Can Oil Giants Play The Long Game?

Over the last few years, the performance of the energy sector has been among the worst. It fell 45% over the last half of a decade whereas the S&P rose 59% over the same period. If we specifically look at oil, there is the supply and demand side to consider. Forecasts say there's probably enough oil to last during the next 100 years, considering current consumption trends. But demand is far less certain.

Supply And Demand

We are running out of "easy" oil but forecasts on how much is left do vary wildly. The biggest problem is that the vast majority of R&D spending is focused on unconventional oil, and not on replacing oil. The industry has been focused on making shale more economical for almost a decade now. Moreover, the Trump administration has made it clear that it will not allow the sector to vanish. The economic equation behind it is rather simple. The less oil is left, the more money there will be in sucking out every drop. Scarcity is a great profit booster. Greater profits encourage companies to expand, not contract. Therefore, the fundamental concept of economics ‘advise' sticking to these depletable sources until they are exhausted.

Even The Oil Giants Are Struggling

It would be challenging to find an integrated oil and gas company with a better balance sheet than Chevron CVX. But even with a strong financial position, Chevron still depends on the price of oil. Along with its U.S. competitor ExxonMobil XOM, they are the only two energy companies that hold the title of Dividend Aristocrats. This status is given to any company in the S&P 500 that has increased its base dividend for at least one-quarter of a century but in an uninterrupted manner. As for Chevron, it has an impressive track record of 32 consecutive years. Moreover, it has increased its dividend by 79% over the last decade alone. But the pandemic devastated its profits.

Royal Dutch Shell plc (NYSE: RDS-B) has also swung to a historic and quite heavy loss with its latest quarter. The Anglo-Dutch oil titan warned that an uncertain demand outlook could curtail its third-quarter production. Most importantly, oil giants are aware that business may never return to normal.

The Greener Perspective

High prices are destroying the demand for oil as the world is turning to renewable sources and other energy storage mediums. Moreover, climate change concerns are creating significant regulatory pressure. The developed world is also taking action to promote electrification. The UK and France plan to ban new gasoline and diesel vehicle sales in certain regions by 2040. Moreover, electric vehicles are central to Europe's post-pandemic recovery plan.

Electrification Station

EVs could truly eliminate the majority of oil consumption. But they need to be accompanied by a significant improvement in battery technology and an expansion of the charging infrastructure. Moreover, they have to become more accessible price-wise. EV pioneer Tesla Inc TSLA as well as startups such as electric and hydrogen-powered Nikola Corporation NKLA disrupted the whole world as they are the ones who made this reality possible.

Finding A Way To Exist In The New Era

As battery-electric vehicles go mainstream, it's not hard to imagine oil companies utilizing their massive infrastructure to get into the battery-charging business. Many companies are already exploring these options. Last week, the British oil and gas giant BP BP committed to cut its oil production over the coming decade with very ambitious energy targets. BP plans to invest tens of billions of dollars over that decade to become one of the world's largest renewable power generators. It might even settle for profits lower than it gets from oil in order to achieve that goal. But, it's not like we'll stop needing oil overnight. If anything, air travel is still fully dependent on fossil fuels.

Nothing Happens Overnight

The bottom line is that some oil companies, even the giant themselves, may not survive the transition. But no one who works in the industry today will be around to see this entirely new oil-free future. It is like the story of the telephone industry: a telephone serves the same purpose it served one hundred years ago, but smartphones are giving us a ton of stuff on the side that no one could have possibly predicted back then.

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