Volvo recently became the latest company to announce a pledge to go all electric. Volvo’s announcement, that it will produce only electric cars by 2030, follows GM’s announcement of going all electric by 2035.
It looks like there will be greater numbers of electric vehicles on the road in the future. Since they don’t use petrol, this trend could have an impact on oil prices. What could the future look like for oil prices? And for the BP (LSE: BP) share price and Royal Dutch Shell (LSE: RDSB) share price both depend a lot on oil prices currently?
Projections
According to the US Energy Information Administration’s (EIA) annual energy outlook 2021, the agency gives three projections in real dollar terms for Brent crude. ‘Real dollar’ adjusts for inflation. In the EIA’s reference case, the agency expects the price of Brent crude to rise to an average of $73 per barrel by 2030 and $95 per barrel by 2050.
Under EIA’s high oil price scenario, Brent crude prices rise above $130 per barrel by 2030 and $170 per barrel by 2050. In the low oil price case, however, the EIA doesn’t project Brent crude rising above $50 per barrel.
Given that Brent is above that level currently, the price of the commodity will have to fall fairly substantially if that scenario is to be accurate for future years.
Impact on the RDSB share price and BP share price
I think BP and Royal Dutch Shell are attractive under the EIA’s reference or high price scenarios. In those two scenarios, I reckon BP and Royal Dutch Shell would have some time to transition to green energy as their upstream fossil fuel divisions could generate cash flow for quite a while. In the high price scenario, I reckon both could be considered value plays at their current share prices.
If the EIA’s low oil price case projection occurred, however, I’d be more hesitant. The RDSB share price and BP share price both didn’t do so well last year when Brent averaged $42 per barrel mainly due to the pandemic.
If the cost of producing oil increases substantially more than expected, I reckon the BP share price and RDSB share price might not do as well as it could in the future also.
What I’d do
Although both companies could face a tough transition ahead given companies like Volvo switching to electric vehicle production in the future, I think both BP and Royal Dutch Shell’s oil divisions could be profitable under the EIA’s reference case scenario for quite some time. As a result, I’d buy at the current BP share price and RDSB share price.
With that in mind, I don’t know if oil prices will do exactly what the EIA’s reference case scenario predicts. Oil prices could be weaker than expected if battery technology improvements make electric vehicles cost competitive sooner. I reckon oil prices could also be weaker than expected if major governments like the US or China implement really tough carbon emission rules. It certainly seems that governments around the world are doing more now against carbon emissions than before.
With BP and Royal Dutch Shell’s convenience and growing green energy divisions, however, I think the supermajors have at least some diversification against oil that make them more attractive.
