The end is nigh for oil
Fossil fuel merchants including oil companies are living on borrowed time, argues a new book
Transition is energy's new buzzword. Benign as it sounds, for oil companies and many utilities it means the game is up. Or will be. Sometime. A consensus about when hasn't emerged. But predictions of the end are legion these days. Dieter Helm's new book, Burn Out, is the latest. It's long on hunches, short on detail.
Helm's thesis is straightforward. Three "predictable surprises" are in store: the end of the commodity super-cycle and the fall in oil and gas prices over the long term; decarbonisation; and technological revolution.
The oil companies that dominate today are doomed, though they don't realise it. Their businesses simply can't exist alongside the climate imperative. There is a "basic and fundamental disconnect" between the "assumptions of business-roughly-as-usual and the fate of the planet".
Prices will fall over the long term because shale, Iran, Iraq and other resource-rich areas have much more oil to yield, but also because producers, fearing imminent demise, will pump while they can. On the demand side, the China growth story is over and new materials will replace plastics (and therefore the need for petrochemicals). All the while, alternative sources of energy will take over. Oil prices of $40-60 a barrel or lower "may be the new normal".
In Helm's words, this is "a story about digitalisation, the coming of robots, 3-D printing, artificial intelligence, and the applications of communications technologies to infrastructure". It is, therefore, about "the electrification of almost everything". Few if any of the big incumbent energy firms "can look forward to survival in the medium term—and certainly not a ripe old age".
Helm scores some hits. In the energy sector, "resistance to the idea that the future might be very different from the past is endemic" and the "existential threat has not sunk in". He's right—the proof is in each long-term outlook from the oil majors. Their future always looks a lot like now, but with more demand for fossil fuels.
Helm is especially strong on the radically different economic model embedded in new alternative energy. Almost all new forms of generation—crucial, because digitalisation means more electricity—do not have an energy cost once they are installed, he writes. A world of zero-marginal-cost energy is one where energy-demand growth does not matter.
This isn't the only big change Helm foresees. A world of sleepless and ununionised robotic workers means cheap labour in Asia is irrelevant. Manufacturing can return closer to the buyers. Global trade will shrink. Europe and, especially, the US will fare best in this new economy.
The thesis is sometimes subtle, and occasionally confusing. Decarbonisation is coming. But Helm spends a good chunk of the book rubbishing both today's alternative energies—simply not up to dealing with the climate problem—and the global emissions agreements, from Kyoto to Paris. It's hard, after this successful demolition job, to grasp that, nonetheless, decarbonisation efforts will be successful.
Technology is the answer, Helm believes. Battery storage at scale will surely make a difference. Smart meters and the internet of things sound plausible. Battery-powered cars will threaten oil, as will materials like graphene to replace plastics. But their triumph is assumed, not shown. The book is light on details. Helm places huge faith in some future solar technology, but isn't clear what it will be. "It is now possible to at least imagine [Helm's italics] a world in which almost everything could be coated in solar film." Almost everything? Is it?
The book's section on the geopolitics of all this is weak and already dated. That tight oil means "the US can now afford to offend the Saudis" is definitely a sentence from the pre-Trump era. So are the bits about the US switching its allegiance from Riyadh to Tehran. Turkey and Russia are no longer "in a stand-off". Iran doesn't have "Red Guards" (Russia and China did), they are Revolutionary Guards. Helm justifiably pans the Saudi Vision 2030, but misnames it. Cnooc did not buy Canada's Nexus, it bought Nexen. And so on.
As for China, Helm thinks its transition from an export-led economy to a consumption-based one will fail. Few other countries have managed such a shift. This is another threat to oil. Yet, Helm writes, it would be "foolhardy to simply extrapolate Chinese energy demand into the future at current growth rates and assume that it will be the engine for pushing world oil demand to 100m b/d and beyond". Perhaps. But global demand is already 98.2m b/d, and rising at a clip of about 1.5m b/d per year, and China accounts for more than a third of the rise this year.
Still, the broad transition argument is hard to dispute and Helm is surely right about the implications for oil companies. The 21st century will not belong to the existing players. Their best ploy may be what Helm calls "harvest and exit": recognise the clock is ticking and pump hard before the price decline takes over.
This is bad news for the pension funds and governments that rely on the oil sector's dividends and taxes. The good news? Digitalisation, electrification and the arrival of the bots will save the planet.
Burn Out: The Endgame for Fossil Fuels. Yale University Press, New Haven: 2017