The oil industry's risky future
Fossil fuels, new energy… What’s the trend?
Over the next two decades, the need for petroleum-based motor fuels – now half or more of the oil industry’s market – will shrink faster than the Antarctic’s ice sheet. The oil industry has acknowledged this looming reality but, as a whole isn’t terribly concerned.
But why not? There’s a lot for oil producers to worry about:
The coming of the electric car. Bloomberg News Energy Finance forecasts that electric car sales will grow from 1.1 million in 2017 to 11 million in 2025 and then 30 million by 2030; at that point, EVs will be cheaper to produce, and buy, than gas buggies. By 2040, EVs are forecast to take 55 percent of the global car market. Also, EVs are likely to remain on the road longer because they have a tenth or fewer moving parts than petrol-powered cars do.
France, the UK, Norway, the Netherlands, and India are among the countries that have banned the sale of internal combustion vehicles after 2030, with cities from Barcelona to Vancouver making similar moves. In China, people wanting to buy a gasoline-powered car have to enter a lottery and face odds of winning of one in 200. Now, at a November 2018 conference, Volkswagen announced its working on its last generation of strictly internal combustion cars: in the future, all VWs will be either hybrids or all-electric.
It’s not just cars. The International Energy Agency foresees 125 million electric cars, buses, trucks, scooters, jitneys, and all forms of EVs on the world’s roads by 2030; the agency thinks that number could rise to 220 million if nations’ policies and regulations address air quality more aggressively.
Already, cities from Cape Town to Copenhagen, as well as London, Paris, and other regional metro centers, are swapping out diesel buses for electrics. The US Department of Transportation has set aside $84 million in grants to fund 52 electric bus transition projects in 41 states.
Daimler and Tesla are building electric long-haul trucks – Tesla is gearing up to deliver 100,000 a year by 2022 – but they’re not alone. DHL, the worldwide delivery company and the world’s largest buyer of trucks, has launched its own EV manufacturing venture. Chinese maker BYD has delivered 500 electric garbage trucks in its home country and 200 to Brazil.
The analysis firm MarketResearchNest expects to see the electric truck market grow by 54 percent a year for at least the next five years. That’s a lot of diesel that oil refiners will no longer be selling.
The arrival of the Age of Renewable Fuels. A November 2018 report from Lazard, the global asset management firm, stated that utility-scale solar and wind projects, in the aggregate, now make electricity as cheaply as, or more cheaply than, oil, gas, or coal plants. Onshore wind farms deliver power at a cost of $29 per megawatt-hour (MWh), with solar and coal averaging around $36, the report found.
Jim Yong Kim, president of the World Bank, said in an October 2018 town hall meeting that the bank’s by-laws require it to fund the lowest-cost option for energy projects and “renewables have now come below the cost of oil, gas, and coal.” In that same month, a statement by the European Bank for Reconstruction and Development noted that “renewables are now the cheapest energy source.”
The combination of economics and environmental marketing has led Xcel Energy, a utility serving eight states, to pledge to use renewable fuels to go carbon neutral by 2050 and get 80 percent of the way there by 2030.
It’s not just utility-scale projects that are vaporizing fossils’ role as the fuel of choice for making electricity or heating and cooling. Rooftop solar panels for homes have plunged in price from almost $12 per kilowatt-hour in 2000 to less than $3 by June 2018, according to the consulting firm Wood Mackenzie.
Peak Oil is about to arrive. According to the International Energy Agency’s World Energy Outlook 2018, we’re likely passing the point of “peak oil” – the point at which oil companies are adding less oil to their reserves than they’re pumping. That doesn’t mean we’re facing an imminent oil shortage; oil companies have more than 50 years’ worth of proven reserves on hand. But it does signal oil’s official transition to a sunset industry.
In a nod to this future, oil companies are dabbling in alternative energy. ExxonMobil is actively looking for clean-energy start-ups to buy into; British Petroleum has partnered in projects that turn biomass into fuels and owns shares in wind projects in the US and Europe. Shell and Saudi Aramco have partnered to create a green energy investment fund; Total Petroleum, France’s national oil company, is aiming to become a global player in solar generation and storage technology.
Royal Dutch Shell is devoting $1 billion a year to building its renewable energy portfolio. But that’s still only about 4 percent of its annual capital budget. At a recent conference, Shell’s CEO assured the audience that his company isn’t “going soft” on oil and gas.
According to Henry Lee, Director of Harvard University’s Environment and Natural Resources Program and former director of Massachusetts’ state energy office, the oil industry as a whole is “concerned but not panicked” about these changes. Lee, who speaks regularly with oil company officials, finds some of them alarmed, some nonchalant about the future, but most not terribly worried.
The two main reasons for their calm: petrochemicals and the developing world.
As renewable energy and electrified vehicles drive down oil demand in Europe and North America, the market for oil is rising in Asia. The multi-nation International Energy Agency forecasts that in 2025, the world will want seven million barrels a day more than it burns now. Emerging nations are growing their consumer economies as well as their populations; more people who want consumer goods and cars are becoming able to afford them. The infrastructure for petrol-based manufacturing and transport systems is already in place and one for an electric economy isn’t.
Of that seven million daily barrels of new oil, about four are expected to be taken by the petrochemical industry.
In addition to cars, delivery trucks, trains, and aircraft, nations with growing affluence will want more electronics, fertilizers, paints, detergents, and especially plastics, that include petro-based chemicals as an essential ingredient. At the same time, the developed world’s taste for these staples isn’t shrinking.
But oil companies aren’t factoring in two key social and political factors that press on them outside of the circle of supply and demand.
Concerns about plastic waste, especially in the oceans, is stirring consumer and political action. McDonald’s has announced that it’s abandoning plastic straws, removing several hundred billion a year from the waste stream; the cities of Los Angeles and Seattle have banned plastic straws in their jurisdictions.
The nation of Costa Rica is moving to ban single-use plastics; 126 other countries are regulating the use of throwaway plastic bags; and global retailer IKEA is phasing out single-use plastics and has committed to make all of its plastic products from recycled materials by 2020.
Plastic has been forecast to account for 20 percent of the world’s oil use by 2050, but these kinds of public pressures and regulatory actions could shrink that figure, perhaps considerably, as new generations grow up with an environmental consciousness that many of today’s elders lack.
Since being sparked in 2012 by author-activist Bill McKibben and students at Middlebury College, the campaign to withdraw investments from fossil fuel companies has persuaded more than 1,000 financial institutions to move more than $8 trillion out of those industries.
In 2015, it was history’s fastest-growing divestment initiative, drawing commitments from almost 700 institutions from the city of London and Seattle University to the United Church of Christ and the nation of Ireland. The campaign is aiming to draw at least $10 trillion in investments out of fossil fuels by 2020.
More than 65 percent of people under 40 told a 2018 Pew Research Center survey that social issues play a major role in their investment decisions. Social investing generally means denying money to oil companies and instead backing renewable energy ventures.
It’s more than just a feel-good impulse. Canada’s Genus Capital Management Fund reports that its fossil-free mutual fund outperformed standard stock-market performance measures by about 2 percent a year for five years. “Divesting from fossil fuels pays,” said Genus’s CEO.
All of this leaves the oil industry’s future as less than assured. Harvard’s Henry Lee doesn’t think oil producers’ long-range plans have factored in these changing social and political winds. “Politicians react to public sentiment, which can change in an instant”, he told the Trends Journal, “and oil companies don’t have a plan to respond to that.”
Barring major recessions and cataclysms – a Middle East war, the collapse of global trade, or a recession, for example – long-term oil prices should rise slightly into the next decade. But now that renewable energies and electric cars are growing in popularity, and dropping in price faster than conventional alternatives, all guarantees are off. Investors will be safest playing short-term price spikes or dips but should no longer view petroleum as a keystone of a safe, long-range investment strategy.