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Big Oil is living on borrowed time

Oil majors' profits amid the climate crisis seem like a sick joke, but if they don't invest wisely the joke will be on them.

By Philippa Nuttall

Oil companies are having an excellent start to 2022. A post-pandemic rebound means oil supplies and prices are ticking up nicely, and ExxonMobil, Chevron and Shell have all unveiled tidy profits in recent days. Yet in a notoriously volatile market, analysts suggest the tide will eventually turn against these companies unless they clean up their operations. Oil demand must decline by 75 per cent if the world is to reach net-zero greenhouse gas emissions by the middle of the century, according to the International Energy Agency (IEA).

In the past week ExxonMobil and Chevron reported combined net annual profits of nearly $38.6bn for 2021, the highest since since 2014, as reported by the Financial Times. Meanwhile, Shell’s earnings for 2021 rose to $19.3bn from $4.8bn the previous year, the company announced today.

In a world struggling with a climate crisis and where net zero and an end to fossil fuels are evoked at every turn, this money-making by some of the most polluting companies in the world seems like a sick joke. It looks even sicker when these fat profits by big oil are compared with the fate of consumers facing historically high energy bills. 

“The long-term picture for the oil and gas industry is clearly downwards,” says Michael Coffin, the head of oil, gas and mining at Carbon Tracker, a think tank. “But there will undoubtedly be short-term price volatility through the energy transition. This will include periods of higher and lower pricing. Whether companies can predict these to take advantage of or insulate themselves from them is a different matter.”

A report published by Carbon Tracker in January considers the financial implications of oil demand peaking in 2026 and the industry winding down in line with the goals of the Paris climate agreement. “To preserve value under such a scenario, it’s imperative that companies do not invest for the long term based on short-term price signals, and that investors hold them to account,” says Coffin. “If they don’t, companies may find that assets they sanction become stranded.”

Companies could waste as much as $530bn on unneeded assets this decade as climate action ramps up, demand for fossil fuels declines and the oil price falls back to around $40 a barrel from its current heady height of $90, the report says.

Coffin is confident that the requisite pressure to reduce oil output will come from a “rapid acceleration of policy action in response to climate change”, but also from investors as they realise the risks of financing infrastructure, such a pipelines, that is likely to become obsolete fairly quickly. “The increasing out-competition of fossil fuels by renewable energy sources and enabling technologies such as hydrogen and batteries” will also speed up the pace of change, insists Coffin. The rise of electric vehicles could significantly depress demand for oil in the coming years and “negatively impact prices and profits”.

Passenger EV sales are expected to increase sharply in the next few years, rising from 3.1 million in 2020 to 14 million in 2025. Such a rise would mean EVs taking a 16 per cent share of passenger vehicle sales globally in the next three years, with this figure reaching 40 per cent of total sales in Germany and 25 per cent in China.

Mat Lawrence, the director of Common Wealth, a UK think tank, believes governments must “take much stronger action to reduce the profitability of investment in fossil fuel assets through regulation, taxes and prohibitions, and reduce demand for hydrocarbon-based power and products”. Unless the state steps in, recent profits “won’t be a blip”, he fears.

For all their fine words and slogans about climate action, in 2020 clean energy investments by the oil and gas industry accounted for only around 1 per cent of total capital expenditure, says the IEA. This figure was expected to rise to about 4 per cent last year. “It is progress at a rate that will kill the planet,” says Lawrence bluntly.

“We need to shift how we organise the energy transition,” he adds. “Market-led co-ordination, delivered by for-profit companies, will lead us to disaster. We need public planning and co-ordination. We need regulation that brings companies in line with 1.5C, including taxes that sharply reduce profitability, and to shift the demand side by rapidly expanding electric public transport and insulating homes, for example.” 

Lawsuits against fossil fuel companies can help to drive this change, says Lawrence, “and they have made huge advances recently, but they are reactive”. 

Market forces will lead the way, believes Kingsmill Bond from RMI, the American non-profit organisation previously known as the Rocky Mountain Institute, but the energy transition won’t happen over night, he warns.

“The bottom line is that the superprofits fossil fuel companies are generating right now are the result of unusual circumstances and unlikely to be sustained in a more steady state environment,” says Bond. “Over time, profits in the oil and gas sector will come under sustained pressure from the combination of declining demand and the supply of cheaper alternative sources of energy.”

The main pressure will come from the rise of renewables that are less expensive than their fossil fuel counterparts, he insists. “But even growing at 20 per cent a year it takes time to displace the old. And when renewables are big enough, governments will start to tax fossil externalities more. Companies should make sure to take the superprofits from this period and use them to reinvent their business model before it is too late.”

This reinvention should take into consideration both climate concerns and consumer needs. “The interests of consumers are not aligned with oil and gas companies who are delighted to see oil prices this high,” comments Euan Graham from the think tank E3G. “We need to put consumers first in the energy transition.”

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