Is The Oil Industry Going Green? And Moving Away From Oil?

Last week’s headline in the Wall Street Journal, “Total Eclipse: Oil Giant Sees Its Future in Electricity” no doubt caused many renewable energy advocates to fan themselves like antebellum Southern belles.More than any other oil major, Total sees electricity as a hedge against oil’s eventual decline and is assembling a new business around it. Last summer, it paid $1 billion for a French maker of industrial batteries.”

Similarly, a Wood Mackenzie study found growing oil industry investment in renewables.” Major oil and gas producers will put more of their capital into wind and solar developments as returns from renewables are poised to exceed some hydrocarbon projects.”

Less noticed was a story about lower investment levels for renewables.Global investments in renewable energy fell by almost a quarter in 2016 amid a drop in prices and lower spending in some markets, according to a U.N.-backed report published Thursday.”

We’ve seen this dance before. About two decades ago, oil major BP tried to rebrand itself as “Beyond Petroleum,” which was meant to indicate they were moving forward into energy more generally (I think), but which many interpreted as meaning that they were specifically going into renewables (as they announced putting up solar panels at their service stations) or were acknowledging “peak oil.”Skeptics like Greenpeace described this is a triumph of “style over substance.” And indeed, the company found “business realities have run headlong into the once lofty expectations surrounding alternative energy.” They exited the solar power business in 2011 and are refocused on oil and gas.

Which is what happened over three decades ago. As New York Times reporter Thomas Friedman (whatever happened to him?) informed us, “ARCO Solar Inc. and Solarex Corp., the leading manufacturers of single crystal silicon cells, have introduced a high degree of automation into this process and expect to continue reducing costs as they increase volume.” That was in 1981. Wall Street encouraged this, with Standard and Poor’s saying, “Diversification into alternative energy fields should offer promising new opportunities for increasing profitability.” Followed only four years later by a complete reversal: “Diversification out of the oil business has been disastrous for most of the majors….” (Both from Chapter 3 of my book.)

Despite the ‘scientific’ consensus that oil prices would keep going up after the 1979/80 tripling, and optimism about technological advances for photovoltaics, it turned out that the sector was not ready for prime time. In hindsight, it’s hard to see why there was so much enthusiasm about a product that was clearly both expensive and immature, and fairly naïve belief in the ability to make various photovoltaic designs viable in the near term remains an object lesson.

Things have changed, of course, and the past failure of both photovoltaics and electric vehicles does not mean that they will fail again, but suggests a need for a bit of skepticism about the enthusiastic claims being made for them now. Certainly, electric vehicles are better and cheaper than they were, but it remains unclear whether they are better and cheaper enough to become more than niche vehicles without the current massive subsidies.

The argument that peak oil demand necessitates diversification into new businesses almost exactly echoes those of the previous era, with Mobil CEO Rawleigh Warner saying in 1977, “The oil business has come to maturity, and with this maturity comes a new set of challenges … oil companies have no other choice. They must diversify or go the way of the buggy-whip makers.” (Decades later, he also supported the peak oil supply arguments, as did the previous Total CEO the late Christophe de Margarie. Another object lesson.)

There is definitely money to be made in new energy technologies such as industrial or electric vehicle batteries, but the issue going forward is how much of it will be from subsidy farming versus selling commercially viable products? The need for power storage has been present since the beginning of the industry and is growing now, but investors should be careful to avoid irrational exuberance.Companies like ARCO and Mobil which saw the decline of the oil industry are no longer with us, but like The Dude, oil prevails.

Michael Lynch , Forbes