The Energy Transition Will Change The Oil Industry: “This Time For Sure!”

The front page of Saturday’s New York Times

business section had two headlines that beg to be juxtaposed: “Rebels open new fronts for climate, and win” about activists gaining ground on the fossil fuel industry, and “Biden finds fossil fuels hard to quit” about approval of an oil project in Alaska. Readers might wonder how to rationalize the seeming inevitably of the end of the fossil fuel age with the continued investment in them—and approval of such by a Democratic president.

Probably the definitive word comes from a book subtitled, “Transition to a Post-Petroleum World,” which opens: “For rich lands and poor alike, the energy patterns of the past are not prologue to the future. The oil-based societies of the industrial world cannot be sustained and cannot be replicated, their spindly foundation, anchored in the shifting sands of the Middle East, have begun a long, irreversible process of erosion.”

But: it was published in 1977 by Norton for the Worldwatch Institute. Aha, you say, this time is different, because, well, climate change and renewables. These deserve serious discussion, but for this piece I just want to revisit some history to suggest that the current frenzy over the oil industry transition should be taken with a large dash of salt.

One of my professors used to insist that there were only five real management theories, and they were just constantly being renamed and recycled by management gurus, which makes me think of ‘power ties,’ ‘power lunches,’ ‘hoteling’ (not letting employees have regular offices), as well as the more serious ones like ‘quality circles’ and ‘six sigma’. But few realize that the oil industry has faced repeated calls for transformation, virtually all of which have proved misguided.

For the oil industry, there have been a number of proposed strategic shifts over the years that only received modest implementation, including the formation of national oil companies, the nationalization of the U.S. oil industry, vertical-de-integration and Enron’s suggestion that large organizations could become asset-light ‘virtual’ corporations.

Diversification was all the rage in the oil industry (and academia) in the late 1970s. I have many times (including in my book The Peak Oil Scare) cited the 1977 argument by Mobil CEO Rawleigh Warner who said, “The oil business has come to maturity, and with this maturity comes a new set of challenges…oil companies have no other choice. They must diversify or go the way of the buggy-whip makers.”

Indeed, much of the petroleum industry responded to this call by investing in other fuels and even solar power (for which they were accused of trying to ‘buy the sun’ by solar advocates), as well as office equipment makers, department stores, etc. A brief review suggests they lost 90% of their money when they sold off or closed the subsidiaries. Oddly enough, if the political move to force horizontal divestiture had succeeded, it would have saved them some money.

Wall Street deserves much of the blame, primarily for listening to the many pundits (and economists). In August 1980, Standard and Poors, in its “Industry Outlook” said “Diversification into alternative energy fields should offer promising new opportunities for increasing profitability.” Followed only four years later by a complete reversal: “Diversification out of the oil business has been disastrous for most of the majors….”

Libraries (and my basement) are littered with books from that period insisting that oil prices would only go up and the bulk of new supply would come from the Middle East, specifically the Persian Gulf. This includes the IEA’s 1982 World Energy Outlook, which thought the only source of significant non-Gulf oil was Mexico. (Search for Chicontepec oil field and you’ll see why.) James Schlesinger, America’s first Energy Secretary and a Ph.D. economist believed that world oil production had probably peaked. (Three decades later, he was praised by peak oil advocates for saying the peak oil debate was over, and its advocates had won.)

Indeed, in the early 2000s, when wan and political unrest in Iraq and Venezuela respectively removed 5 mb/d from the market, many instead blamed high prices on ‘peak oil.’ The CEO of Total went so far as to predict oil production would never pass 85 mb/d, and, later, that $100/barrel was the floor price for oil. Most of the industry didn’t sign off on peak oil per se, but agreed that the ‘easy’ oil was gone and invested in high-cost projects, with the full blessing of the IEA (through its oil price forecasts of $130/barrel for 2020) and many of the same pundits now insisting the oil industry must be transformed were fully on board with that outlook.

There was another argument made for the transition from oil in the 2000s, exemplified by Rocky Mountain Institute’s report, “Winning the Oil Endgame,” which argued that efficiency could allow for a cut in 29% of the official forecast for U.S. oil consumption in 2025 and another 23% shortly thereafter. Plus, biofuels like cellulosic ethanol could provide another 25% of U.S. oil needs. And it opens with quotes from senior executives of BP, Shell, Texaco, and Arco, as well as GM and Ford, to the extent that new technologies were on the verge of displacing oil. (The link is below, the opening quotes are quite entertaining.) Since the publication of the report, oil demand has grown only 5% (from 2002 to 2019), which is below the projected level growth of 34% (to 2020), but the intervening period included a major recession and a tripling of the oil price for a decade.

Still, there are many experts (often self-described) who insist that the transition is real this time because:

Electric cars are competitive with petroleum engines;

              But sales are still tiny and heavily subsidized;

Natural gas leakage is a major source of global warming;

              But leaks can be greatly reduced;

Consumer behavior will change post-pandemic;

              But that’s an assumption with minimal evidence as of yet;

And/or many companies and governments are setting goals for Net Zero emissions;

              But the road to hell is paved with good intentions.

The reality seems to be that travel and driving are getting close to pre-pandemic norms in places that have vaccines, consumers have shown far more enthusiasm for SUVs than for EVs, and even now, new coal plants are being built around the world. ( says 180 GW was under construction in 2020, with another 300 GW in various stages of planning.)

So, what will be accomplished by having oil company boards add advocates for the energy transition? Well, in theory, they might prove to be smarter about the coming transition than those already on the board. But the impact on the climate will be negligible because oil production doesn’t determine oil demand, which is the source of the targeted greenhouse gas emissions (in theory but not always). It simply means that the oil which, say, Exxon is going to produce in Guyana would be displaced by oil from elsewhere, primarily the Middle East and Russia.

Given the many times that a consensus of academics, the government, consultants and Wall Street, to say nothing of activists, have pushed the oil industry (among others) down a well-intentioned path, only to find their expectations misguided, it would behoove the industry—and investors—to practice a little more due diligence before committing to massive strategy shifts. Maybe boards can add carpenters who can remind them to “Measure twice, cut once.”

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