With the stock market capitalization of the five-biggest US oil companies slashed by half since the beginning of the year, the future is increasingly clear: although stopping oil production overnight would bring the world to a grinding halt, particularly in the transport, cement and metals industries, but as we emerge from lockdown, we must now focus on building a circular carbon economy and reduce industry’s contribution to carbon dioxide emissions.
The post-pandemic economic recovery offers a huge opportunity to make huge advances in decarbonization. The coal industry, the biggest polluter, may not even survive, and won’t be missed: Austria and Sweden have closed their last coal-fired power stations, Spain has shut two more, while Portugal and the United Kingdom have broken records for generating non-coal powered electricity. In short, coal is not the sector to invest in, and things aren’t looking much better for oil.
With the price of solar energy hitting record lows (1.2 cents per kWh last week in Abu Dhabi), the signs are that we are approaching a flat-rate future where energy will be too cheap to bother putting a price on, with oil relegated to uses unable to adapt to abundant and far-cheaper electricity. Companies that don’t make the transition to these low-cost, cleaner energies will be less and less competitive. In the not-too distant future, everything from our radiators to blast furnaces, airplanes and container ships will be powered by electricity generated by renewables.
The oil companies themselves are now investing heavily in the technology to capture, reuse and store carbon dioxide so as to make what they do more palatable to public opinion until they’re able to diversify fully away from oil; meanwhile the Middle East’s oil producers are also moving into solar power, using another resource they also have in abundance.
The impact of this transition on the oil market will be complex. We are talking about an intensely speculative sector where the vast majority of players have never laid a hand on a barrel of oil in their lives, and who have had the opportunity, last April, to experience what happens when companies must pay a buyer to take the stuff off their hands.
How will the oil market react to this kind of crisis? Considering the enormous differences in production costs, which range from $8.98 or $9.08 dollars per barrel in Saudi Arabia and Iran respectively to $28.99 in Nigeria, $34.99 in Brazil and $44.33 in the United Kingdom, there’s going to be a rush to get out of oil and it isn’t going to be pretty: we can expect more panic as investors rush for the fire escape. The oil companies are already trying to cut costs: BP is laying off 15% of its staff, some 10,000 people; Chevron is talking about 6,000 layoffs, while Shell, the company that stockbrokers down the years have advised investors to hold onto because of its generous dividends, will be cutting them for the first time since the second world war, prompting even the most traditionally minded analysts to recommend investing elsewhere.
Under these conditions, maintaining state subsidies to oil companies is suicidal for our economies and investors. What we knew was toxic to our planet is nowalso toxic to shareholders.
In short, rebuilding the global economy around renewable energy has never made more sense.
About the Author
This article was written by Enrique Dans, professor of Innovation at IE Business School and blogger at enriquedans.com.
