Big Oil Relents: Peak Oil is Upon Us
According to BP’s (NYSE: BP) latest energy outlook, the world will drastically reduce its reliance on oil and gas over the next 25 years.
A Yahoo! News piece covered this announcement, noting that this transition means “we could soon reach what is commonly referred to as peak oil, the point when global production of oil reaches its high point before entering into steady decline.”
It’s interesting, but I remember back in 2005/2006, my colleagues and I were talking about peak oil, but in a bit of a different way.
The argument for peak oil back then was based on the fact that all the “easy-to-get” oil had been produced, and moving forward, it would be considerably more expensive to produce oil and gas, thereby instigating the start of the peak. But with the advent of new technologies, peak oil was temporarily delayed.
Oil and gas are finite resources, and certainly will run out one day. Likely a lot faster than most most insiders are willing to admit. But with this latest report from BP, the argument is being made that peak oil will actually be accelerated, not because of increases in production costs, but instead, because of government action designed to phase out the use of fossil fuels, which has been driven primarily by a move to “decarbonize” and the need to provide energy security for countries that have long been heavily reliant on their energy needs from Russia.
Here are some highlights from the report that are worth reading …
- The carbon budget is running out. Despite the marked increase in government ambitions, CO2 emissions have increased every year since the Paris COP in 2015 (bar 2020). The longer the delay in taking decisive action to reduce emissions on a sustained basis, the greater are the likely resulting economic and social costs.
- Government support for the energy transition has increased in a number of countries, including the passing of the Inflation Reduction Act in the US. But the scale of the decarbonziation challenge suggests greater support is required globally, including policies to facilitate quicker permitting and approval of low-carbon energy and infrastructure.
- The disruption to global energy supplies and associated energy shortages caused by the Russian invasion of Ukraine increases the importance attached to addressing all three elements of the energy trilemma: security, affordability, and sustainability.
- The war has long-lasting effects on the global energy system. The heightened focus on energy security increases demand for domestically produced renewables and other non-fossil fuels, helping to accelerate the energy transition.
- The global power system decarbonizes, led by the increasing dominance of wind and solar power. Wind and solar account for all or most of the growth in power generation, aided by continuing cost competitiveness and an increasing ability to high proportions of these variable power resources into power systems. The growth in wind and solar requires a significant acceleration in the financing and building of new capacity.
Of course, BP’s analysis comes with a caveat …
Although the company recognizes the reality that the world will rely less and less on fossil fuels going forward, management is still going to hustle the shit out of oil and gas, because that’s their bread and butter.
This isn’t a criticism, by the way, but instead a simple observation of truth that can’t be ignored.
Along with all the bullet points supporting the argument that we are moving towards a less carbon-intensive energy economy, BP includes the following notes …
Carbon capture, use and storage plays a central role in enabling rapid decarbonization trajectories: capturing industrial process emissions, acting as a source of carbon dioxide removal, and abating emissions from the use of fossil fuels.
Here’s the problem with that: to date, there has been little progress made in making carbon capture and storage (CCS) economically viable. Yes, billions will be investing in CCS, not because it makes economic sense, but because it placates fossil fuel interests who are not going gently into that good night.
Ultimately, as the proliferation of renewable energy and storage continues at a rapid pace, most of these CCS operations will cease to exist due to a combination of prohibitive costs and the fact that fewer and fewer coal and natural gas power plants will be built.
The recent energy shortages and price spikes highlight the importance of the transition away from hydrocarbons being orderly, such that the demand for hydrocarbons falls in line with available supplies. Natural declines in existing production sources mean there needs to be continuing upstream investment in oil and natural gas over the next 30 years
This is code for “please keep investing in our company.”
An orderly transition was already happening prior to the Russian invasion of Ukraine. And that has actually expedited the transition away from hydrocarbons. I’m not saying it’s wise to shut off the valves and go cold turkey. But the argument that this will take 30 years of continued investment in oil and gas assets to ensure an orderly transition is, for lack of a better word, bullshit.
Look, I get it.
If I was running an oil and gas company, the last thing I’d do is abandon that which generated trillions of dollars every year. But let’s not trivialize the pace at which this transition away from fossil fuel is happening.
Last year, the world spent $1.1 trillion transitioning to cleaner power. This is what was spent producing oil and gas. This is the first time such a thing has ever happened.
This is NOT trivial, and further supports my argument that every investor should have some exposure to the renewable energy and electric vehicle space. Here’s a list of some of the companies that are absolutely taking the lead in this transition …
- Hannon Armstrong Sustainable Infrastructure: (NYSE: HASI)
- Brookfield Renewable Partners (NYSE: BEP)
- First Solar (NASDAQ: FSLR)
- SolarEdge (NASDAQ: SEDG)
- Tesla (NASDAQ: TSLA)
- Proterra (NASDAQ: PTRA)
- Norsk Hydro (OTCBB: NHYDY)
- Northland Power (TSX: NPI)
- Orsted (OTCBB: DNNGY)
- ABB (NYSE: ABB)
- GM (NYSE: GM)
- Siemens (OTCBB: SIEGY)
While BP is coming clean on what many of us already knew, the Big Oil machine will continue to provide the world with fossil fuels, because we need them. But make no mistake: this transition away from fossil fuels is happening. Big Oil knows it, but it will be dragged through this transition, kicking and screaming.
In the meantime, you can check out BP’s latest energy outlook here: https://www.bp.com/en/global/
Energy Demand will Increase 58% Over the Next 25 Years
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