The Pain Will Never Be Over

The oil industry has suffered over the past three years. Since the fall in oil prices in 2014 companies have gone bust, tens of thousands have lost their jobs, and hundreds of billions of dollars in spending has been delayed or cancelled.

Oil companies can be profitable again. Oil service contractors too. But the good times aren’t ever coming back.

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The world is currently investing over US$250bn/yr in renewables. This compares to US$450bn/yr in oil and gas (I can’t find a source for coal). But the thing is – every penny invested in renewables eats the cake of oil and gas. With every new turbine installed part of a hydrocarbon fueled power station is replaced. With every solar panel installed, demand for hydrocarbons falls – and by more than the total installed power of the unit.

  1. The virtuous circle – efficiency increases throughout the chain
    1. The efficiency of solar panels and wind turbines increases, with more power captured per unit time
    2. Installation gets more efficient as best practise is adopted
    3. More installers move into the market and lower installation costs (a particular issue in the offshore wind sector where oil and gas service companies who previously ignored the market move in and professionalise the industry)
    4. More infrastructure installed means it’s easier to install the next marginal bit of infrastructure – you may need to install a second power line or upgrade a substation but it still requires much less investment
  2. Renewables go direct to energy – with hydrocarbons you have to find it, dig it up, ship it (likely several times) maybe refine it, and then eventually you can burn it to turn it into electricity. Renewables go direct, cutting out the transportation energy, cutting out the refining costs and pumping costs. So the total factor efficiency of renewables is actually measured far higher than hydrocarbons
  3. No one goes from an EV to IC – people who buy into EV buy into it for good. Petrol stations lose customers for good with every person who switches away from internal combustion engines – so if 10% of cars sold are EV in any one year, there’s every year of growth in EV behind that where those people may buy a car once every 5-10 years, but they’re not buying IC-engined cars.
  4. Storage – sorted. Everyone knows the issue with renewables nowadays is the ability to store energy. Something we are rapidly solving. And every day, as more and more electric vehicles are sold, we get closer to solving it. Part of the solution is going to come through using batteries that were once installed in a car for renewables storage. The cycle on a battery degrades it over time to the point where you eventually need to replace it to make the car efficient enough to be worthwhile once again. Those batteries that are replaced are still a valuable resource when it comes to storing energy.
  5. Autonomy – autonomous cars are going to be EV. And with autonomous cars the entire ownership model for cars changes, the number of cars needed falls (eating some more cake in the form of energy required for the heavy industry of car manufacturing)

The fossil fuel industry will still be around, for decades to come. Aviation and shipping will still use oil and gas. And heavy industry needs the heat intensity that you get from hydrocarbons, hydrocarbons are more efficient at this. Petrochemicals will become ever more important to the world as our population continues to grow. But when people talk about a supply gap of 10s of millions of barrels a day caused by declining production in the major producing fields globally – they fail to realise that renewables, through pricing power more than anything else now, are drinking their milkshake – not draining the fields. But ensuring it’s not worth pulling it out of the ground at all.

The stupidest thing you can do with oil is burn it

Nature gave us these incredible long-chain hydrocarbons, something that takes huge amounts of energy to create. Reworking those long chains into plastics and chemicals and a hundred other uses is the intelligent way to use them. Burning them built the modern world. And we should be thankful for that. But stopping burning them now makes sense as the cost of renewables has fallen to parity or even below hydrocarbons.

Moore’s Law Meets Big Oil

Evolution, not revolution. Something that is true in almost all aspects of everyday life until you look around you and the world is completely different. When it comes to political systems I believe evolution leads to better outcomes than revolution, which almost always results in a body count.

But economics is different, driven by the market, technological change, and political influence – revolution is more common. Whether the growth in telegraph lines in the early US, where the Pony Express was set up in 1860 and destroyed by the transcontinental telegraph by 1861, or the growth of the internal combustion engine, or the internet.

Revolution happens fast in the economic world, and in technology, particularly so – driven by Moore’s law computers get faster and cheaper and so their applications grow rapidly.

The oil industry, insurance industry, auto-manufacture industry are all set for an almighty upset. This incredible report goes to something that has been apparent for a while, the oil industry is not likely to recover from this current downturn. Things will bump along for a few years but the market is not going to improve as the previously forecast demand growth simply will not happen. Electric vehicles are now viable, the running costs are low and so long as internal combustion engines see their negative externalities taxed (in the form of petrol duty in the UK), electric vehicles will become more and more competitive.

The market is not ready. Oil companies set their breakeven in the mid-50s, hoping to make money when demand returns. But demand for transportation will decline and continue declining. The environmental issues in China, the diesel scandal in Europe, the air quality concerns in London – all will put pressure on both emerging and developed markets to move more rapidly beyond combustion and towards EV.

The current consensus within the oil industry is that combustion vehicle sales will continue to outnumber EV sales long into the future. This is foolish and rests on a series of assumptions that don’t apply to EV combined with autonomous vehicles. Sales of autonomous electrical vehicles do not need to come close to sales of combustion, non-autonomous vehicles as the ownership of vehicles will change. This isn’t new – it’s the future business model for any automaker who wants to stay in business, but it is also not figured into forecasts for how disruptive EV will be.

Autonomous trucks are being trialled, autonomous vehicles as fleets that can work 24/7 servicing 10+ times as many people as a single car can today are already working in Tesloop. We’re rapidly approaching the inflexion point in the transportation industry, and as battery costs continue to drop towards the mining cost of Lithium, the curve for the adoption of EV becomes ever steeper.

The oil industry will be decimated by a fall in demand for oil – with huge geopolitical implications for the Middle East. The oil industry will still exist, but primarily as feedstock for chemicals and fuel for shipping and planes. The auto-industry will be decimated by a fall in sales and unless manufacturers adopt radically different business models and become first movers as Uber/Lyft type companies they will be swept away. The insurance industry will fail as the cost of insuring dramatically safer vehicles falls. This is all likely to happen before 2030, the world as we know it with petroleum running the world, will be completely different.

Moore’s law drives this – the fall in the cost of processing power makes autonomy work, and any economic process driven by Moore’s law will see gains along the same line – Moore’s law is coming to the transportation market.