A nice image from Mark Rain titled Peaked Oil:
Why are the oil companies, facing extinction in 30 years, refusing to adapt or hedge? BP and Shell have abandoned their renewable figleaves and Exxon never bothered. Chevron has a modest geothermal business (which unlike wind or solar is technologically related to oil) but is not exactly betting the farm on it. Contrast the automakers, most of which have strong lines of EVs and hybrids. They won’t lose whichever way the market goes.
If you want to comment on peak oil, please read this post by
Eric Chris Nelder first so we can argue about data, not talking points. H/t Kevin Drum.
Author: James Wimberley
James Wimberley (b. 1946, an Englishman raised in the Channel Islands. three adult children) is a former career international bureaucrat with the Council of Europe in Strasbourg. His main achievements there were the Lisbon Convention on recognition of qualifications and the Kosovo law on school education. He retired in 2006 to a little white house in Andalucia, His first wife Patricia Morris died in 2009 after a long illness. He remarried in 2011. to the former Brazilian TV actress Lu MendonÃ§a. The cat overlords are now three.
I suppose I've been invited to join real scholars on the list because my skills, acquired in a decade of technical assistance work in eastern Europe, include being able to ask faux-naÃ¯f questions like the exotic Persians and Chinese of eighteenth-century philosophical fiction. So I'm quite comfortable in the role of country-cousin blogger with a European perspective. The other specialised skill I learnt was making toasts with a moral in the course of drunken Caucasian banquets. I'm open to expenses-paid offers to retell Noah the great Armenian and Columbus, the orange, and university reform in Georgia.
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30 thoughts on “Photoshopitprop”
The only obvious explanation for this is good management. It makes sense to milk a cash cow dry, rather than use its revenues to go out into an unrelated industry. And there aren’t many industries related to Big Oil, except maybe geothermal. What are the core competencies of a Big Oil company?
– Geophysics (although this can be contracted out)
– Political subornation
– Drilling and distribution (again contracted out)
I’m not sure that any of these skills can be leveraged into a new line of business. Political subornation is a useful corporate skill, and the oil companies are good at it. But their skills along these lines are rather specialized. Dealmaking is a widely distributed skill, and the practitioners in Manhattan are just as good as those in Houston. The other two skills become irrelevant on the downside of peak oil.
In addition, if you follow the logic of Peak Oil, where profits are determined by demand relative to supply, rather than costs, maximum return will come in the relatively short period before the cost of extraction goes through the roof, so everyone wants to stay in until then.
Another point is, I think, more subtle: the longer that oil companies wait, the more work other people will have done in making alternatives profitable and in shaking out which particular technologies are best going forward. The oil companies will be sitting on huge piles of cash and will be able to buy the winners at that point with much less risk than investing now. (It’s a lot like buying a computer or a smartphone: the longer you can hold off, the more power you will get for your money.) If the last-gasp runup in oil prices is also accompanied by a global recession, it will be even better for the oil companies, because the stock prices of the alternative-energy firms they want to buy will be lower.
Sure, we would get to a better future faster if those tens of billions of dollars went into research and development and deployment now, but less of that future would be owned by the people making that decision.
(Which is exactly the kind of market failure we have governments for, but that would be socialism)
There is a difference between a producer and a consumer. While it might be a good idea as a consumer to wait so that you can get more “power for your money.” It is rather obvious that Apple made an absolute killing being the first to produce a smartphone. In a similar vein Mobil made a fortune being the first to produce a synthetic motor oil. It is an enormous advantage in being the first one to market.
Putting tens of billions of dollars into research would be an enormous waste of money. Real research is not conducted by thousands of people blogging about things they know nothing about. Real research is done by relatively few people with considerable education and insight. These are not things that are simply bought.
To be precise, Apple’s shareholders made a killing from owning part of a company that produced a wildly popular smartphone (not the first by any means, unless you use a tautological definition). My point is that Exxon/Mobil or Shell or BP or any of the others also stand to make a killing by owning the premier companies in solar, wind, smart grids etc, once it becomes clear who those companies are. Rather than buy a portfolio of those companies now and get a mediocre overall rate of return, it may well make more sense for them to build up a few more tens of billions of dollars in retained earnings and buy the leaders when the state of the market is more obvious.
Once it becomes clear who those companies are they aren’t going to be cheap.
It’s like saying once we know who the premier maker of them fancy horseless carriages is we are going to purchase them and make a killing.
Let’s not make our own search engine, we’ll just wait and see who makes the premier one and google it to find out who that is, so we can purchase it.
The oil companies are more interested in battery companies. They will also look at extraction companies (rare earths). They are not in the electrical business. I doubt any of them want to be players in the manufacturing of solar cells or wind turbines. They will leave that to GE, Siemens, etc.
Indeed. Apple was preceded in the smartphone market by Blackberry (the corporate and government hit) and by Danger’s Sidekick (a hit in the Deaf community, I believe because it had a much better keyboard than the Blackberry).
The oil companies are not facing extinction in 30 years. That is outright stupidity. The oil companies that you refer to are much more than oil companies. They also are natural gas companies and chemical companies.
They also employ more phd geologists than the oildrum and “smartplanet” could even name.
Your question assumes that oil is definitely gone in 30 years and the industry knows it. If you assume those things their behavior is hard to explain. But if you assume the peak oil theory is wrong, or, that they simply don’t believe it (An industry executive in his/her 60s has been hearing that the end of oil is 30 years away for, well, at least 30 years now) their behavior makes perfect sense.
“Peak oil” doesn’t necessarily imply that there will be no oil in 30 years. There’s really no question that at some point within the next few decades, there will be a year after which crude oil production will never be as high again. But that doesn’t tell us much about the shape of the production curve after that, which is subject to a lot more variables than just pumping capacity. Some of those shapes would likely lead to easy profits for the fossil fuel industry for quite a few years, and others would require them to make massive changes in business strategy, very quickly.
Once upon at time (like the Precambrian), I took chemistry in high school. When we were learning the bit of O-chem we were taught, Mr. Van Camp asked us a rhetorical question: “When are we going to figure out that petroleum is much to valuable to burn?” (The reference was to oil as an industrial feedstock.) Clearly we haven’t learned that even today.
Petrochemical use maybe 5-10% of the crude produced – it’s a minor market compared to the fuel sector. Also, while some petrochemical supply use naphtha as the feedstock for ethylene, you can also use ethane. There’ll be plenty of ethane from natural gas liquids for a long time. If that runs out, then you can make ethylene from fischer-tropsch chemistry from syngas (carbon monoxide and hydrogen). You can get syngas from pyrolysis of coal, or taking captured CO2 and reacting it with hydrogen from electrolysis of water.
So don’t worry about the petrochemical market.
They won’t be “extinct” in 30 years. They will likely be producing less oil, yes. Oil is used for lots of things other than burning in internal compustion engines, right?
And of course they don’t believe all that peak oil nonsense, as Keith points out. To them, that’s just moonbat foolishness.
They’ll likely survive even if the most dire predictions are true. Production will fall and prices will rise (and, at higher prices, it will be economical to develop more “unconventional” oil resources, right? So that would mute the decline a bit).
And seriously… you think modern businesses (or any business, ever?) think about 30 years from now? Oil companies probably think longer-term than most, because their projects take time to come online, but 30 years? Nah.
“And of course they donâ€™t believe all that peak oil nonsense, as Keith points out. To them, thatâ€™s just moonbat foolishness.”
Christophe de Margerie, Totalâ€™s Chief Executive predicts the world will never be able to produce more than 89 million barrels of oil a day.
Jeroen van der Veer, the chief executive of Royal Dutch Shell estimates that after 2015 supplies of easy-to-access oil and gas will no longer keep up with demand
The moonbat foolishness resides elsewhere.
I don’t think it will hit the oil majors at much. What it might do is reduce the upstream profits relative to the profits from downstream refining and petrochemicals (‘cos the profit at an oil major was always mostly in extraction and production of crude: only about one out of seven years would the downstream business make serious coin relative to the E&P guys, who have much nicer offices than the downstream guys.) And you’ll see more gas-to-liquids investment, even though Fischer-Tropsch chemistry is. Shell’s scenario planning is about as far-sighted in corporate planning as you’ll see anywhere.
Also, the oil majors have cycled in and out of alternative technology or biofuels for years: Shell used to own about 20% of the world’s enzymes production in the 1980s, and Shell, BP (as both BP and Arco) have cycled in and out of the solar market at least once. If they’ve decided it makes sense to make only early-stage bets in R&D with academic partnerships, and to wait 10-15 years for a Winning Technology to emerge before putting steel and concrete in the ground, or to, that seems rational, given the crappy returns CleanTech in general has given in the 2000s.
It will, however, hit the national oil companies (e.g. like PetroVez or Pemex), because they tend not to have the in-house technology for extraction of more challenging reserves.
Stipulating that the peak oil thesis is true, couldn’t it be the case that precisely the scarcity of oil will make pumping and selling it a good business for a good long while, for increasingly high-value added or high-energy-density applications, even if substitutes are found for many of its high-volume uses (electricity production, powering cars)?
I also agree with Mr. Scrooge’s comment that diversification into what are currently unrelated kinds of energy production could be a bad business decision. It might even make more sense for an oil company to go into the business of holding and investing money (as SoCal company See’s Candies started doing once it had saturated the regional market for cute and nostalgia-drenched but fairly low quality confections) than to move into the business of making solar panels or wind farms if the company has no experience with such things.
Finally, is it common for *any* company seriously and effectively to plan thirty years into the future? Don’t at least 90 percent of companies whose entire product line, in retrospect, will become obsolete on a scale of decades in fact keep producing those products and go under (or shrink drastically)?
And why on earth should anyone in any sort of senior position care what the state of the company is 30 years out? What matters is the next quarter. Or, taking the longest possible view, the value of their company stock when they need to roll their 401k into an IRA.
It might actually make sense for them to simply do what they do best – extract oil from the ground and sea- and be as profitable as they can in the short-term. That way, if or when the time comes that oil extraction is no longer a viable business, they’ll have a healthy cash reserve to make a major push into doing alternative energy. Or they could at least “wind down” the company in a profitable way.
One of the problems with many companies is that the shareholders generally aren’t willing to let them go into a profitable decline, like if Barnes & Nobles decided they were just going to do the “physical bookstore” experience as long as it was profitable. The only way to do it is to move them into private ownership, like what Michael Dell is trying to do with Dell.
I concede that “extinct” was an exaggeration, or optimistic hope. It assumes the global economy will have gone 100% renewable, so any extraction of oil and gas for petrochemicals and other specialised uses will have to be offset by by carbon sequestration. The bulk of hydrocarbon liquids (for aviation and the like) would be synfuels from atmospheric carbon.
Just looking at peak oil doesn’t get us there, just to an ever-smaller and less influential oil business. I don’t buy that half-way house scenario. Technology shifts are disruptive and usually complete. Horses disappeared from American roads by 1930 or thereabouts. The effect of current oil prices has been to start a major shift to EVs, which economies of scale will only accelerate. Public transport is getting stronger. PV and wind electricity won’t stop at grid parity, they will keep dropping to the point where all alternatives are too expensive. The scenario that keeps oil executives and Saudi princelings awake at night is surely not the drying up of fields, which they can manage and live with, but an energy transition – pushed forward by $100/bbl oil – that succeeds so fast that oil demand and prices crash beforehand. Let’s make it happen.
That’s what I’m guessing will happen as well. If oil prices go up high enough, we’ll reach a point where electric cars/buses start benefiting from a reinforcing cycle of more chargers available making electric cars more viable over larger areas, further creating demand for additional charging stations. We already have about 5,800 EV charging stations in the US, and we are perfectly capable of mass-manufacturing EV cars.
At least as long as electricity remains cheap compared to petroleum, which seems likely. It’s easier to add electricity generating capacity to keep prices down versus adding additional supplies of petroleum to the world market.
The first commercial jets were sold in the 1950’s. In 2012 there were about 4 times as many turboprop planes sold as there were in 2003.
There are approximately zero commercial electric freight trucks today.
Ditto commercial electric airplanes.
Commercially available dump trucks, excavators, backhoe loaders???
To just assume that by 2030 the entire market will be electric is silly.
Renewable electric production is 15%, most of that as hydro. The IEA (not exactly an oil shill) estimates that by 2035 renewables might be 1/3 of global energy. Natural Gas usage is growing. Guess who produces most of that gas.
No, guess again
How about a hint, its those same companies that you optimistically hope will be extinct by 2030.
That’s what I meant about energy density.
A lot depends on whether high-density biofuels become commercially viable. (They’ve run a military plane on biofuel–but it’s very pricey.) I don’t think we know the answer to that yet, but a great deal depends on it.
Biodiesel (and renewable diesel) are high density liquid fuels that are sorta commercially viable today (standards/subsidies make it sorta). The first commercial aircraft flight on 100% biofuel was last year in a Falcon 20.
I don’t understand what “a great deal depends on it” means. We cannot grow enough plants to replace the 85 MMBPD of oil that we consume. Not unless you think starving 80% of the population is a good idea.
I notice you leave out buses, where electric propulsion is available today, and is likely to grow fast as it’s such a good fit to the use pattern: fixed routes, concern about urban air pollution, lower noise and better ride. Small urban delivery vans are also good for electric for similar reasons. The excavators and dump trucks are marginal, the big surface transport challenge is long-distance trucks. 20 years of battery improvements and that will come too; trucks don’t have higher power-to-weight ratios than cars, or am I missing something? There’s even blue-sky research on electric commercial airplanes. This is a long shot and synfuels (from processes using green electricity to reform atmospheric CO2 as well as biofuels) look a better path forwards.
BTW, I’m with Deathsinger against those suggesting that the oil companies can simply wait and buy renewable energy companies when the oil runs out. At that time they will be high-risk companies with a high cost of capital, trying to take over companies that will be bigger, more secure and more influential than them. Why should YingliTrina’s then shareholders accept a bid from Exxon, which would probably fly their company into the ground? The time to get in has probably already passed. BP and Shell were in, but are getting out. These are not businesses they really understand or are good at. Understanding them would be incompatible with their historic model and culture.
Exxon’s market cap is 600 times that of Yingli. And Exxon makes money. Like enough to buy Yingli with a week’s worth of profit.
Exxon is simply too well run to waste its time with Chinese solar panel companies. BP on the other hand…
James, the idea is that by then, Exxon and such will be sitting on enormous piles of actual cash. The bid would be made with cash, or stock where most of the value of Exxon would be the cash holding, not the energy business.
Yingli and Trina are today much, much smaller than Exxon. In 2040, I doubt very much if they or their successors will be. Their smallest factories will be 10-gigawatt a year operations; think General Motors.
The mooted takeover would be assessed by shareholders in Exxon, by then basically a bond fund with a small sideline in oil, on its chances of increasing their average return. Buying unrelated high technology businesses for high valuations, and they would have to be high to convince the YingliTrina shareholders, is rarely a sound investment. That’s not taking account of the political reaction in China.
And Exxon executives will be watching the whole time, deciding on when to buy.
Also, ‘ I doubt very much if they or their successors will be’ is an important phrase; right not if one buys stock in one of those companies one is buying a lottery ticket; who will be successful and huge is uncertain now. There is therefore a tradeoff between buying cheap and buying correctly.
In addition, the Exxon executives will have inside knowledge of the oil industry, which will be a big factor in the profitability of those firms. And, of course, massive government lobbying resources.
I suspect nobody is still reading this, but just talking to myself, I think you need also to look at the perceived riskiness of the business and its cost of capital. (a) Climate disruption will be worse and oil companies even more unpopular, like coal companies today, with a fraying “social license to operate” and wolves baying round the sledge. The regulatory risks from their investments will be much higher. (b) the marginal cost of new oil extraction will be very high, exposing oil investments to stranding if prices fall. Conversely, renewables will have become a mature, well-understood, bankable business. Won’t bankers prefer lending to no-risk geothermal companies?
James, would that this be so, but such a world would be a far, far, far different place from ours. And the Global Financial Collapse cements just how different such a world would be; the financial firms whose fraud cause the collapse generally did well, and are still quite powerful.
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