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Page added on August 13, 2016
Why oil companies must look beyond oil
Persistently low oil prices have had a devastating effect on the economies of all major oil producers/exporters who are accustomed to a price regime of over $100/b. The lifting of sanctions on Iran and its ability to quickly ramp up to pre-sanction (2012) levels of production and exports has made the market even more liquid and exerted downward pressure on oil prices.
Economic survival and grabbing market share – self destructive
Suddenly when oil prices collapsed, the major oil producers and exporters found themselves in a challenging situation, as falling oil revenues were not sufficient to balance government budgets. In an effort to sustain their economic growth, while finding it difficult to keep the economy growing at the desired pace; they had to take some unpopular measures. Austerity measures, downsizing, delaying of some major projects, removing energy subsidies, and draining of sovereign wealth funds are some of the many immediate measures that oil producing/exporting countries are undertaking to cope up with falling oil revenues. The question is for how long they can survive if such a unique situation persists over an extended period of time?
OPEC and Non-OPEC need to collaborate
Oil prices are likely to remain below $50/b for at least a year or so; unless all stake holders, including OPEC and major non-OPEC producers cooperate on a production freeze/cut. This is a difficult task and even harder to implement. The reason being that all oil producers/exporters are in a catch-22 situation. Almost all oil producing/exporting countries are facing a dilemma of a budget deficit due to deteriorating oil revenues. Each producer is trying to produce/export more by offering discounts to grab the market and trying to lift oil revenues to narrow-down their budget deficit. For example the headline:Saudi oil output sets record despite global glut signals that is, there is a silent war going on among oil producers/exporters to produce and sell more in an effort to sustain/revive their sluggish economies. Their individual actions continue to push up the already overflowing inventories and further exerts downward pressure on oil prices.
Oil demand and regulatory reforms
On the global oil demand front the international agencies’ forecast is always associated with strong oil demand in Asia and more particularly linked with China and India. For example, BP and IEA respectively predicted that non-OECD Asian oil demand is likely to increase by 15 and 11 million bpd during 2015/2035.
It is quite possible that these forecast may not materialize as predicted due to so many on-going initiatives in both the countries. Such optimistic forecast may lead to overinvestment in the upstream sector, further dis-balancing the oil market equilibrium in the medium to long-term.
In an effort to curb pollution, a number of ongoing regulatory and legislative initiatives in China and India are taking place. For example, total vehicle sales in China grew by 4.7 percent in 2015 to 24.6 million, down from 6.9 percent sales growth seen in 2014. This is partly contributable to weaker GDP growth, but mostly due to certain initiatives such as quotas imposed by the Chinese government in cities such as Beijing and Shanghai where aspiring car owners must enter a ballot to get a license plate. Other measures include alternative day driving restrictions and progressively improving average fuel consumption standards.
Rapid penetration of electric vehicles in China is yet another factor that could dent the projected oil demand growth. India’s oil demand is expected to grow as the ownership of vehicles is still expected to increase significantly. However, an Indian court handed down rulings in an effort to control air pollution in urban areas in particular. Examples of this are a ruling by India’s Supreme Court in 2015 which results in banning the sale of luxury diesel cars in New Delhi and the National Green Tribunal, a special environmental court, which directed the government last month to ban all diesel vehicles in the capital that are more than 10 years old.
Structural changes in auto-industry
The higher oil prices and environmental challenges in the past have motivated the auto-industry to revolutionize and move away from over a century old Internal Combustion Engine (ICE) dominance with Electric Vehicles (EVs) and Fuel Cells Vehicle (FCV). What does it mean to oil companies? Do oil companies need a new long-term strategy to remain successfully in the business? Or live with a status quo strategy? If they ignore such a threat and do nothing it may undermine their long-term objectives. One should not ignore the fact that more than 72 percent of oil demand is mainly associated with transport sector and out of this over 80 percent has been linked with road transport. Speedy penetration of EVs will certainly displace sizeable oil demand in decades to come and could be detrimental for the oil industry.
Until recently, the oil industry perhaps is not giving any attention as what is happening around the auto-industry. However, a recent announcement of almost all the ICEs car manufacturers’ plans of moving away from ICE to EVs while some companies are planning to completely stop manufacturing of ICEs beyond 2050 should be alarming and eye opening for oil industry.
Volkswagen and Audi are aiming for EVs to make up 25 percent or more of sales by 2025, while Mercedes is about to unveil an entire fleet of electric vehicles, other automakers Hyundai, BMW, GM, Chevrolet Bolt, Tesla, and others also unveiled big plans.
In addition, the introduction of semi and fully autonomous cars and drones to replace domestic delivery will surely have a substantial impact on global oil demand. What this paradigm shift means for oil companies? Surely rapid penetration of EVs will displace sizable oil demand in road transport which accounts for major chunk of oil consumed. Author and Andreas de Vries in their recently published the article “Wake up call for oil companies: electric vehicles will deflate oil demand” predicted that under the reference case the penetration of EVs will displace 13.8 million bpd by 2040 and under the high case it could reach 39.5 million bpd.
To defend the oil industry from complete disintegration, is the current lower $50/b oil price regime part of oil and gas companies’ strategy to discourage the speedy development of EVs industry? Or rather is it due to technological innovation or due to self destructive policies for individual survival (grabbing market share) rather than protecting the industry? Some smart companies already expanded their old philosophy of being purely oil and gas business towards energy business including development of renewables. I think sooner or later most oil companies will need to develop a new strategy before it is too late. Those sticking with the philosophy of “old is gold” could find themselves losing out.
15 Comments on "Why oil companies must look beyond oil"
Anonymous on Sat, 13th Aug 2016 11:00 pm
lol
makati1 on Sat, 13th Aug 2016 11:08 pm
Anon, I second your hilarity. This article is pure bullshit.
GregT on Sun, 14th Aug 2016 12:45 am
USA-TODAY 🙂
Go Speed Racer on Sun, 14th Aug 2016 4:34 am
To make money, the oil companies could sell bottled water. After all, a gallon of bottled water sells for a lot more than a gallon of gas.
Kenz300 on Sun, 14th Aug 2016 7:58 am
The world is in transition away from fossil fuels………
Oil producing countries and oil companies need to take their heads out of their xxx and see that the world is changing with or without them……….
It is time for fossil fuel companies to change their business models and become “ENERGY” companies and embrace wind, solar and biofuels………..
BP once used a slogan BEYOND PETROLEUM……….then they changed management and sold off their investments to focus on their core business…….BIG MISTAKE……….
Climate Change is real….. we will all be impacted by it……
Exxon’s Climate Change Cover-Up Is ‘Unparalleled Evil,’ Says Activist
http://www.huffingtonpost.com/entry/exxon-evil-bill-mckibben_561e7362e4b028dd7ea5f45f?utm_hp_ref=green&ir=Green§ion=green
rockman on Sun, 14th Aug 2016 11:43 am
And again the almost childlike assumption that if a company has expertise to produce one form of energy would be just as capable of efficiently producing any form of energy. More important that a company which has an entire infrastructure and work force dedicated to one business would have the motivation to completely restructure themselves.
Texas has developed a world class wind power industry and none of it was produced by the fossil fuel industry. CA is the leading solar power producer in the US and it also wasn’t developed by the ff industry. So many who would accept the idea that a ff producer would readily give up that capability to switch to building out renewables would laugh at the idea of an auto manufacturer giving up that business the build helicopters. After all both businesses involve building transportation systems so why not ?
Or more simply: why couldn’t a scientist with a Ph.d in biology switch to doing research on subatomic particles? After all they’re science just like oil and solar are both energy sources. LOL.
Northwest Resident on Sun, 14th Aug 2016 12:26 pm
rockman — All excellent points. But let’s face it. Articles and thousands of others daily like this one aren’t targeted at smart people. They are targeted at the clueless masses with the intent to keep the polish shining on that thin veneer of “all is well” illusion. We can easily imagine somebody out there, fully invested in fossil fuels and watching his investment shrinking, seriously considering the prospect of dumping his energy stocks altogether. But after he reads this article, the numbskull will think “no, I’m smarter than that, I’ll just ride this out and wait for fossil fuel companies to switch to renewables, then I’ll make a killing!” Little does he realize, of course, that the joke is on him.
Boat on Sun, 14th Aug 2016 12:30 pm
“I think sooner or later most oil companies will need to develop a new strategy before it is too late. Those sticking with the philosophy of “old is gold” could find themselves losing out.”
The world is adding some 20 million vehicles per year. For the sake of argument let’s say electric vehicles grow to 20 million per year around 2035 causing the last peak oil. That would still leave close to 70 million new FF vehicles being sold.
Of course there many other types of FF machines much more difficult to replace. Just remember, for any technology ran by electric, it has to be cheaper than a FF equivalent which has not happened yet to any kind of meaningful scale.
Oil companies will be around for a long time.
http://www.statista.com/statistics/262747/worldwide-automobile-production-since-2000/
peakyeast on Sun, 14th Aug 2016 2:16 pm
If the definition of “a long time” is from a fruit-fly perspective then I agree the oil companies and civilisation will be around for “a long time”.
Kenz300 on Sun, 14th Aug 2016 2:28 pm
Electric cars, trucks, bicycles and mass transit are the future….
fossil fuel ICE cars are the past…………..
The Netherlands’ ban on gas-powered cars ‘likely to become law’, all new cars electric by 2025
https://electrek.co/2016/08/14/netherlands-ban-gas-powered-cars-likely-law-all-new-cars-electric-2025/
Scotland blows away the competition – 106% of electricity needs from wind – joins select club
https://electrek.co/2016/08/14/scotland-electricity-needs-from-wind/
rockman on Sun, 14th Aug 2016 3:31 pm
NR – Sad but true. And thanks to the oil price bust there are good buying opportunities…both production and stock. But one needs to be a very knowledgable buyer. And as you point out the vast majority don’t even come close.
Ralph on Mon, 15th Aug 2016 7:25 am
I think there is a strong parallel between our current over-specialised heavy industry and evolutionary dead end species, who find themselves in a niche ecological corner with no-where to go when that corner closes.
Many UK aero companies started as car companies – RollsRoyce being the headline example, but Smiths were the go to company for both car and plane instruments for decades. The support infrastructure for deep sea oil rigs and offshore wind turbines are not so different, and control and management needs of pipelines and power networks are not so different.
In the US, domestic industry turned to building planes tanks and warships in a matter of months in 1941 (?)
Two hundred years ago it was not so unusual for one person to be scientist, entrepreneur, government employee and ordained in the church. Of course, it helped to be born into the landed gentry…
Kenz300 on Mon, 15th Aug 2016 9:07 am
Seems like Oil companies and their workers are already changing and are moving to safer, cleaner and cheaper alternative energy sources……… it is never smart to put all your eggs in one basket…….
diversify…..diversify….diversify
Renewable Energy Training Opportunities for Vets and Displaced Fossil Energy Workers –
http://www.renewableenergyworld.com/articles/2016/07/renewable-energy-training-opportunities-for-vets-and-displaced-fossil-energy-workers.html
3 Sure Signs of Texas’ Emerging Solar Market
http://www.renewableenergyworld.com/ugc-content/2016/07/22/3-sure-signs-of-texas-emerging-solar-market.html
Energy from Offshore: Engineering Firm Transitions Expertise from Offshore Oil to Offshore Wind –
http://www.renewableenergyworld.com/articles/2016/07/energy-from-offshore-engineering-firm-transitions-expertise-from-offshore-oil-to-offshore-wind.html
shortonoil on Mon, 15th Aug 2016 11:51 am
“The world is adding some 20 million vehicles per year. For the sake of argument let’s say electric vehicles grow to 20 million per year around 2035 causing the last peak oil. “
The oil markets aren’t buying it, and neither are we.
http://futures.tradingcharts.com/marketquotes/CL.html
If you look at the long end of this, out to 2019 and further, there is almost no activity. Even though the front end has seen a monster short squeeze recently (compliments of the EIA’s fairy godmother stance) that squeeze is likely to end in the very near future; like this week.
http://www.zerohedge.com/news/2016-08-15/morgan-stanley-says-oil-squeeze-will-end-august-17-heres-why
The market is so bad at present that oil companies are hardly even looking for new oil. In 2015 they found 2 Gb, and the world burned 34. They are pumping it 17 times faster than they are replacing it, and they don’t seem to be a bit concerned.
Maybe you can’t get your head wrapped around the Laws of Physics, mathematics, models and all of that, but when the oil companies themselves start broadcasting it over a mega phone one would have to be damn stupid not to understand.
Oil is becoming so worthless that even oil companies aren’t looking for it? That is called the coming end of the oil age!
http://www.thehillsgroup.org/
PracticalMaina on Mon, 15th Aug 2016 1:10 pm
I like my BP panel, just saying, before they fucked the Gulf.
There panel works better than there deepwater rig operations, just saying.