Is it Over for Oil?

It is no secret that oil has been a staple resource for society for more than 150 years, following its discovery in the U.S. as a valuable fuel for lighting homes. Subsequent advancement in extraction techniques, as well as the creation of new technologies such as cars and planes, also meant that new ways to use it were quickly realised. Its grasp on industries, from automation to aviation, and even to retail, have remained firm ever since. Nations have waged war over it (e.g. Gulf War, Iran-Iraq War), governments have risen and fallen because of it, and the trajectory of global markets have changed countless times all because this black gold that comes from the ground.

It was science that discovered this pioneering chemical substance, and it appears increasingly likely that it is science that has secured its replacement and confirmed its inevitable decline. This is because climate scientists and vehicle engineers, spearheaded by Elon Musk, are out to get oil. The issue of climate change has become markedly more prominent in recent years, and the subsequent calls for tighter environmental regulations, solidified through global accords like the 2015 Paris Climate Agreement, have gained traction in the political world. Ultimately, this has resulted in a shift in new investment and attention away from fossil fuels, as a slew of governments and companies introduce net-zero emissions targets and investment in renewable resources. The reality of the situation has been clear to both investors and producers for years – even prior to the coronavirus pandemic. Oil, in its current form, is unlikely to be at the forefront of the energy sector in the long-term.

The underperforming nature of the sector is most indisputable when looking at its performance across stock markets. ExxonMobil, a major U.S oil company that was once the biggest company in the world, has not seen its share price change significantly in 20 years. In fact, exactly 20 years ago, its share price was only about eight per cent lower than it is today! The erosion of energy companies’ market share of the S&P 500 index from eleven per cent to five per cent in the last decade is evidence alone that the industry was in decline before COVID-19 struck, and this should also act as an indicator to fossil fuel companies that, if they wish to survive, diversification is becoming increasingly urgent.

Bernard Looney, British Petroleum (BP)’s current Chief Executive, has recognised the need for diversification with his astonishing pledge to make BP, a major fossil fuels company, carbon neutral by 2050. Yes, you read that right! He specifically pledged to accelerate measures to move into renewable energies, while reducing capital expenditure on oil. As part of these measures, BP will continue to invest in a greener future by increasing its investment in low-carbon energy tenfold over the next ten years.

A similar commitment to go carbon-neutral by 2050 has also been made by Repsol, Spain’s largest oil company, and Royal Dutch Shell, the U.K.’s largest oil company. And while there are question marks surrounding the effectiveness of carbon offsetting techniques, major oil companies making these bold commitments is clear evidence of the industry’s recognition that diversification is key if they wish to stay afloat beyond the short-term.

The increasing presence of electric vehicles has catalysed the notable decline in demand for oil. Passenger vehicles were the greatest source of demand for oil prior to the pandemic, with consumption of petrol averaging 9.7 million barrels a day in the U.S. alone in 2019. Therefore Tesla’s meteoric rise to the pinnacle of the automotive industry will have had oil producers exceptionally fearful for the future, particularly as Elon Musk has stated on numerous occasions that he seeks to “destroy the oil industry”(You can read our extensive article on Tesla here). The growth in electric vehicles (EVs) on the road in the last decade has been faster than anticipated, and although they still represent only a small proportion of all cars on the road, it is clear that they present a real threat to oil producers. This has been particularly evident in the last two years, as European oil companies such as BP have been hedging their bets on the production of EVs by investing in a range of companies and funds that make up the electricity supply chain. With fuel efficiency improving, and the number of EVs on the road forecast to reach 300 million by 2040, the clock is certainly ticking for oil.

Now, let’s clarify one thing. These concerns were all etched on the minds of investors before the coronavirus pandemic. The fear isn’t new, and, as stated, for years, analysts have believed oil to be on its last legs. So, where do we go from here?

The oil market has recovered from shocks and troubling times in the past, even as recently as 2015 when prices plunged 70 per cent following a huge U.S. production increase. But, the trouble and turmoil that the oil industry has faced in 2020 is unprecedented and unparalleled. The Covid-19 pandemic sent huge shockwaves through every sector when it initially swept across the globe earlier this year, but the oil sector was hit particularly hard, largely as a result of the destruction of the aviation industry and travel restrictions. Oil demand fell faster and further than at any point in history when countries were supposedly facing the worst of the pandemic in April, with OPEC agreeing to cut production by 10 million barrels per day, or 23 per cent of their entire production levels. On the 20th April, oil prices went negative for the first time in modern history, with U.S. oil

price benchmark Western Texas Intermediate (WTI) falling from $17.85 per barrel (already very low) to minus $37.83 by the end of the day. Brent Crude, another U.S. oil price benchmark used globally, fell to an 18-year low of

$19.71 per barrel in the same month. To contextualise, in the second quarter of 2011, the WTI benchmark stood at $112.76 while the Brent Crude benchmark stood at $124.55 - a shocking illustration of the crisis that we are facing. And while prices have recovered to encouraging levels in recent weeks, producers and investors remain bearish - more price falls could be imminent as a result of a resurgence of the virus across the U.S. and Europe. These rising infections and local lockdowns have stoked fears of an imminent second wave. Many of these producers, employees, investors, and government officials, believe this crisis could accelerate the dampening of long-term oil demand, which stood at 100 million barrels per day in 2019, and also speed up the transition to renewable energies. Former BP Chief Executive John Browne declared that this crisis is merely a “warning of what is to come” for the industry, and believes that oil demand will struggle to recover in an upwards fashion like many are expecting. This concern is particularly evident with the slashing of capital spending seen by oil companies in the first quarter of this year – some 25 per cent! Not only does this show the massive fall in demand caused by the pandemic, but also the lack of appetite for bullish investors to invest new capital into the oil industry, with many fearing demand growth will weaken indefinitely, accompanied by more liberal, progressive governments turning their budgets toward renewable energies. This transition to renewable energy is already happening, with the Financial Times reporting that returns from new long-term renewable projects could now be seeing similar returns to new oil projects, something the coronavirus pandemic has undoubtedly helped.

So, what does this mean for the future?

No one truly knows when the world will no longer need oil; estimates range from merely three or four years to several decades. But the International Oil Agency (IEA) predicts oil growth will begin slowing in 2025 with a peak in demand occurring between 2030 and 2035. However, there are several factors that could impact this forecast. With no end in sight for the Covid-19 pandemic, its longevity could have huge implications for oil, as a long-lasting pandemic would have the potential to seriously damage the oil market again, possibly beyond repair. On the other hand, a swift recovery through remedies such as a treatment or vaccine would allow oil demand to pick up once more as planes return to the air, cars return to the highways, and consumer spending rallies. But demand, on the whole, will dwindle regardless of what kind of recovery we see from this pandemic - we just don’t know how quickly. Crucially, oil is still a major part of our lives, and the marked increase in demand for things like cheap, fast-fashion products over the last two decades has meant in some areas that the presence of oil is growing. In fact, since only the year 2000, the use of fossil fuels to make clothing has doubled, which is a troubling trend in a sector that isn’t yet receiving enough attention from environmentalists.

However, we are making progress. The fact that Tesla, an exclusively electric car manufacturer, is now the biggest company in the car industry with seemingly limitless share price upside, is a striking sign of the times, as consumers increasingly look to purchase more efficient, eco-friendly alternatives to gas-guzzling vehicles. Upcoming events in the political sphere will also be watched closely by oil executives, and many will be apprehensive as they witness oil-friendly President Donald Trump struggling in polls against Joe Biden, with fewer than three months until election day. If you want to find out more about recent events in the world of oil and their significance on the sector as a whole, our recent Energy Sector recap article is a must-read and can be found here.