Is it the end of the oil era?

While the last few years has seen an acceptance in the oil industry that renewable energy is eventually going to dominate the energy markets, the argument has focused on the question of when the shift from oil to renewables will take place. Analysts have widely predicted a peak in oil demand in the 2030s. Barclays projected a global peak in oil demand between 2030 and 2035, followed by a steady demand reduction, while the International Energy Agency (IEA) projections in 2018 projected that oil demand would reach a peak in 2040, since downshifted to the 2030s.

Many analysts have argued that a structural shift in the oil market is impossible due to the slow rate of industrial change. Under current policy paths, the majority of internal combustion engine vehicles will still be in use in the late 2030s – a significant indicator of oil continued consumption. While current transport modalities may be shut down, oil consuming assets remain. Once the economy returns to business as usual, consumption from airplanes and cars will soar again.  The question is whether it needs to.

As the use of electric vehicles (EVs) has increased, the oil industry has been planning for shifts in demand. Until recently, few analysts have suggested that the shift could be anything but long and slow. One outlier is Kingsmill Bond of Carbon Tracker who has for some years been promoting the notion that the shift could be as soon as 2021.

Markets are driven by tipping points, which means they are driven by incremental changes – they look to where new growth lies. Bond calls this the rule of 3%, saying, “Any fast-growing challenger will rapidly take all the growth in a slow growing market. As a rule of thumb, incumbent sales will peak when the challenger gets to around 3% market share.” In the Carbon Tracker report Myths of the Transition, he points out that U.S. horse numbers peaked when cars were 3% of their size, U.K. steam demand peaked when electricity was 3% of power supply and U.K. gas lighting demand peaked when electricity was 2% of lighting.

The simple fact is that prior to the current market situation, the size of the global EV fleet was the most significant variable determining the potential displacement of oil demand. In the United Kingdom, EV sales made up nearly 6% of all vehicle sales in January 2020, while Norway’s figure for 2019 was 46%. Globally EVs were 2.2% of the market in 2018 and many expect to see the 3% figure hit in 2019.

Despite concerns about the impact of EVs on oil demand though, analysts predicted that the loss of transportation fuel demand for the oil market would be offset by a growth of demand in the petrochemical sector, driven by increases in the global middle classes and economic growth in developing countries. A huge part of that demand was expected to be in plastics, with BP identifying ‘non-combusted’ oil demand the biggest drive of growth to 2040 in its Energy Outlook. Single-use plastics were expected to account for nearly 40% of predicted demand of 5.5 million barrels a day.

In the last couple of years, however, we have seen a volte face in the public’s acceptance of plastic use, especially disposable. Described by some NGOs as the ‘Blue Planet Effect’ there has been a significant growth in focus on the importance of cutting plastics use. BP’s predictions show oil demand peaking as soon as the 2020s, if governments implement regulation and eventually ban their use.

So demand was under enormous pressure prior to the crisis. Once we come out the other side though, there are changes that could fundamentally impact the uptick in oil demand. Automobile Association (AA) President, Edmund King suggested that travel patterns could be permanently affected by people’s experience of using home working technologies. While such technologies have been around for years, and are in wide-spread piecemeal use, lack of usability combined with expectations of work meant that their use has predominantly been as a backup in case of problems.

During lockdown, if there have been technical problems, people simply have to keep going until they sort it out. And sort it out they are. Recognition that long commutes to and from offices are an unproductive and inefficient use of time is spreading. Post-corona, if people travel less and continue to focus on mobility needs rather than owning and driving a car, the future for oil demand may be bleak.

For those of use watching reports of clean air across Europe, that might seem like a good thing. For those companies attempting to navigate the shift, less so. Arij van Berkel, director at Lux Research points out the traditional oil company approach to a price drop is to maintain investment in exploration and cut downstream investment in refineries and clean energy. With the oil price this low, and many expecting the price to remain low throughout the year, that’s not a strategy that makes much sense any more.

Oil companies need to maintain the value of their cashflow and their dividends – that has always been what makes them such an attractive investment. Boards are attempting to balance the recognition of coming changes with the need to fund their transition as a business. For many that means using oil reserves to either build or buy their way into new business opportunities. Whether it’s Dong Energy rebranding as Orsted, BP committing to carbon neutrality by 2050 or Total buying its way into the renewables industry, the writing is on the wall. Oil companies are shifting their focus to the future and that future is clean energy.

The final nail in the coffin for the oil era will be green stimulus. The EU has recommitted to its Green New Deal and Germany’s finance minister has been reported to have confirmed support for climate-neutrality in its stimulus packages. There will be significant demand for clean power, renewable heat and support for innovation in PERC efficiency, floating solar, flexible PV, perovskite, self-cleaning modules – all hold significant opportunity. Combine strength in innovation with green stimulus and an oil industry that needs to reinvent itself and it’s possible that investors may soon lose interest in high carbon infrastructure altogether.

Throughout Q2 2020, pv magazine is diving deep into the topic of green finance and what it means for solar industry players, as a part of its UP initiative. Topics will include the European Green Deal, regional growth opportunities, green bonds, and the role of the carbon bubble. Stay tuned and get involved!