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Sunset For Oil? You Must Be Kidding, Surely?

Business, China, Company Strategy, Economics, Environment, Oil & Gas, Sustainability, Technology, US
By John Richardson on 07-Aug-2015


Sunset2By John Richardson

SURE, you can very easily argue that the oil industry is many, many decades away from going down the same path as the coal industry, where, in countries such as the US, it is going bankrupt.

The biggest case for oil’s longevity is its role in transportation, it is altogether from different coal, which has mainly lost out to cleaner-burning natural gas in power generation. Coal does not have any role in the transportation sector, with the exception of just about only China where they turn coal into diesel and gasoline. And even China makes most of its transportation fuels from crude.

(By the way, I will look at natural  gas in a separate blog post as the arguments around its future are a little different).

And for over one hundred years now, oil has been tightly bound into global transportation. This has left us with billions of dollars’ worth infrastructure investment in pipelines and refineries etc. that would have to be replaced at an enormous cost if you were to make a significant switch from gasoline and diesel to, say, natural gas or battery-powered vehicles.

This is assuming, of course, that it is even worth considering replacing all this infrastructure. Before this can even be thought about, we would have to find alternatives to oil in transportation that a.) We could produce in the enormous volumes needed and b.) At a cost that makes global economic sense.

Here are a couple of other objections to the idea that oil is anywhere close to being a sunset industry, and I am sure you can think of many more:

  • What about all the jobs that would be lost in the oil industry. What would you do with all these people?
  • And how would the innovators overcome political resistance from the oil and autos companies that benefit so enormously from the hydrocarbons-driven global economy? “Big Oil” in the US will not role-over and die. Of course not. Neither will the petro-states of the Middle East, Africa and elsewhere, which rely hugely on oil for the very economic survival.

The above arguments took me just a few minutes to summarise because they are part of our shared understanding. We all know them, probably as well as we know the old nursery rhymes we were taught in school.

But shared understanding isn’t the always the same as the truth, as we have found out with China very recently. The shared understanding on China was that its economy would never suffer a serious, long-term downward correction. This has been proved wrong.

And with oil, where there is an economic will there might just be a way, as a Financial Times interview with Bill Gates in June of this year indicated:

As a parting shot Mr Gates compared the search for renewable technologies with the early days of the technology industry and predicted that some investors would make a lot of money by backing companies that would one day be successful.

“If I came and talked to you about software in the late 1970s, I would tell you: ‘Hey, somebody’s going to make a lot of money. Now there’s a tonne of software companies whose names will never be remembered. . . If you happened to pick Microsoft, Apple or Google, you would have made lots of money.”

Mr Gates, in the same article, urged governments to switch more resources from subsidising renewable energy into basic research. At present, government subsidies amounted to more than $100 billion with only $6 billion a year being invested in renewable energy R&D, he said.

Hence, his belief is that if this happens major new global companies will emerge from nowhere, just as Google did from 1998 onwards.

One the examples of new technologies that he gave is something called solar-chemical power. If successful, this technology would actually piggy-back on oil pipelines and gasoline tanks inside existing cars So there potentially goes the infrastructure objection to the “Sunset for Oil” theory.

And what if we can find ways of storing electricity much more effectively? This would make both solar and wind power and electric cars much more viable. Research here includes looking at ways of using capacitors, or electrical fields to store power. Another way to go could be to replace today’s lithium-ion batteries with, say, magnesium-ion batteries.

Here is another “what if”. What if another new technology – Driverless cars – really takes off? This could reduce the volume of traffic on the roads by as much as 90% as most of us would be want to rent or lease a car, per ride, than actually own one.

I also mentioned above how the autos companies would fight against the end of oil.  But if driverless cars really do take hold, auto companies as we know them might not even be around anymore. Luis Martinez of the International Transport Forum, a division of the OECD, told The Economist:

The value in carmaking will shift from hardware to software and from products to services. That would shake existing carmakers, just as smartphones upended Nokia and Kodak. Already, high-tech newcomers such as Google, Uber and Tesla are muscling in.

Bill Gates is backing his words with his money: He plans to double his investment in renewable energy research from $1bn and $2bn over the next five years.

“No disrespect to Mr Gates as he is a brilliant man, but this is chickenfeed in terms of the overall money that will be needed to replace oil,” I can here you say.

True, but Mr Gates and others like him have the economic will to make these relatively small investments because they sense there has been a huge change in the political will. Thus, the returns on their investments could be equally big.

The climate change debate is essentially over, whether you like it or not. Governments the world over believe that humans are the cause of climate change. So they will be taking a close look at numbers such as these, which were published in an IMF report released in May of this year:

•Post-tax fossil fuel subsidies are dramatically higher than previously estimated—$4.9 trillion (6.5% of global GDP) in 2013, and projected to reach $5.3 trillion (6.5% of global GDP) in 2015.

•Post-tax subsidies are large and pervasive in both advanced and developing economies and among oil-producing and non-oil-producing countries alike.

•The fiscal, environmental, and welfare impacts of energy subsidy reform are potentially enormous. Eliminating post-tax subsidies in 2015 could raise government revenue by $2.9 trillion (3.6% of global GDP), cut global CO2 emissions by more than 20%, and cut pre-mature air pollution deaths by more than half. After allowing for the higher energy costs faced by consumers, this action would raise global economic welfare by $1.8 trillion (2.2% of global GDP).

So much therefore for the argument that moving away from oil would be too damaging for the global economy.

You can instead easily make the opposite argument that the shift would create many new jobs in new industries, whilst also potentially reducing the enormous economic costs of climate change, if by shifting from oil, in transportation and everything else, we can minimise the rise in global temperatures.

This shift might also limit the human cost of climate change that right now is set to be mainly borne by the world’s poorest people as they often live in equatorial regions. It is these equatorial, or tropical, regions that are most at risk from rising sea levels and droughts.

Do you still dismiss all of this as nonsense? So be it, but the move away from an oil-driven global economy could happen a lot quicker than many people think. It is a scenario that any oil or chemicals company planner with a 20 or even ten-year horizon must consider.

And here’s the thing: As we move towards a potentially ex-oil economy, what will this mean for the demand growth for oil over the next five years, if you only think in  much-shorter timeframes?