With a convergence of action and sentiment against oil products and oil companies, 2015 proved to be the year during which oil era entered the phase of terminal decline.
- The recently concluded Paris summit on climate change heralded a multinational effort to shift the global energy system away from fossil fuels including oil.
- Clean energy products and technology have made their way to the forefront of the policy agenda. And public sentiment has also called for a weakening of the nexus between economic development and carbon-intensive energy demand.
Oil has been in use for over 150 years but the decisive turn towards the “oil age” happened just over a hundred years back.
- In 1911, Winston Churchill as minister of the navy decided to convert the British naval fleet from coal to oil. This was mainly because-oil enabled an acceleration of speed; it was cleaner; it required less storage space; and it allowed for mid-ocean refuelling.
- With this, the British navy outgunned and out-sped the German navy and the now manifest superiority of the internal combustion engine pushed the world into the oil age.
A hundred years on, this age may be coming to an end. The following forces are pushing this along:
- Climate change:
Globally, oil is considered to be a key factor responsible for climate change. All countries reiterated this fact in the recently concluded Paris Climate Summit. The disguised cost of oil is the damage it does to the environment and human health. Unlike power plants, which are few in number and little easier to regulate, cars are ubiquitous and much more difficult to control. The transport sector is a principal source of global emissions of greenhouse gases.
- State of the petroleum industry business model:
The state of the petroleum industry business model is unstable now. On the supply side, there is now no “easy oil” left to discover. On the other side, the demand is ever growing. Oil companies are finding it difficult to fulfill these demands.
- Further, oil prices look as if they are on a secular downward curve. Most experts expect prices to rise from current levels but they believe this rise will be modest. This is because the market is flush and demand is structurally depressed. The companies are now confronting uncertain economics and the increasing probability of stranded assets.
- Clean energy technology:
Countries across the world are scaling up solar and wind energy and are also looking for alternatives to diesel and gasoline as transportation fuels. Clean energy discussion is now on the agenda at every international meet. Renewable generation is now breaking records, and reaching price parity with fossil fuels in many parts of the world.
- Public sentiment:
The anti-fossil fuel lobby is no longer limited to environmental activists. As people choke on the smog of air pollution, public opinion is looking to hold the fossil fuel industry accountable for environmental damage. A number of lawsuits have been filed against oil and coal companies. None have been upheld so far but the signals are clear. It is but a matter of time before these companies face the legal and reputational pressures that the tobacco companies had to deal with years back.
- Risks in new projects:
The technical risks of new oil projects have risen to never before seen levels. So capital expenditure – the amount companies have to invest to get new sources of oil flowing – has gone through the roof. In a nutshell, oil is becoming less profitable.
With breakthroughs in battery technology, the dream of wholly electrified transport systems is now within reach. China has committed to five million electric cars on the road by 2020 and Norway has undergone such an e-car boom that they are now clogging its bus lanes. These developments would allow us to constrain our oil use to a much more sensible level.
However, the confluence of the above mentioned forces will not mean the end of oil. It will continue to flow within the interstices of the 21st-century economy. But it will diminish in significance and give rise to a new reconfigured energy system.