Big Oils’ Existential Crisis

This is the end… of oil as we know it. Oil execs may finally be waking up to their worst nightmare — a world with a lot less oil.

On Sept. 14, a report by Beyond Petroleum ($BP), one of the largest oil & gas companies in the world, warned of a peak in oil demand. Here, BP presented 3 scenarios where oil consumption would increase 10%, fall 50% or fall 80% by 2050. Even in the most optimistic scenario, oil demand remains relatively flat.

COVID shutdowns led to the worst drop in oil demand in over 30 years. The result: US gasoline consumption dropped 48%, jet fuel consumption dropped 73% and oil prices fell over 80%. Oil price fell so low that major oil producers (e.g. OPEC, Saudi Arabia, Russia) agreed to reduce supply in April to bring prices back up.

COVID accelerated oils’ price collapse which had been on a downwards trend for the past 12 years. Here’s what’s driving this trend:

• Tighter government policies have forced companies to shift their investments towards renewable energy and reduce oil production.
• Shift in consumer behavior has led to increased usage of renewable energy (e.g. solar panels and wind turbines).

Make way for the future

Oil execs really don’t like the idea of exiting a highly profitable oil business to enter a less profitable renewable energy business. Renewable energy requires a higher initial investment but their long-run operating cost is near zero – if the wind blows and the sun shines, energy is free. In other words, oil generates more profits in the earlier days while renewable energy is more profitable in the long run. Will a global pandemic finally change big oils’ views?

• The change… In Aug., BP announced a big shift in business strategy with a plan to reduce oil & gas production by 40% and invest $5b a year into renewable energy sources (e.g. wind turbines, solar panels, hydrogen fuel).
• The resistance… ExxonMobil ($XOM), once the largest US company years ago, has lost over 50% of its value in the past year. The company has invested the least into renewable energies amongst the major oil producers.

For investors… don’t expect to strike oil

Stock prices of oil companies closely follow the price of oil but in many cases, it’s not that simple. Oil companies are affected by both oil prices and factors unique to each company: sales growth, debt level, company size, etc.

A gloomy future for oil demand and prices should make investors think twice before buying their next oil investment.