By Irina Slav
Ironically, the wave of ESG investing in global energy markets may lead to much higher oil prices as a serious lack of capital expenditure on new fossil fuels dries up just as demand for crude continues to grow
Pressure from investors, tighter emissions regulation from governments, and public protests against their business have become more or less the new normal for oil companies. What the world—or at least the most affluent parts of it—seem to want from the oil industry is to stop being the oil industry.
Many investors are buying into this pressure. ESG investing is all the rage, and sustainable ETFs are popping up like mushrooms after a rain. But some investors are taking a different approach. They are betting on oil. Because what many in the pressure camp seem to underestimate is the fact that the supply of oil is not the only element of the oil equation.
“Imagine Shell decided to stop selling petrol and diesel today,” the supermajor’s CEO Ben van Beurden wrote in a LinkedIn post earlier this month. “This would certainly cut Shell’s carbon emissions. But it would not help the world one bit. Demand for fuel would not change. People would fill up their cars and delivery trucks at other service stations.”
Van Beurden was commenting on a Dutch court’s ruling that environmentalists hailed as a landmark decision, ordering Shell to reduce its emissions footprint by 45 percent from 2019 levels by 2030.
The ruling effectively requires that Shell shrinks its business, meaning it requires one company to work against itself. For any other industry, this would have been unthinkable. But not for Big Oil, which has been targeted as the single party responsible for the rising greenhouse gas emissions produced by humankind. Again, the users of the emission-generating products are being either wilfully ignored or named victims, misled by Big Oil about the harm their products do.
The truth, as unpalatable as it is for many in the green transition corner, is that the world still runs on oil. Demand for oil has been rising for decades as our energy needs grow with the global population. The use of fossil fuels is also on a continual rise despite—this is important—the boom in renewable energy capacity installations over the past decade. According to a report by a renewable energy policy network REN21, the share of coal, oil, and gas in the world’s energy mix has not changed over the past decade.
So, oil demand is still on the rise, but pressure on the companies that extract oil is growing to the point where these companies are being forced to reduce their spending on future production. There is only one way such a situation could end, and it is with much higher oil prices as demand remains robust. No wonder, then, that some investors are expanding their exposure to oil, as per a Wall Street Journal report from earlier this month.
The report notes data from Wood Mackenzie that says investments in oil production dropped to $330 billion last year. That’s less than half of what was spent on oil in 2014 when Brent was trading well above $100 per barrel. The pandemic certainly had a lot to do with this. But so did the renewed push for a more renewable energy future. Lower investments in oil mean lower production going forward. This is good from an energy transition perspective but not from an oil demand perspective. And it is a long-term problem.
Back in May, Rystad Energy wrote that the proven reserves of Big Oil are falling at a drastic rate: last year, the group lost—meaning failed to replace with new discoveries—15 percent of its reserves. Its existing reserves could be depleted within 15 years. The world will not be off oil by then.
The potentially fatal flaw in the energy transition plan is that it appears to substitute one part of the world for the whole world. Granted, there is a lot of talk about helping developing nations to wean themselves off fossil fuel and this talk even includes money but that’s as far as it goes. As Oilprice commentator Syed Rizvi noted in a recent post, there are more than a billion people around the world with no access to electricity at all. Fossil fuels are for them the only source of energy.
This is likely to continue to be the case for quite a while, because one other thing the energy transition proponents seem to forget is that even renewable energy is a business—and businesses require profits. Africa is a case in point: the continent has abundant solar and wind resources and yet these are not being harnessed. The reason: there are not enough paying customers for the future solar and wind farms.
Investment celebrity Richard Bernstein earlier this week said traders were buying bitcoin in a bear market and ignoring oil in a bull market. Indeed, the latest trends in trading and investing seem to follow fads rather than logic.
“We’ve got this major bull market going on in commodities, and all people are saying is that it doesn’t matter,” Bernstein said, as quoted by CNBC.
What this shows is a major divide between trader sentiments, policies, and reality. Some traders and politicians seem to inhabit a parallel world in which bitcoin will always be a good investment even when its price is falling off a cliff, and the green energy transition is absolutely unavoidable. In the real world, bitcoin has a considerable emissions footprint and hundreds of millions of people rely on fossil fuels for their energy needs and will continue to rely on it because they can’t afford renewable energy.