Amory Lovins writes: Why would anyone want to be in the oil business? Like airlines, it’s a great industry but a bad business. Here are the most obvious challenges to its business model:
- Oil companies are extremely capital-intensive; they can’t charge a high enough price to pay for Arctic oil because to deliver energy at a given rate takes more capital investment than photovoltaics do.
- They have decadal lead times and high technological, geological, and political risks.
- National oil companies own about 94 percent of global reserves and can take or tax away the major oil companies’ remaining 6 percent at any time, holding their most basic assets and expected profits at risk.
- Resource owners force major oil companies into riskier and costlier plays even as investors demand lower risks and higher returns.
- The industry is politically fraught, unpopular, interfered with, and reputationally damaged by its worst actors.
Its service companies (like Schlumberger and Halliburton) and the national oil companies are becoming formidable competitors.
- Its permanent subsidies are coming under greater scrutiny and criticism.
- It must sell its products at world oil prices that are highly volatile and beyond its control.
- Much of the reserve base underlying its market valuation is unburnable for climate reasons, potentially wiping trillions off balance sheets.
- The costly Arctic, deep-sea, and otherwise remote reserves that until a year ago got half the new investments by the biggest oil companies are also economically stranded assets — at least four times costlier than demand-side competitors and increasingly challenged even by some supply-side competitors.
What a recipe for headaches! No wonder savvy investors are starting to shift their money into assets with rapid growth, wide benefit, solid public acceptance and even enthusiasm, modest risk, and durable value. Energy efficiency and renewables lead the pack. Increasingly they poach investment, momentum, and people from major companies’ deep talent pools. Even my own nonprofit organization’s CEO is a ten-year Shell veteran.
Yet I think these widely recognized challenges are easier to handle than others the industry is only just starting to realize. Having advised oil companies for 42 years, I’m worried that many don’t yet grasp how their competitive landscape is being transformed far faster than their cultures can comprehend or cope with.
Most importantly, their demand is going away — not incrementally but fundamentally. Like whale oil in the 1850s, oil is becoming uncompetitive even at low prices before it becomes unavailable even at high prices. [Continue reading…]