exajoules of energy, but we end up consuming only half of that. Imagine that the rest goes basically to waste as heat. That's heat. Exactly. So imagine when you switch on your car, when you, basically when you use your car, 75% of the energy is dissipated in heat, right? This is the internal combustion engine. Now what we are seeing is that as we move from molecules to electrons, and this is something that's been going on for many years and will continue if anything will accelerate, then the energy system becomes more efficient, becomes more efficient, and with that you need to actually produce less primary energy in order to fulfill the final energy demand. Okay? So this is one thing which is, which is very important. The other is the fact that as the world becomes more and more wealthy, right? So the, the, let's call it the per capita GDP currently is the per capita average GDP in the world is roughly $15,000 per capita. Right? That will continue to increase. And once you reach certain levels of GDP per capita, the energy demand per capita stops increasing, so it no longer increases. And it makes perfect sense, right? So Once you reach 80, $90,000 per capita, then you don't necessarily increase the number of trips that you take or you don't necessarily heat your home more. Right? You just, you just level off. So once you take all of these things into consideration, so the changes in the way you produce energy, the macro kind of trends that see the world becoming more and more rich, you still see, this is the key takeaway. You still see energy demand growing, but it doesn't grow at the same rate as it was doing 20, 30 or 40 years ago. So it's actually decelerating. So it's still growing, but slightly decelerating. So that is number one, the number two and I already mentioned this, there is a very fast uptick in electrification. So this is happening for a variety of reasons. Both kind of technology driven, but also geopolitically driven. So the, for instance technology we clearly see a. The electrification of road transportation, specifically outside of the United States. So we, what we have seen is the share of electric vehicle globally in 2025, actually surprised to the upside. We saw something like more than 25%. Actually 28.5% of new cars sold globally were electric vehicles. And China is a major source of that. But also it's not just road transportation which has been electrified. It's also other part of the energy system. So it's more and more what you see is we use more electricity for space heating and in the industrial processes we tend to use more electricity. And this is driven by typically by economic. And also then there is the famous growth in AI, the famous data center. Right. So data center are in countries like the United States are pretty much the ones responsible for demand. Growing demand power demand growing growing power demand in the United States has remained stable for, for many, many years. What we are seeing is that in the next 15 years it's probably going to grow by 30% and that that is driven by data centers.
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Is that so? So that, that's kind of fascinating. Okay, so I, I sort of get the, the more efficient, as you move to electrification, you've got more efficient conversion of energy. That electrification is happening faster than we think from the UAE. And it's, you know, the penetration of Chinese EVs is phenomenal. Building nuclear power stations in a couple of years, a fraction of the time it takes in Europe, I mean it is quite astonishing for a country that's, you know, that is a, you know, wealth is founded on oil. But just one, a few questions thrown up there. One is that so that 90 grand, that plateauing of energy consumption per capita once you hit a level of development, does that still hold true in AI? In. In the world of AI or. Because obviously what we will read at the moment in Ivor spoused it, of course whether it's true or not we'll find out is, you know a Google search uses much less energy than a chat GPT search. So does that 90 grand still hold true or could we see an ex. A sudden jump in acceleration of per capita energy demand as a result of AI?
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Yeah, very good point, very good point Paul. One of the things we have done as part of the Newhouse view is to upgrade our GDP forecast due to the AI boom, right? Our expectation is that the AI will increase productivity and that increase will be widespread. It's not going to be just concentrated in the US and China which are the producer of AI. AI. It's probably going to be spread out everywhere you have access to computing power. So most of the world would benefit from the growth in AI. It's a very good question whether energy will be affected by the growth in GDP which is a growth in productivity. We don't know. So the short answer is that we don't know yet. But early signs are showing that AI is actually increasing productivity. So these are very early signs. And then if that translates into increased energy demand, that very much depends on how the work is going to play out. Is it going to play out in energy intensive sector? If the answer is yes, then for sure. If it's going to play out primarily in service related sector, then probably not so much. It's a little bit too early to tell, but you raise a very interesting point there. Hello, I'm David Hunt, founder and Managing director at Hyperion Search. Founded over a decade ago, Hyperion Search has helped organizations from major utilities to startups recruit their leadership teams and key individual contributors to accelerate both their growth and the energy transition. Our three main verticals are renewable power, energy storage and the mobility. The energy transition and the talent that delivers it has been our passion since day one. To find out more, visit hyperionsearch.com or listen to my Leaders in Clean Tech podcast available on all platforms.
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When you look at those development curves, let's bring this question in here. If you look at those development curves, there's kind of the analogy is sometimes made with the Cell phone in that, like the Global south, skipped landlines and went straight to, straight to cell phones. Are we seeing that same curve in electrification or is still functionally all that energy produced via hydrocarbons and you know, we're going to see the same patterns.
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This is extremely fascinating because I can tell you that not just in London, but in a variety of other places, specifically here in the United States, I raised the topic of, you know, China versus the United States. And to make an extreme simplification, what I say is that China is an electric and renewable superpower and the United States is increasingly looking like an oil and gas superpower. Specifically in the past year, right. With the repeal of the IRA and the one big beautiful bill which talks about energy dominance specifically in terms of oil and gas. Right. What I would say is that places like Africa, we always thought. Right. I remember even going back 10, 15 years ago thinking the next frontier for oil consumption, oil and gas consumption, would be Africa. Why? Well, because this is exactly what you do. Once you exit that phase in development, which is you're stuck between one and $2,000, thousand dollars per capita, then you start to move up to the line and that you enter the kind of the middle income stage, you have a GDP per capita between 5 and $10,000. What you see everywhere in the world is that you stop by the car, you start to take the first flight and so on and so forth. It's the famous middle class kind of paradigm. Right? That is still true. I'm not saying that's not true. But there are early signs that the middle class in places like Africa, Pakistan and Southeast Asia is actually moving towards buying electric vehicle instead of a Detroit made car or a Stuttgart made car, which is most likely an internal combustion engine. Why is that? Well, because these countries were part of the Belt and Road initiative for many years and are gravitating more and more towards China. Therefore it's very possible. And I'm not saying that this, this is going to happen at all. What I'm saying is that this is early sign that places like Africa can actually electrify much faster than we initially thought because of their proximity to China. China is a, this is absolutely undeniable. China is a renewable and an electro superpower.
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Does that skip copper? So in that sort of cell phone analogy, actually, you know, in Africa you, you go from sort of localized renewable generation, localized energy storage. You know, people are much more familiar with that environment. Therefore the car makes sense because it itself is a energy storage device.
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Right.
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And you're going to skip the sort of mass grid systems that you know that have characterized the Western world at the same time. Is that also another dynamic there?
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Well, it's possible, right? It's very possible. The self horizon is absolutely correct. What we have seen is that the deployment of solar, rooftop solar with batteries in Pakistan just in the past year has been going berserk. Right. The uptick of electric vehicle in Vietnam again going berserk. And this is not just countries that are close to China. Also some European countries are seeing an uptick in solar pv. Right. I think it's Hungary or Bulgaria, one of the two. Unfortunately I can't remember exactly which one. Also the uptick in electric vehicle in Europe just in the, in the last three to four months of 2025. So there are clearly signs that the electrification is, is going very quickly and we need to ask ourselves why. And that's in my view that, that, that goes back to the main thesis of the house view which we are going to publish this week. It's. I call it the divergence. Right. So I said surplus in the, in the next two years. But then after that divergence. And what that is, what we clearly see is that the molecules, specifically oil and gas, are bound to become more costly. So you need to invest a lot in the next 15 years just to keep the production stable. And this means that shale and deep water, which typically are costly, will continue to be necessary. So prices in oil cannot go down significantly even if a place like Venezuela can be with their immense reserve, even if they start to produce 3 million barrels per day. And as I said at the beginning, it's going to take 15 years. The gap is not going to be closed only by Venezuela or only by deploying all the spare capacity in opec. You still need deep water and you still need Shell. So that is increasing in cost. The thing is that the batteries, if I look at the batteries, the battery costs are decreasing, continues to decrease in extremely fast pace. And this means that if you look at the deployment of batteries in places like Australia, China, Pakistan is going up very, very quickly. So that is, it's very possible then that going to see some surprises when it comes to electric vehicle penetration in, in places like Africa, it's absolutely possible. I'm not saying it's a, it's a done deal. What I'm saying is that it's, it's very, it's, it's quite likely.
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B
Yeah, well, a lot of it's going to be down to cost. Right. And again if China continues as is it's got a, you know, it's part of a whole system it's trying to implement and you know, in sort of a neo colonialization product. And that's me saying it, not you. But you know, you can see them going hand in hand.
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A
But you see places like China for instance, if I look at the supply chain of solar, it's completely oversupplied right now. So and China is exporting enormous amount of solar PV component to many countries around the globe. Around the world. Clearly not in the United States so much. Definitely not in in places like Europe or if that makes it through Europe, probably there is a tariff associated to that. But in many other places there is a very strong push of solar PV component coming from China because China is definitely oversupplied and welcome.
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B
Right, because you're tackling energy poverty, which is the fundamental source of poverty and these things are easy to install and don't need that massive pylons and miles and miles of copper and so forth. I want to kind of come back to that long because it's going to be a real challenge finishing that. And people have identified this sort of investment gap that could occur if some of these forecasts are off in hydrocarbon supply and as that market degrades over 10, 20, 30, 50, 100 years, it's certainly going to be more volatile and probably and hence why many of our share client base are building out trading and optimization capabilities to manage those risks and manage that displacement in time and form of hydrocarbons, you know, as flows change around the world. Just on China. This you know I find this piece absolutely fascinating. What are we seeing on the demand side there? Because it kind of surprised with that over penetration or that penetration of EVs and gasoline demand went down. It's been clouded by as we discussed in this podcasts quite frequently the SPR buying that's happened more recently. Like what can we divine from what's going on in China about A economic growth there and B how hydrocarbon demand is changing versus power demand, how that relates to sort of a renewables penetration and the likelihood of them being as you describe, a renewable global superpower.
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A
So Paul, how much do we have Something like a couple of hours. Yeah, yeah, yeah.
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Sit back and relax. Let's go.
- [41:52]
A
I think you want me to do it probably in the next two to five minutes. I give you some big headlines number so let's start with electric vehicle, right. Because road transportation is a major component of all demand. 45% of all demand is road transportation. China is the largest Automobile market in the world by far. Right. So twice as large as the United States. Probably 30 million vehicles are sold in any given year in China versus the roughly 15 million in the United States now. In China right Now, more than 50% of new sales are electric vehicle more than 50% with roughly a split of 60 to 40 depending on on the point in time between full battery electric and the plug in hybrid. So this is a market that is going to electrify, it's going to come close to the numbers of Norway. Norway is more than 90% in the next few years. Is it surprising? Not really, because China has been investing in producing an automobile, an electric vehicle industry for, for decades. Right. Specifically for the past 10 years. And right now their vehicles are extremely competitive. Right. I always joke that you sit into a BYD and it has the interior of a Maserati, the acceleration of Tesla and the cost of a Corolla. So it's very difficult to beat the BYD these days. So the Garzling demand in China can actually peak over the next couple of years and our expectation is that it does. And if you think the role that the growth of road transport in China had over the past 15 years in terms of global demand, you see why oil demand is no longer growing at the same Speed it was 10, 15 years ago. I said earlier in our conversation that we expect the growth this year to be probably around a million barrels per day in normal city. If we had the same parameters that we had 15 years ago, probably with China not electrifying, oil demand would be growing at around 1.5 to 1.8 million barrels per day. So there is this. The second is the electrification of the power, the increasing removals in the power sector. So the we do expect for the first time this year the use of coal in power generation to actually decline by something like 2 to 5%. And this will be the first time that this happens. And the reason is that you have this extremely fast uptick in solar and solar plus batteries. Right. So this is a sign of basically an economy and an energy system which is trying to do its best to decarbonize. It's not necessarily for the sake of decarbonization, but it's because the solar is actually very competitive. It's our competing coal when it comes to the costs. So these are two kind of very important parts of the energy demand in China. But energy continues to grow energy demand in China. So this is an economy which is still growing around 4%, 4 to 5% per year. So last year it was close to 5% and this year it's probably going to be around 4.5%. I do not belong to the camp of people that are skeptical of the number in China. Remember when I was much younger I was trying to use a proxy for GDP growth in China using electricity demand. Right. What I eventually found was that the numbers in China when it comes to GDP growth may be too smooth to be true. But if you take a big average, something like a yearly average or a multi year average, they're probably not far from reality. So I don't doubt that China is actually growing at 4 to 5% and this will result in continuous growth in energy demand. But not necessarily, at least not anymore. Oil demand in road transportation and coal demand for the reason that I just said.
- [46:41]
B
Yeah, yeah, fascinating. I was going to ask on sort of the veracity of the data and I also, you know, it's not just the EVs that they're producing. I was kind of fascinated by, in, in the UAE there's lots of these things called G Tours, which are actually sort of analogs, dare I say of Land Rover defenders. And everyone was complaining that apparently they have really bad gas mileage. So you know, they're also just producing products of every kind. But you know, so, so China growing, but that mix is changing. Let's. I think that's been really, I found that fascinating on the demand side and there's, there's lots of kind of unknown, you know, I guess the big ones are really AI and then, and then how development is going to potentially whether the same assumptions hold true on energy demand and then how that electrification rolls out in the global South. But come what may, it seems pretty, people feel pretty confident that there is as you highlighted that there is going to be this, you know, more exploration needed on hydrocarbons, you know, as you're switching from coal to gas, et cetera, et cetera. That seems like that's going to be tricky for companies to navigate over the next 20 years. I mean how concerned are people that you know, that supply gap could get quite serious and we could see real shocks to the upside. Not in one or two years as a result of events, but really as we look a decade forward.
- [48:07]
A
Yeah, yeah. So that's, you know, when I don't speak to oil experts and of course you are an oil expert and here,
- [48:16]
B
no, no no recruiter, the audience is
- [48:20]
A
made of oil and energy experts. So I don't need to over labor the concept. But specifically when I talk to politicians I always bring out A slide that shows the decline rates on the supply side. So we need to understand that the natural decline rates is 17% per year. You have an oil field that's producing 100,000 barrels in a year. If you don't invest anything by virtue of the geology and the pressure on average next year is going to, that field is going to produce 83,000 barrels. So this is something that we need to understand. So it means that even if the demand, the total demand for oil and gas, well, the demand for gas is actually keep on increasing in our house views. So it increases quite significantly between now and 2040 by something like 15 to 20%. The oil demand actually remains relatively flat. Right. So it increases until the early 2000-30s and then it plateaus and then slight decreases. But even with this profile you still have, when it's all said and done, when I do consider things like the natural decline rates, when I do consider the OPEC spare capacity, I still see that there is a call on undiscovered resources by 2040, which is close to 10 million barrels per day. So this means that as we stand today, there is a gap of 10 million barrels per day. And how long does it take to basically find new fields and then start producing? Roughly 12 years. So basically we need to start right now to look for new resources, new oil resources, and to be able to produce them when we need them, which is in 2035, 2040 and onwards. And if I look at the rate of success of exploration in the past two, three years has been absolutely dismal. So we for investment that have averaged around $70 billion per year, we have found one third, one fourth of the total reserves that we used to find five, six years ago. And the cost, cost of finding new resources has gone up by one or two, one or two folds. So we are, we are in a tight spot. We have this gap of basically colon undiscovery sources, which is 10 million barrels per day. And that assumes that we basically use the total spare capacity of OPEC, which is currently, according to our estimates, close to 6 million barrels per day. So the international oil company, national oil companies, government needs to understand that even if the world is electrifying, even if we're going to have many more electric vehicles, we still need to produce close to 100, 105 million barrels a day of oil in 2040. And that requires a lot of investment. Yeah, at least between now and 2040. Cumulative $8 trillion. Right. So that's according to our house view estimate.
- [51:53]
B
Yeah. And there's a Talent aspect to that as well. Right. I know from sort of personal circles that lots of, you know, people are retiring from the upstream oil and gas sector. At the same time, you're not getting the same pull through of engineers globally. Right. There's some hotspots, but, you know, so it's going to be, going to be challenging.
- [52:13]
A
Yeah, absolutely. Yes, I can see that. So I remember when, when I joined the. That tells you my age. But when 25 years ago I joined the oil industry, I realized that there was a big gap between me and the, the next in line, which was people in their basic, in the 40th and even 50th. And why was that? Because the 1980s, the second half of 1980s, the 1990s, were a period of extremely low investment because the prices were very low because demand had been destroyed. Right. So there was a big oil demand destruction in the 1980s. So there was a huge gap and there was a lot of people. There were a lot of people who were hired in the early 2000 because we had a strong pull from the market oil demand. We knew that the point would grow in a very strong manner. And it did for the next basically 20 years. So right now we are again to a situation similar to what we had back in the late 80s and 1990s, especially foil prices stay in the low range because that no matter what. So even if we know, even if everybody knows, I tell you that I remember I was in Adipec back two, three months ago and I mean, the expectation there was that the oil prices would be very low and people were not concerned probably because they were, they were casting an eye to the next 10, 15 years. Right. So this was one of the messages I was giving them. But no matter what, if we go through a period of lower prices, let's say for the next 12 years, you cannot expect investment.
- [54:07]
B
Yeah, well, also it's, you know, inflation adjusted, those prices are actually incredibly low. The other thing that's happening at the same time is huge consolidation, particularly in the drilling companies, oil services. So when you think about the cost to find those barrels in the future, it's going to be even higher because you don't have the same level of competition. Right. So it's going to be quite a challenge. Well, Claudio, we'll put links to the house view when this goes out. That'll be next Wednesday. So hopefully those things will line up so people can view it there. And thanks very much for your time and I hope we can have you back on again in the future. And do a bit more divination around some of the demand side.
- [54:46]
A
Thank you so much for inviting us, Paul. It's been a pleasure.
- [54:52]
B
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