Et tu British Petroleum?
BP has joined a growing number of oil and gas companies that recognize the industry’s best days are in the rearview mirror, anticipating that oil use will peak within 10 years. The company’s new Energy Outlook asks not whether demand will drop, only how soon and how quickly.
The London-based energy company is not the first to plunge a dagger into the back of the oil industry. Royal Dutch Shell predicted in 2018 that oil demand would peak in the late 2020s. Smaller industry forecasters have also made similar predictions.
Stubborn industry loyalists should heed these warnings, even if U.S. oil producers still dream of oil markets growing indefinitely. Consumer demand is shrinking, which will leave companies with three options: expand market share, diversify the product line, or wind the business down.
TOMLINSON’S TAKE: Oil companies following in coal’s footsteps to oblivion
The easiest way to grow market share is to slash prices below what competitors can match. OPEC leader Saudi Arabia and its partner Russia have adopted this strategy, keeping international oil prices around $40 for most of the year. Most U.S. companies cannot survive at that price point.
Some industry analysts, especially those contracted by U.S. firms, predict that once the Coronavirus Recession recedes and people travel again, the price of oil will shoot up. They even expect the price will rise high enough to grow demand for expensive fracked oil from American wells.
BP’s demand outlook, though, argues otherwise. The company’s economists say oil demand will barely surpass 2019 levels. OPEC and Russia are holding back 1.5 million barrels a day, more than enough to keep prices low if they choose.
Russian officials made it pretty clear in April that they want prices around $40 a barrel to keep the U.S. industry from making a comeback. Saudi Arabia and other OPEC nations are learning to live with these lower prices.
Most U.S. oil is simply too expensive compared with Saudi, Russian and other OPEC resources. And if BP is correct about a flat demand curve, OPEC nations with few other income streams will fiercely defend their market share.
In a declining market, low-cost producers will also scramble to sell as much oil as they can to make sure they are not left with an asset no one wants. In short, North American firms can no longer rely on international price gouging for their business plans.
I also like to remind people that these Energy Outlooks—OPEC, Exxon, Chevron and others produce them too—are primarily tools to reassure investors that a company’s strategy is sound. One reason BP’s outlook is radically different this year is because the company is diversifying into a more climate-friendly focus on renewable energy products.
One of my major disappointments with U.S. oil companies is their fitful and over-hyped investments in cleaner forms of energy. Chevron spends millions telling the world about their green initiatives, but the actual percentage of their capital spending on them is very small.
If American energy companies want to survive, they need to join the Europeans in killing the fossil fuel business, just as Brutus helped assassinate Julius Caesar, whose final words I paraphrased above. Otherwise, they risk inadvertently taking the third option, which is to wind up their business.
I’m looking at you Exxon Mobil.
The most famous, and some would say notorious of the oil supermajors is a shadow of its former self after years of stubborn denial about climate change, electrification and the future uses for oil. The Irving-based corporation will lose another $1 billion this year, mostly due to hubris, according to a great piece by The Wall Street Journal.
TOMLINSON’S TAKE: U.S. oil and gas companies lag on climate pledges
Instead of recognizing that climate change and consumer preferences demanded a new business plan, Exxon schemed to pump an additional 1 million barrels a day when the world already has all the oil it can ever burn safely. CEO Darren Woods mocked companies looking for cleaner forms of energy and is letting the opportunity slip away.
The oil industry will have many Mark Antonys who will stand over the corpse and praise the enormous contributions fossil fuels have made to global society, and they will not be wrong. We will still need a petroleum industry, though in a much smaller form, to make lubricants and chemicals we need for modern life.
Climate change, though, requires us to stop burning petroleum and pumping carbon dioxide into the atmosphere. We are making progress every day, and no matter how oil workers may feel about that, most of the world is rejoicing at the industry’s demise.
BP’s Energy Outlook should be a wake-up call for the entire oil and gas industry, their employees and most importantly, investors.
Tomlinson writes commentary about business, economics and policy.
twitter.com/cltomlinson
chris.tomlinson@chron.com
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