Clean Energy Rises: Is This The Death Of The Petroleum Industry?
The U.S. derives its energy consumption from five primary sources: petroleum, natural gas, coal, nuclear, and renewables or green energy. In 1950, U.S. energy consumption was dominated by petroleum and coal. By 2019, nearly 70 years later, petroleum was still number one, natural gas was a close second, renewables were third, and coal was number four. The use of renewables has been rising steadily in recent decades and by 2019 it was the third most consumed primary energy source in America. In short, there is a groundswell of support for cleaner fuels. Yes, things are changing, and change is rarely easy. Which countries will be most affected by this transition to renewable energy? What will the U.S. energy complex look like in 20 or 30 years? While that’s hard to say, here are a few things to watch.
Clean Energy is Coming
At its core, the green energy movement seeks to reduce CO2 emissions. Which country produces the greatest amount of CO2? Look no further than China. According to the International Energy Agency, China is responsible for nearly twice the amount of CO2 released into the atmosphere compared to the U.S. Although CO2 has been gradually declining in the U.S. since peaking in 2000, emissions have been rising substantially in China during the same period. With the movement to clean energy gaining traction, how will the U.S. energy complex change? Could this mark the end of the internal combustion engine?
EVs: Not Your Father’s Automobile
In 2019, petroleum provided 91% of the energy used by the transportation sector and 34% of the energy used by the industrial sector. Thus, the transportation sector was the most dependent. With the growing popularity of electric vehicles, the disdain of petroleum, and the rise of alternative green energy sources, crude oil consumption may continue to trend downward. Recently, General Motors GM +0.8% announced it would produce only EVs by 2035. Several other companies are building plants to produce EVs as well. This will reduce demand, which will have a detrimental effect on oil producers.
Oil Companies Must Adapt
How will two of the world’s largest integrated oil & gas companies, Exxon and Chevron CVX +0.8%, be affected? Many oil & gas stocks have been trending lower since mid-2014. Then came the pandemic and the precipitous collapse in demand, which didn’t help. Just ask Exxon. First, the company has been struggling with paying its stock dividend. Next, it announced in August 2020 that it would suspend its employer match in its 401k savings plan. And finally, in January, the CEOs of Exxon and Chevron discussed a possible merger. If it materializes, it would be one of the largest mergers ever and create the world’s second largest oil company behind Saudi Aramco. They may be stronger together, but will regulators allow it?
As the energy sector seeks to find a new, more profitable business model, we could see several mergers and a few more bankruptcies. Rather than reinvent the wheel, the largest oil companies may seek to acquire some of today’s clean energy providers. Usually when one company acquires another, the stock of the acquired company rises.
Which Countries Stand to Lose?
To understand which countries could get hurt the most, we need to cover a few facts. According to the U.S. Energy Information Administration, the U.S. was the world’s largest producer of oil in 2019, supplying 19% of global supply, followed by Saudi Arabia (12%), and Russia (11%). The U.S. was also the world’s largest consumer of oil in 2018 at 20% followed by China (14%).
Which countries will be hardest hit by the transition to renewable energy? Most likely Saudi Arabia, Russia, and Iraq, as these are the largest exporters of crude. More to the point, in 2019, Saudi Arabia derived 68% of its revenue from the sale of oil, while Russia received slightly over 50% of its revenue from petroleum exports. Although the U.S. is the world’s fourth largest exporter, it should fare better as it has a more diverse economy. That’s not to suggest there won’t pain though.
U.S. Energy Jobs: Get Ready for Change
What about U.S. energy jobs? According to the 2019 U.S. Energy and Employment Report, in 2018 over 1.1 million individuals worked in the U.S. “fuels” sector, which includes extraction and mining; petroleum refineries; and firms that support coal mining, oil, and gas field machinery manufacturing. Oil, and natural gas, two subsets of this, employed 603,000 and 271,000, respectively. Considering a total U.S. labor force of about 150 million, the percentage of jobs in this sector is relatively small. However, that’s little comfort to those affected.
The Global Transition to Clean Energy
Any transition to a new world of clean energy would probably not follow a consistent and simultaneous pattern from one country to the next. First, there will be disagreement among countries. Additionally, in countries where the government relies heavily on revenue from petroleum exports, they will need to replace the lost oil revenue before undertaking such a transition. The ol’ profit motive will certainly be a top priority.
How will lower demand affect the price of oil? Historically, when supply remains constant and demand falls, the price falls as well. Will supply remain constant? I doubt supply will fall because for that to occur, the largest oil producing countries would need to agree on their individual and collective output. As demand falls, each country would need to decrease production, which would decrease revenue. It won’t likely be that harmonious as countries put their interests ahead of the others. Countries that are heavily dependent on oil revenue may resist the change. However, if global oil consumption and production falls, the supply-demand curve may not be greatly affected, and the price of oil could avoid extreme movements.
For those of you working in the petroleum industry, there is a slight glimmer of hope. More to the point, petroleum is used in many aspects of daily life. According to the International Association of Oil & Gas Producers, it is used in beauty products, furniture, electronics, agriculture, clothing, and even toys.
Although I wouldn’t predict the death of the oil & gas industry quite yet, compared to its glory days, it does seem to be headed for life support.