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The future of Big Oil is… er… gas and renewables

Faced with a glut of oil and prices well below the break-even point for many companies, the oil industry has been disinvesting, closing drilling operations, prematurely decommissioning wells, and severely curtailing exploration.  What this adds up to is some serious oil shortages in a year or so, together with an economy crushing spike in prices.

Economists don’t see a problem with any of this, of course.  Once prices rise, exploration and drilling will become profitable once again, companies will expand their operations again, and oil will flow once more.  In the real world, however, the big oil companies face serious problems attracting the investment that would be required to begin exploration and drilling once more; even if prices rise well above $100 per barrel.

Investors and banks have had their fingers badly burned by the losses resulting from two years of unexpectedly low prices.  They are not about to open their cheque books just because the price of oil spikes.  We would need prices above $100 per barrel for several years before the risk would be worth taking.  But recent history suggests that the global economy simply cannot sustain prices anywhere near $100 per barrel.

In any case, Big Oil is not hanging around to see if they can attract the necessary investment.  Most are turning to green energy as an alternative profit centre; while those that intend drilling in future are more interested in gas than oil.  For example, in an interview with Bloomberg, Royal Dutch Shell CEO Ben van Beurden explained:

“We’re more a gas company than an oil company.  If you have to place bets, which we have to, I’d rather place them there.”

The Bloomberg article explains:

“Shell prides itself on taking a longer and more clear-eyed view of the future than its rivals. In the 1970s it began drafting “Shell Scenarios,” detailed analyses of global politics and economics, and their implications for energy demand. It’s been less hesitant than competitors such as ExxonMobil—the only private oil company that’s larger—to acknowledge the need to cut carbon emissions and invest in greener energy as a hedge. This year it created a unit for renewables, and Van Beurden in June told investors that Shell “strongly supports” global agreements to limit climate change.”

In this transition, natural gas is viewed as a ‘bridging fuel’ that might keep the global economy operating while we cut back on coal and oil and massively expand green energy.  However, attempts to substitute natural gas for oil as a liquid transport fuel have not taken off.  And while there has been a large percentage expansion (from a very small base) in electric cars, we are unlikely to see either electric or gas powered trucks, ships or commercial aeroplanes anytime soon.  So if the other Big Oil corporations follow Royal Dutch Shell’s lead and move out of oil in favour of gas, we can look forward to some serious global transport problems in the course of the next five to ten years.

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