Sarah Miller - Aug 17,2021

There’s nothing like rising oil prices to lift the mood of the oil industry. With crude prices at $50 per barrel or below, the end of fossil fuels has a frightening aura of reality. At $60/bbl and above, that reality easily blurs. Maybe there’s an expansive way forward after all: Pay down some debt and investors will get over their negativity. Maybe oil demand will rise for another decade or two. Maybe the industry can concoct an energy fix that’s friendly to both its business model and the environment. At this point, however, such a mood is more akin to the up-phase of bipolar disorder than to a realistic take on the future. After a summer of unprecedented and deadly heat waves, floods and wildfires worldwide, and the direst-ever UN climate report, it’s evident that the climate crisis is, indeed, a crisis. Flight from fossil fuels is poised to speed up, not slow down, and pricey oil and gas are accelerators of that change. Recent oil price wobbles underscore the point.

Devastating floods from China to Germany. Heat-driven wildfires from Siberia to Western North America and the Mediterranean. Temperature above 100° F (40°C) across the normally chilly US Northwest and Canadian Pacific region. Such headlines provide a lurid backdrop for the latest IPCC Climate Change 2021 report on the physical science of warming, replete with predictions of just the kind of damaging events the world is now seeing.

And while the scores of scientists involved in the effort note that some climate changes will continue regardless, they stress that the different impacts of differing volumes of cumulative emissions become evident within 20 years. So the amount of coal, oil and gas the world burns today will matter in the severity of warming within most of our lifetimes.

In the face of such dire climate warnings, it probably isn’t realistic to expect the same investment funds who own, and in some cases insure, much of the at-risk infrastructure and land to drop their objections to continued heavy fossil fuel use. Or to expect them to worry overly much about the future of oil companies that no longer have a combined equity value large enough to sink stock markets, even momentarily.

On the contrary, as Energy Intelligence recently noted, the new UN report is likely to be “widely used as a reference framework, for example by insurance companies, investors pressing companies to adapt to climate risk, and judges in climate litigation cases” (NE Aug.12'21 ). In other words, this month’s scientists’ findings may be even more damaging to oil industry prospects than the International Energy Agency's Net Zero by 2050 study that created so much consternation last month (WEO Jun.11'21 ).

A summer of floods, fires and heat is likely to further deepen investors’ determination to accelerate the energy transition, whether or not governments get their acts together to accomplish much in November at the UN Climate Change Conference in Glasgow. And from an oil industry perspective, investor pressure has been a highly effective tool in forcing policy change.    

Electricity and Transportation

Leaving aside the distraction of the last 10%, hard-to-eliminate emissions on which so much talk is being expended at the moment, the first very large and very important stage of the transition is playing out at high speed in the arenas of power generation and road transportation, vitally affecting demand prospects for natural gas and oil, respectively. In both cases, competitive economics increasingly reinforce the climate case against fossil fuels. 

For both broad oil industry prospects, and the large near-term drop in greenhouse gas emissions emphasized in the UN report, this is what is important. Not the potential -- or not -- for wide use of hydrogen and carbon capture and storage (CCS) at some point decades down the road.    

Sky-high prices for natural gas have hugely advanced the economic advantages wind and solar generation were only gradually starting to enjoy in many places. A year ago, levelized cost of energy calculations from Energy Intelligence showed the cost of power from new-built solar facilities was roughly 15% higher than the cost of electricity from a new combined cycle gas-fired plants in “developing Asia,” a category that reflects mainly China and India.

This month, average gas prices in developing Asia are above $9 per million Btu, up from under $4/MMBtu a year ago. Meanwhile, capital costs for solar are down by another 35%-plus. The result? Instead of being 15% higher, the cost of power from a new solar plant is now less than half that of gas-fired power in the prime markets the industry is looking to for continued growth in gas consumption.

Consider that most of the gas to run new power plants would have to be imported by both China and India, and the solar capacity would be homemade, at least in the case of China, and it’s hard to see why much new gas-fired generating capacity would be built in these key gas markets. Even if gas prices fall back next year or soon thereafter, the continuing decline in solar capital costs is likely to keep new gas capacity uncompetitive.

There was a window when gas-fired electricity was cheaper, but it has now closed – sooner than it would have if gas prices hadn’t soared. The Europeans can’t see the point in imported gas as a bridge fuel, why should the Chinese and Indians?   

Now for EVs

Prospects for continued growth in oil consumption don’t look much brighter in the face of dramatic gains in electric vehicle (EV) sales, most notably in Europe and China, but also in the US and elsewhere. In first-half 2021, EV sales worldwide shot up by 168% over weak early 2020 levels to 2.69 million, according to . This data collection and analysis site is forecasting 98% growth for full-year 2021, for a total of 6.4 million vehicles. The percentage growth number falls back only because the 2020 base level strengthens.

EVs share of total light vehicle markets are closing in on 20% in Europe, 15% in China, and 4% in the US. New models in all shapes and sizes are being launched, including SUVs and not-a-few pickup trucks, especially in the US, where President Joe Biden just announced a target of 50% market share for battery electric vehicles alone by 2030.

EVs reportedly top a generally boiling US used car market, portending a likely fast absorption of EVs into the less expensive realms of the auto fleet, as well. In any case, auto analysts are forecasting that EV prices will reach parity with conventional cars, possibly as soon as 2022 and by mid-decade latest, thanks to falling battery costs. In the meantime, confirmation from the US government’s Argonne Lab that EV maintenance costs run roughly 40% below those for internal combustion drive trains adds to the already bright outlook for electrification of fleet vehicles such as delivery vans and buses, where overall operating costs are more important than the purchase price.

The transition to EVs is happening faster than anyone forecast a year or two ago. Odds are that, a year from now, Biden’s 50% EV target will look modest. So far, EVs share of the total auto fleet has been low enough that oil demand forecasters could ignore the phenomenon in their short-term outlooks. This will not be true for much longer.

Much as the impacts of climate change are suddenly visible to everyone, decades before they were expected, the impacts of the energy transition will soon be an immediate fact on the ground for oil producers -- not a concern for the distant future.  

Sarah Miller is a former editor of Petroleum Intelligence Weekly, World Gas Intelligence and Energy Compass.


Further disruption lies ahead. The 2021 Outlook provides important context and pointers to help you navigate these changes, and understand how sometimes confusing events fit the broader picture.