Summary: the war-induced scramble for hydrocarbons and calls from the majors for more investment in oil and gas output should not distract from an ongoing seismic shift to renewables which may advance ‘peak oil’ to as early as 2025, a scenario that will give pause for thought and serious consideration in Gulf energy states.
We thank our regular contributor Alastair Newton for today’s newsletter. Alastair worked as a professional political analyst in the City of London from 2005 to 2015. Before that he spent 20 years as a career diplomat with the British Diplomatic Service. In 2015 he co-founded and is a director of Alavan Business Advisory Ltd.
When I first wrote about ‘peak oil’ for Arab Digest in September 2019 forecasts about its timing varied significantly. If anything, Russia’s invasion of Ukraine has further muddied the waters. However, the publication on 30 January of the ‘2023 edition’ of BP’s well-regarded Energy Outlook makes this a good time to revisit this issue.
As usual, the Outlook offers three scenarios — while arguing that, in practice, we are today a long way away from a trajectory which would get the world to ‘net zero’ by 2050. Nevertheless, its ‘core’ New Momentum scenario does offer some encouragement in that it foresees emissions peaking a little earlier this decade than the 2022 edition postulated. This is in line with the International Energy Agency’s (IEA) most recent World Energy Outlook which anticipates peak demand in 2025.
It was therefore something of a surprise when, less than a week later, BP’s chief executive Bernard Looney announced that the company was slowing down its transition away from oil and gas relative to aims set in 2020. However, as Tom Wilson and Derek Brower note in the 10 February edition of the FT, Mr Looney was faced with little choice as BP’s share price continued to languish, including relative to its Big Oil competitors whose share valuations soared through 2022 on the back of war-inflated oil and gas prices. They go on to quote Nick Stansbury at Legal & General Investment Management (a BP shareholder) as follows:
I definitely don’t think that what we’re seeing at BP tells you that it’s the wrong thing for a big oil company to try to transition its business model in the right way to make it fit for the future…. Investors are not yet confident of that today, in part because of the lack of certainty and clarity that exists around what the energy system of the future is going to look like.
If anything, this “lack of certainty and clarity” has been compounded by the West’s Augustinian response to Russia’s invasion of Ukraine. This, in turn, has encouraged already ingrained short-term-ism among investors. Thus, it is hardly surprising that the likes of ExxonMobil (whose annual Outlook for Energy gets far less attention than BP’s even though it is also well worth reading) continue vehemently to argue (at a time when investment in new projects is falling) that: “…oil and natural gas remain a significant part of the energy mix for decades, reinforcing the need for continued investment”.
However, it is worth the effort to look through today’s hydrocarbon-generated ‘smokescreen’ into the not-distant future as follows:
- In the United States, even before we start to see any impact from the Inflation Reduction Act (IRA), gasoline consumption has fallen by around six percent relative to pre-pandemic peaks, according to a 7 February report from the Energy Information Administration which believes that this is a trend set to continue. If so, it is one with major implications given that US motorists currently consume around nine percent of total global oil output. A wide range of factors lie behind this view including, most recently, forecasts that prices for electric vehicles in the US are set to fall by the end of this year to match those for ‘conventional’ autos. Growth in demand for petroleum products, notably petrochemicals, will certainly soak up some of the emerging surplus; but experts such as Alan Struth of S&P Global Platts still see overall US demand for oil starting to fall even within the next two to three years.
- In Europe, the Commission is trying to match the IRA through its proposed Net-Zero Industry Act providing at least €250 billion to clean-tech companies and bringing forward the target for doubling the EU’s installed solar capacity from 2030 to 2025. And the EU’s largest economy, Germany, for all of its short-term focus on coal and LNG, has increased its 2030 target for the renewable share in power generation from 65% to 80%.
- Meanwhile China, driven in part by the perceived need for greater energy self-sufficiency as tensions with the US continue to mount, last year set a target for the renewable share of renewable generation capacity equivalent to the total power generation of Japan, i.e. 1,000 terawatt-hours.
Against this backdrop a 13 February article in The Economist notes as follows:
…America’s and Europe’s vast spending packages [alone]…are…pretty momentous — sufficient, forecasters consulted by The Economist estimate, to accelerate the energy transition by five to ten years. The investment surge and tighter targets should create an enormous amount of renewable generation capacity. All told, the IEA expects global renewable energy capacity to rise by 2,400gw between 2022 and 2027, an amount equivalent to China’s entire installed power capacity today. That is almost 30% higher than the agency’s forecast in 2021.… Renewables are set to account for 90% of the increase in global generation capacity over the period.
Put all this together and one can see ‘method’ in Mr Looney’s ‘madness’. On the one hand, exacerbated by the war in Ukraine, he is under pressure — from governments and shareholders alike — to (in his words) “invest in today’s energy system”. On the other — and in common with BP’s peers — he runs the risk of falling behind the transition curve which has steepened sharply thanks to that same war. Only time will tell if Mr Looney has, this time, tuned into the ‘vibe’ to the point of getting the balance ‘right’ and being able to take investors with him. Nevertheless, if The Economist is correct, we should not be waiting long to find out.