A glimpse of a post-oil era
Stewart Spence was a young hotelier in Aberdeen in 1971 when he first realised what an oil
rush meant. His hotel, the Commodore, was the only one in the Scottish city
with en-suite bathrooms. One day an American oil executive strode in, wearing
denims, cowboy boots and a stetson. Once assured that the bedrooms had private
facilities, he booked 20 rooms for six months and paid upfront by banker’s
draft. The American, boss of an oil-services company called Global Marine, was
ferrying three oil rigs from the Gulf of Mexico to Aberdeen. Thus began
Scotland’s North Sea oil boom. Steak houses, cigars and words like roughneck
and roustabout took hold. Texans famously drank Dom Pérignon champagne out of
pint mugs. They lived the high life until oil prices crashed in 1986. Then they
disappeared almost as swiftly as they had come, says Mr Spence.
Since those days
oil has brought both boom and bust to Aberdeen, but never before the sense of
despondency that grips the city today. In 2012 it had more multi-millionaires
per 100,000 people than London and the world’s busiest heliport, taking workers
to and from the rigs. But the oil-price crash in 2014 drove home the fact that
after almost half a century of exploitation, many of Aberdeen’s offshore fields
have become too expensive to be sustainable. The number of jobs has plummeted,
and some oil producers are on the brink of bankruptcy.
As the world
enters what could be the twilight of the oil age, some wonder whether
Aberdeen’s travails could be a harbinger of things to come in oil-producing
regions across the world. Mr Spence thinks so. He still runs the smartest hotel
in Aberdeen and is about to install a charging station for electric vehicles.
Not so fast, say
many oil-industry veterans. They accept that high-cost oil regions like
Scotland’s North Sea, Canada’s oil sands and the Russian Arctic may be in
trouble, but expect at least one more oil boom, born from the ashes of today’s
bust, because there has been so little investment in the past two years to open
up new sources of supply. Within the next couple of years, they think the
market will once again swing from glut to shortage. The biggest beneficiaries
will be producers in places with low-cost, abundant oil such as the Middle
East, America’s Permian basin, Brazil’s pre-salt fields and parts of west
Africa. But although those regions may see a boom in investment, it would be
short-lived, because long-term demand is falling and the market could quickly
become oversupplied.
After dark
When it comes,
what might a terminal decline in the use of oil mean for the industry,
governments and the world at large? The biggest turmoil would be felt in
oil-dependent developing countries. As Jason Bordoff, of Columbia University’s
Centre on Global Energy Policy, notes, the social stresses now evident in
budget-strapped petrostates such as Venezuela and Nigeria are a hint of things
to come. Gulf countries would accelerate their efforts to diversify their
economies away from oil, as Saudi Arabia is already doing. America might
rethink its “oil-for-security” geopolitical bargain with that country. Lower
oil revenues could increase instability in places like Iraq.
Oil companies,
for their part, will have to explore new lines of business
Oil companies,
for their part, will have to explore new lines of business. The North Sea
provides a glimpse of some of the opportunities that lie ahead. Near Aberdeen,
firms such as Royal Dutch Shell are decommissioning parts of the spectacular
network of rigs and pipelines installed in the 1970s. Andrew McCallum, an
adviser to Britain’s regulator, the Oil and Gas Authority, says oil companies
could deploy their decommissioning skills on projects around the world.
Look to Norway
Statoil, the
Norwegian state oil company, has set an example of what oil companies might do
in future. Earlier this year it acquired a lease to build the world’s largest
floating wind farm 15 miles off the coast of Peterhead, north of Aberdeen. Each
of its five 6MW turbines will be tethered to the seabed on a floating steel
base, enabling it to operate in deeper water than a conventional turbine
embedded into the sea floor. That will give it access to stronger winds farther
offshore, making it cheaper to produce electricity.
Back in Norway, Statoil also operates two projects to store carbon dioxide
under water, in some of the most advanced examples of a technology seen as key
to removing greenhouse gases from the atmosphere: carbon capture and storage
(CCS). This is costly and still in its infancy, and governments have supported
it only erratically. In 2015 a mere 28m tonnes of CO2 was stored that way. To help meet the 2ºC limit,
the IEA says the world needs to store a whopping 4bn tonnes a year by 2040.
Biofuels are
another way to diversify. At the North Sea port of Rotterdam, Neste, a Finnish
refiner, ships in waste fats from the world’s slaughterhouses and converts them
into biodiesel for the haulage and aviation industry. It costs more than
regular diesel, but under EU rules member countries’ fuel mix must include 10%
biofuels by 2020. Neste’s boss, Matti Lievonen, recalls that in 2012
nine-tenths of his company’s operating profit came from refining fossil fuels,
whereas now renewables account for 40%.
Not all oil
companies want to be innovators. Many plan to develop more gas, but also insist
that the world’s demand for oil as feedstock for petrochemicals will keep them
in business even if demand from cars wanes. The IEA predicts that
petrochemicals will raise demand for oil by almost 6m b/d in the next 25 years.
Oil companies are putting pressure on governments to impose carbon taxes,
believing them to be the best way to kill off coal and boost natural gas, at
least until renewable energy and batteries have come of age. So far governments
have shown remarkably little appetite for such taxes. The IEA calculated that
carbon markets covered only 11% of global energy-related emissions in 2014. In
contrast, 13% of emissions were linked to fossil-fuel use supported by
consumption subsidies.
Transport fuels
are more widely taxed, but at vastly different rates, ranging from high in
Europe to low in America and China. Experts say that in America it is easier to
regulate fuel consumption via vehicle-efficiency standards, which consumers
notice much less than fuel taxes.
The crucial, and
underappreciated, players in the future of oil are consumers. Their choices, at
least as much as those of producers and governments, will determine its
ultimate fate, because oil fuels the industries that make goods for them, the
trucks that deliver those goods, the cars they drive and the plastic objects
that clutter their homes.
This special
report started by recalling how the horse was displaced by the car. Urban
planners failed to find ways to reduce the horse-manure problem. Governments
paved roads, put up traffic signs and introduced legislation that allowed the
motor car to establish itself. Yet it was the allure of the Model T for
millions of consumers that finally drove the horse off the road.
Similarly, oil
companies may turn their attention to alternative fuels, governments may tinker
with fuel taxes and congestion charges, battery costs may come down with a bump
and the electricity grid may be converted to run on sun and wind. But none of
these developments alone will end the oil era. Only when entrepreneurs can
capture the public’s imagination with new vehicles that transform the whole
travel experience, rather than just change the fuel, will the petrol engine run
out of road.
This could
happen with electric self-driving cars, which may eventually become not just
four-wheeled travel pods but mobile offices, hotels and entertainment centres,
running noiselessly through city streets day and night. Or it could be some
other futuristic innovation. A new play in London, “Oil”, predicts that the
hydrocarbon age will end with the Chinese mining helium-3 on the Moon to fuel
nuclear-powered cars and homes on Earth. Whatever your particular fantasy,
there are bound to be more oil wars and oil shocks. But it will be when the
internal-combustion engine eventually loses its remarkable grip on the world’s
roads that the age of oil will come to a screeching halt.
http://www.economist.com/news/special-report/21710634-glimpse-post-oil-era-when-oil-no-longer-demand
