Is the oil industry really approaching its last hurrah?

According to a report in The Times, a survey of 34 fund managers found that “24 per cent want oil companies to wind down their business and return cash to shareholders.” But are they right?

Article updated: 2 May 2019 1:00pm Author: Michael Baxter

There are two problems with oil, it is not good for the environment and its supply is limited. At some point we will have to find an alternative — because at some point, the planet will have run out.

Is the oil industry running out of gas?

As for climate change, I don’t find it remotely hard to see why our burning of fossil fuels is correlated with climate change. More than a billion years ago, carbon dioxide used to be more common in the atmosphere and it was hotter, then evolution threw up the innovation that was photosynthesis and things changed. As we burn fossil fuels we reverse a process that was hundreds of millions of years in the making.

As I understand it, there have been other occasions when a change in carbon dioxide in the atmosphere changed climate. For example, when the land mass we know as India collided with Asia, the result was the Himalayas. The higher the Earth’s surface area, the more carbon dioxide sits in the ground. The consequence of the formation of the Himalayas was an ice age.

Critics say that the volume of carbon dioxide humans create is tiny compared to the amount created by nature. The argument misses the point. When left to itself, nature’s carbon dioxide emissions and carbon dioxide capture, tends to capture balances out. But the effect of humans burning fossil fuels is accumulative. One year’s worth might not make a difference. Decades worth, piled on top of each other, does.

The Paris Climate Change Agreement calls for limiting global average temperature to well below two degrees.

It is a massively difficult task, and not helped by the decision by a pariah state called the United States to pull out of the Paris Agreement.

Yet, I would say the agreement lacks ambition. The impact of a 1.5 degree rise could be catastrophic. I am genuinely concerned that rising temperatures might melt the permafrost; that the Tundra we studied in geography lessons at schools, will melt away, releasing all kinds of chemicals, mainly methane, that lurk there. This could create a horrendous positive feedback loop.

It may not be like that, but we dare not take the risk.

That is why we must win the fight against climate change.

Cutting the burning of fossil fuels won’t be enough, but it will be vital. Carbon capture, perhaps through planting trees will be required too. I wonder whether in 30 years time, there will be ugly carbon capture plants every few miles, making the current debate about the aesthetics of wind farms seem ridiculous.

We will also have to do something about our meat consumption. As a carnivore myself, the idea of giving up steak, lamb or chicken fills me with horror. I just hope that stem cell technology or plant substitutes that taste like meat won’t make it necessary for us to give up meat or foods that taste just like it.

But we must, absolutely must, move away from fossil fuels, including, eventually, natural gas and oil from fracking.

Although, oil has a secondary benefit, plastics; not even that will be enough to save it, as we need to reverse plastic pollution and learn how to become better at recycling plastic.

The oil majors will have a problem.

I also believe that certain oil majors have confused the story by putting out misleading figures and funding biased research to try and disprove the anthropogenic climate change hypothesis.

The tobacco firms once did something similar concerning the effects of smoking. I find it astonishing how they got away with being punished through fines. Maybe the amount of taxation they paid saved them from the wrath of regulations.

But the damage done to the environment and maybe to the human race through funding research designed to delay the war against climate change is a disgrace. The fines such companies receive should be much greater than the fines imposed on BP after the Gulf of Mexico oil spill. Does climate change impose an existential threat to the oil industry? Of course it does.

The renewable revolution

But there is another side to this debate, namely the speed by which the cost of renewables is falling.

To be clear, it is the trend and something called the learning rate and Wright’s Law that makes the difference. Any criticism that takes no account of Wright’s Law is invalid.

Wright’s Law means the cost of renewables are falling, the cost of energy storage is falling and the carbon footprint from wind and solar is falling.

Wright’s Law

According to Ramez Naam, who is the guru on these things, Theodore Paul Wright, an aeronautical engineer back in the 1930s explains it. Wright “observed that every doubling of production of US aircraft brought down prices by 13%.”

Wright’s Law is another phrase for learning rate — it applies to falling cost of a product type for every doubling in the installed user base.

Mr Naam says that the cost of electricity from solar drops by 25-30 per cent for every doubling in the user base. For wind it drops by 15-20 per cent.

Solar currently accounts for two per cent of global electricity output, wind accounts for six per cent. So I would say that creates an opportunity to double the installed base of wind power two and a half fold, and solar by around four fold.

But that is not the full story, As we move to electric cars, the demand for electricity will rise. Modern technologies such as server farms will increase demand for electricity. I can see the installed base of wind increasing four times, the installed base of solar increasing six fold.

This will lead to a the cost of electricity from wind halving. The cost of energy from solar will fall by 80 per cent.

At current prices, solar and wind are already competitive with traditional sources of electricity. In Spain, Mexico, Chile and India, solar power is now cheaper than building new fossil fuel electricity plants. Ditto for Arizona, Nevada, Colorado and Texas.

Electricity generated from wind is typically cheaper than solar.

The problem, of course, is what happens when it’s neither sunny nor windy? One answer lies with smart technology, in which we channel energy from intermittent sources into devices whose usage are not time sensitive.

Another answer lies with energy storage. Since the beginning of 2018, the levelised cost of electricity for lithium-ion batteries has fallen 35% to $187 per megawatt.

It is widely reported that once lithium ion falls below $100 per megawatt hour, electric cars are cheaper than internal combustion engine cars, over the life-time of the car and taking into account energy usage.

Elon Musk claims that Tesla has got the cost down to $100 a megawatt hour.

He also claims Tesla batteries can now last 350 miles.

I believe we will eventually see electric cars use a combination of lithium-ion batteries and graphene based super-capacitors. These super-capacitors can be charged up almost instantly and an indefinite number of times. But their capacity is low. But graphene could increase this capacity. I can see cars using the super-capacitors for short journeys, and via wireless re-charging from smart roads.

In time, car batteries may be used, via 5G and smart technology to support national grids, but only when the life-longevity of lithium ion batteries improve.

But don’t renewables create carbon emissions?

The process of making solar panels, in particular, emits carbon dioxide. However, a report in Nature, published in 2016, found that over the previous 40 years, the carbon footprint of solar fell by between 17 and 24 per cent.

A learning rate will apply to carbon emissions from solar. As the longevity of solar increases, its life-time carbon footprint will fall. As the ability to recycle solar improves its carbon footprint will fall.

According to the World Nuclear Organisation, solar’s carbon footprint is roughly a tenth of the carbon footprint of coal and oil, but twice that of nuclear.

Carbon footprint of different technologies, source: World Nuclear Organisation.

Mean tonnes of carbon dioxide per gigawatt hour
Coal 888
Oil 733
Natural Gas 499
Solar PV 85
Biomass 45
Nuclear 29
Hydro electric 26
Wind 26

Solar and wind also see high fluctuation. Solar ranges from a high 731 tonnes of carbon dioxide per gigawatt hour, and a low of 13. Wind ranges from 124 to six.Nuclear 130 to two.

But, following the learning rate, carbon emissions of solar will continue to fall.

Smart technology will be more effective at directing energy to low usage times, the carbon footprint of energy storage will fall.

This all begs the question, what is wrong with nuclear? My observation here is that I am aware of no evidence that nuclear is subject to the same kind of learning rate as solar or wind.

The key stage

However, energy storage is limited in one sense. It does not provide storage over an extended time-frame, except for water storage, in which water is pumped up a hill. But this is land intensive, and only seems viable in Scandinavia (Norway especially) and maybe Canada and Siberia.

Ramez Naam has argued that the renewable revolution will hit a fourth wave — at this point: “Value deflation, where renewables create so much supply at certain hours that they drive down wholesale prices; Depletion of the best sites in some regions; Seasonal intermittency and the unsolved problem of seasonal storage.”

He suggests that this point is still some way off, and by then technology may have created a fix.

Or we may support solar and wind with traditional energy, on rare occasions, and which can be turned up and down.

Future of oil companies

I think it is questionable. The markets are supposed to value companies by discounting future revenue. I give the oil industry as we know it, between 15 and 20 years.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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