Is oil dead? ‘Black gold’ loses its sparkle

January 20, 2021

London (Jan 20)  A global pandemic, collapsing prices and the green energy revolution all spell trouble for oil. Are the industry’s current travails just another cycle in its history of boom and bust, or will 2020 emerge as a year when a once mighty sector went into terminal decline?

When you visit Masdar City, “you will see few cars driving around the streets,” says Chris Wan, chief architect working on the project close to Abu Dhabi. “Masdar City is designed to be people-centric rather than car-centric,” he continues. “For internal circulation, we have prioritised walking, and we are also experimenting with hop-on, hop-off autonomous electric vehicles to help people get around.”

Inaugurated in 2006, Masdar City provides a vision of what the world could look like if it were to wean itself off oil. Wan explains that the city is largely powered by solar energy farms, including the nearby 100MW Shams array, which, when launched in 2013, was the largest in the world. The urban space is designed to minimise energy use – narrow streets, thick walls and small windows keep out the Arabian heat. With fewer cars on the roads “it is also a safer environment for kids to play”.

What is especially remarkable about Masdar City is that it is situated in the UAE, a country whose economy, like many others in the region, has long been dominated by the export of oil (oil exports now comprise around 17 per cent of GDP, down from a high of 60 per cent in 1979). The city’s development, which is ongoing, shows it is possible to imagine a world that doesn’t run on oil – even in a country that was historically dependent on the stuff.

Imagining a world without oil appears especially urgent in 2020. This year has seen a combination of forces come together that have wreaked havoc on oil markets and thrown fuel onto debates about its future. What are the challenges facing oil producers, how significant will these issues be, and how is the industry adapting?

A forecast published in September 2020 describes how demand for liquid fuels “never really recovers from the fall caused by Covid-19, implying that oil demand peaked in 2019”. What is surprising about this projection is that it comes from BP, one of the world’s best-known oil producers. To be sure, this is just one model for future energy demand described in the firm’s annual Energy Outlook report (other models suggest a slower decline). Nonetheless, when an oil major is playing down the future of the industry, it suggests something significant is happening.

The oil industry has faced numerous headwinds this year. The most obvious, of course, is the Covid-19 pandemic. Lockdowns and travel bans around the world led to a slump in demand for fuels. With fewer people travelling by plane, train and automobile, oil prices turned negative for the first time in history in April (producers were essentially forced to pay customers to take crude off them).

Whether you are driving a car, applying lipstick, or bagging up your shopping at the supermarket, you will be using products derived from oil.

Here are the top uses of black gold according to the US Energy Information Administration:

Transportation: 68 per cent (road vehicles, jet fuel, bunker fuel for shipping).

Industrial: 26 per cent (plastics, solvents, lubricants, fertilisers, pharmaceuticals etc).

Residential and commercial: 5 per cent (heating).

Electric power: <1 per cent.

Besides the pandemic’s immediate impact on travel, the changes in culture and behaviour the disease has wrought may also dampen demand for oil. Capital Economics, a research firm, points out that the massive rise in remote working means many millions of people are likely to commute less often to work by car. Simultaneously, the widespread adoption of video calling will cut demand for international business travel – so less jet fuel will be needed. What is more, a combination of new technologies and ‘deglobalisation’ could reduce the need for shipping, Capital Economics suggests. With 3D printing, a preference for short supply chains and ‘onshoring’ of manufacturing, we may well need less bunker fuel to ship goods around the world.

Then there is the policy response to the recession. Many countries have signalled their commitment to ‘building back greener’. Governments, especially in Europe, have made significant commitments to using the crisis as an opportunity to boost ‘green’ industries. This too could put oil out of favour.

While the pandemic is the biggest immediate challenge to oil, it has not been the only crisis facing producers. In March 2020, a price war between Saudi Arabia and Russia led to a significant drop in prices per barrel. Professor Michael Bradshaw, an oil expert at the UK Energy Research Centre (UKERC), explains the reason behind the spat.

Since 2014, American shale oil production has taken a growing share of the global market and lowered prices. This led the Organization for Petroleum Exporting Countries (OPEC) and other nations including Russia to try to stabilise prices by reducing supply. However, communication between Russia and OPEC broke down in 2020, as Russia continued to oversupply the market. Saudi Arabia responded by increasing production, leading to a price war.

Another factor weighing on the future of oil is the renewables revolution and the concomitant electrification of transport. Energy from renewable sources currently only makes up about 11 per cent of global energy supply, yet this proportion is increasing fast. A combination of improving technology, economies of scale and government incentives mean these alternative energy sources may soon compete directly with oil. And, crucially, electric vehicle sales are rising fast and will take a bigger share of the market over time. That, in turn, will reduce demand for petrol and diesel.

Oil firms are seeing another fundamental challenge: staffing. Thanks to a tarnished reputation and climate change concerns, it is becoming increasingly difficult to attract new talent in some countries. According to one 2019 study, the number of graduates applying to work at UK oil and gas firms dropped by 61 per cent between 2012 and 2017.

“We think we will see oil consumption down by 8 per cent in 2020 compared to 2019,” says Cailin Birch, analyst at research firm the Economist Intelligence Unit (EIU). “We don’t expect full oil demand to return before 2023.” She adds that prices per barrel will stabilise around the $45 mark (in 2010, by contrast, a barrel traded at $79). Although the EIU sees demand for crude creeping up after 2023, Birch says they expect global oil consumption to peak in the late 2020s – which correlates with Capital Economics’ view that ‘peak demand’ will arrive around 2030.

Does this mean that oil will be consigned to the history books within a decade? Not necessarily.

“If you look at the OECD [a club of wealthy countries], we actually had peak oil demand in 2005,” explains UKERC’s Bradshaw. However, “in the global South and non-OECD countries, we are not yet past peak demand”. Birch of the EIU points to the fact that China has increased oil consumption in the second half of 2020 as the government pushes to kickstart an industry-led recovery.

For Bradshaw, it is likely there will at least be one more cycle of oil demand. “The next question is what happens after we reach peak global demand.” Depending on who you ask, oil usage will plateau at a high level for many years, decline gradually or drop off very steeply.

 The way that demand changes around the world will depend on a wide variety of factors too. Today, the well-known ‘oil majors’ – firms such as BP, Shell or Total – actually only hold around 12 per cent of oil reserves. The vast majority is in the hands of National Oil Companies (NOCs) such as Saudi Arabia’s Aramco, Russia’s Gazprom or Mexico’s Pemex. This means that even if firms like BP commit to becoming cleaner ‘energy’ companies, their influence is smaller than in the past.


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