The end of the oil industry in the not-too-near future has been predicted for years. These predictions became more frequent recently amid the push for a transition to non-fossil fuel energy in parts of the world, notably in the West. But, are reports of oil’s elimination greatly exaggerated? Is this big oil’s last hurrah?
Business Insider reported recently, citing energy analysts, that the Willow project in Alaska by President Biden could be one of the last big projects for the oil industry as it declines and gets replaced by low-carbon energy.
The authors of the report, in addition to calling Alaska’s North Slope “untouched” by the oil industry, argued that oil companies are no longer spending so much on production growth, but are focusing instead on profits and diversifying into renewable energy.
The argument was supported by the recent record profits that oil companies made last year and European supermajors’ expansion into things like wind, solar, EV charging, and batteries.
Indeed, all of this is happening. The supermajors are boosting dividends and buying back stock like there’s no tomorrow. Spending on production growth is being deprioritized concerning shareholder returns. Yet to claim that this signals the beginning of the end of the oil era is premature.
For starters, one big reason for oil companies’ reprioritization is government policy rather than changes in the market environment. The Biden administration is an excellent example of a government that is trying its best to stifle the oil industry. It has succeeded, too, as evidenced by the industry’s reluctance to respond to that same administration’s calls for more production.
European governments are also a good collective example – the twin pressures from them and climate-anxious investors have been the reason these companies are diversifying so energetically into renewables. At least they were, until recently.
In 2022, BP said it was going to reduce its production of crude oil and natural gas by 40% from 2019 levels until 2030. A year later, the supermajor dropped a bomb: it cut its oil and gas output reduction target to 25% from 2019 levels.
Not only this, but the chief executive of BP, and enthusiastic supporter of the energy transition, Bernard Looney, was reported by the Wall Street Journal to have expressed a certain disappointment with the rate of returns on the company’s low-carbon energy investments and, as a result, was going to dial back BP’s push in this direction.
Meanwhile, Saudi Arabia is sticking to its plan to boost oil export capacity substantially. According to chief executive Amin Nasser, Aramco should be able to export 3 million bpd additionally by 2030, boosting total production capacity to 13 million bpd.
Saudi Arabia must be well aware of the transition push in the West but appears to be unbothered by it. And why should it be when none other than energy transition champion IEA forecasted that global oil demand this year would reach 102 million barrels daily, growing by 3.2 million barrels daily. By the way, 102 million bpd would be a record-high level of oil demand.
Also meanwhile, Guyana is planning to tender more of its offshore oil and gas blocks, eager to monetize its natural resources, and the supermajors are definitely interested. It’s not just Guyana, either. Across the world, investments in offshore oil and gas are surging.
“People who hoped the oil companies would stop investing in oil are likely to be disappointed,” Kevin Book, managing director at ClearView Energy Partners, recently told E&E News and that statement sums up the reality of the global energy system pretty well.
Indeed, investors are starting to notice that oil and gas stocks are outperforming other industries and to remember that the point of investing is not to save the planet – though it would be a nice side effect – but to make money. So they are buying oil and gas stocks again.
Another thing that not just investors but the whole world began to notice recently was energy security. Europe had a rude awakening in this respect last year when it suddenly discovered that despite all the wind and solar capacity it had built over the years it was still overwhelmingly dependent on fossil fuels.
EU officials boasted incessantly about their success in reducing imports of oil and gas from Russia, shyly omitting certain facts such as the unprecedented surge in oil and gas imports from the United States and the equally unprecedented surge in fuel imports from Asia. But only after they stocked up well on Russian hydrocarbons – including coal – before they slammed the import bans in place.
This awareness of the importance of energy security spread around the world, leading to Shell forecasting a future in which emission reduction may take the back seat while security sits behind the wheel. Granted, this is not Shell’s only scenario for the future but it is nevertheless notable in that just a year ago nobody would have dared suggest it.
The developing world is meanwhile calling the developed world out on its transition ambitions. African leaders are slamming the West for its insistence that they don’t develop their oil and gas resources after the West itself became the developed world precisely thanks to these same resources. And the West is changing its tune because it needs the oil and gas of Africa for its energy security.
China is perhaps the best example of energy security taken seriously. The country has the biggest wind and solar generation capacity and is the biggest market for EVs. Yet China is building as many new coal plants as the rest of the world combined and China is consuming more oil than ever. It has a growing economy and a growing economy needs more energy, from everywhere it can get it.
Meanwhile, Europe is looking for ways to reduce its gas demand. There are doubts about whether it can meet its criteria if it remains at current levels, or afford it.
One thing is for certain—the United States is growing regarding energy security. It will be thanks to the reality of energy security that imposed itself on the Biden administration when fuel prices surged so high that the administration had to decimate the strategic petroleum reserve after its pleas to the oil industry failed to elicit a favorable response.
The last 12 months taught the world several important energy lessons: that energy security invariably trumps any emission reduction ambitions; that bad political decisions lead to real economic pain, fast; and that oil is far from dead. It is very much alive and likely to remain kicking for decades to come.