Summary: Society demands that oil be “kept in the ground” – lets try that and see what happens!

About the publisher: Richard Norris is a leading business developer and advisor to energy investors, developers, bankers and the public sector.

I see a growing frustration within the Oil and Gas industry with anyone working therein being portrayed as the devil incarnate. This is not new but is certainly very acute right now. The media crusade to be more ever-more alarmist – it sells more papers (or in modern terms, popularity = advertising revenue. No irony there) – is clearly part of this.  

Fossil fuels = Co2 = the Apocalypse. Simples

Interestingly the venerable review Nature published an article reminding the world (who have clearly forgotten, or never cared to check) that the extreme RCP8.5 scenario is not, in fact, anything like the “business as usual” scenario which it is repeatedly used. This really significant edification got a brief mention on the BBC website but otherwise went mostly under (or “un”) reported.

Whilst the 3 deg “likely” scenario is still not great, it is not apocalyptic; billions won’t die in the next two decades. (here and here)

In the meantime, it is not uncommon to be confronted with the conspiracy theory that “the only reason energy transition is not going faster is due to “Big Oil’s evil actions”. Lobbying against and/or active suppression of clean technologies is supposed to be their game. Rather like the moon-landing-was-faked conspiracy theory, it would require a large number of people to be involved and none of them to break-ranks and tell the truth. In the real world people always talk. As an apocryphal Sicilian saying has it “Three men can keep a secret, if two of them are dead”.  The bigger the supposed cover-up, the more people who know, the less likely it is to remain a secret. 

A far simpler explanation is that:

  • (a) the technology required to replace the conveniently useful fossil fuels is actually quite complex (for example, Prof David McKay) and
  • (b) whilst fossil-fuels are cheap there has been little incentive (prior to the modern era) to seek alternatives.

Ironically, Big Oil has been responsible for significant emissions reductions – notably in the US which has the biggest decrease of any large country since Kyoto (admittedly from a very high starting point). The innovations around horizontal stimulated wells in both gas and light-oil plays has unlocked huge amounts of natural gas at almost give-away prices (indeed in some areas you literally can’t give it away but have to pay for someone to take it). No wonder the technologically (relatively) easy switch from coal to gas for power has made significant inroads. Gas is not carbon-free of course, but is roughly half as bad as coal, so it is a move in the right direction.

Elsewhere the technologically difficult development of LNG has also made gas into a global and currently very cheap commodity. So, in these respects one could argue that Big Oil has invested in fossil fuels and has firstly, therefore not invested that capital in alternatives – although here I am always a bit baffled by the logic. The clue is in the name… these are oil and gas companies.  Do we “expect” huge multinationals who produce borderline toxic processed foods to be at the forefront of organic food or diabetes research?    No, we expect them to change when consumer demand/pressure overcomes their huge advertising budgets and trickery to ensure food is healthier. Meanwhile the health issues are an externality borne silently by everyone via creaking health-care systems. 

Secondly, the relative success of oil and gas producers (and we should remember that Big Oil only really represents about 15% of world oil production), has indeed created low prices. This certainly has made the drive for efficiency and substitution less compelling. It is however an unintended consequence of the business cycle rather than a deliberate policy. In the US there have been a lot of companies going bankrupt due to low oil prices, they did not deliberately force prices down to hurt themselves (or to hurt uptake of renewables). They just used stupidly cheap “other-people’s money” to produce oil at a loss. No its not “subsidies” – it is QE. It is worth noting that a lot of investments in renewables have also benefited from the same waves of cheap capital coming out of QE… and typically with much more geared capital structures. This in one to watch.

Indeed, we can point to OPECs position of cutting production – if the aim was to undermine renewables, it would make no sense to support the price of oil. Clearly OPEC behaviour is driven by producer countries need to have a certain level of revenue for internal budgeting. But beyond this rather simplistic view, there is a strong thread of reasoning coming out of OPEC that wants to maintain stability within a Goldilocks’s price range. That is, neither so low that it reduces supply and sets the industry up for yet another roller-coaster spike and crash, nor so high that it tanks the world economy. Whilst this is repetition for regular readers of my blogs, it is worth noting that high energy prices (specifically oil) are highly correlated with onset of recessions (here and here).

In the minds of many, the OPEC reasoning is purely self-centred. Be that as it may, higher oil prices should be “a good thing” as they would drive research, investment and substitution. But if you do want higher prices, be very careful what you wish for (see image – from the excellent GTK report). It is not shown here – but the oil price correlates almost perfectly with the Food Price Index, not something people who want to “keep it in the ground” might like to hear. (see here for an amusing explanation)

Not only do high oil prices correlate with recessions, but not unsurprisingly in countries which are net importers of hydrocarbons (which is most, and the UK now is, although it has been a net exporter for many decades so has lost touch a bit with reality), high oil prices correlate with social unrest and conflict.

It might be worth noting here that any and all Carbon Taxes will serve to increase the price of energy – which is exactly the point. The aim is for higher prices to reduce demand, but the potential to spark unrest/conflict is becoming more apparent in the minds of policy makers.

So, there is a large segment of society who think that fossil fuels are only evil. The benefits society has reaped over the last 150 years (for the OECD) and is currently reaping for so-called “developing” countries is ignored. It is instructive that not only are these benefits good for humans but also, richer countries look after their environments better (see right).

Arguing the case, or thinking about a “PR battle for the image of fossil fuels” is a non-starter.  The consuming public want someone to blame to avoid any personal agency.

Sadly, Big Oil kowtows to this attitude, but it is a bit easy to blame the CEO – he or she is doing the Board’s strategy which is in-turn more or less oriented by what shareholders, and increasingly “stakeholders” want. Oil and gas companies can make real and useful efforts to decarbonize their production. Leaks and flaring are scandalous. Accepting responsibility for the “Scope 3” emissions seems to be again simply helping the public buy into the narrative of evil oil companies and blameless consumers.

In the battle of “hearts and minds” the use of clever infographics to show all the products and services that come from hydrocarbons are imho plain useless. Moreover, I would argue they actually miss the point, which is that the current cost everything, (including renewable energy and the Food Price Index) is directly affected by the cost of fossil-fuels simply because the latter power 85% of the world (see more here).

So, with people clamoring for fossil fuels to be “kept in the ground” – maybe it is time to take them at their word and remind everyone of where stuff comes from (and the cost basis for all that stuff).

 I suggest the industry should instigate a Fuel-Strike, simply shut off the taps for a day, or two…

Now to be clear this is not a genuine call to action, but more of a satirical though-experiment.  In addition, it is never going to happen voluntarily – (a) it would be too scary and (b) individual countries and companies’ cash-flows would hurt badly… so individual self-interest will prevail. But think about if for a moment.

However, it is possible, indeed likely, that it will happen involuntarily one day… obviously not all taps turning off, but a genuine attack on Saudi infrastructure (rather than one that had all the hallmarks of a “see what I could do if I really wanted to…” kind of attack).   This scenario would be local, but we know that the supply side is actually pretty tight, and even a localized but big supply outage would be big a wake-up call.

An alternative scenario, would be a leftist Democrat president “banning Fraccing on day one…” . There are a lot of reasons why this kind of campaign rhetoric wouldn’t be implemented in any such way, but again as a thought-experiment, it is instructive.  The eight-million barrels of oil per day coming from LTO would decline to less than four million within a year. You have to go back to the late 1970s for anything equivalent.  The price of oil rose 10x over about 4 years, and the oil importers suffered huge recessions.

Another scenario would be strike action in Brazil – topical today – but in a couple of years when Brazil is supplying 5 or 6 mmbbls/day (2x today’s production) – industrial action could impact the world economy, not just Brazil’s.

Fuel Strike for Society – a wake up call before we get alarm bells?