The oil industry had a crisis year in 2020. Royal Dutch Shell posted a loss of $21.7bn last year and the US giant Exxon Mobil suffered a $22.4bn loss. Oil prices even turned negative. Much of this can be explained by the pandemic depressing demand for oil. But even before the pandemic hit, the oil industry was having to plan for a future away from fossil fuels. Could COVID-19 accelerate this trend?
European and American producers are pursuing radically different strategies, with completely opposite forecasts of the oil market.
In Europe, oil companies are clearly responding to the pandemic by turning more rapidly away from oil. BP has been a particularly notable case of this. Before the pandemic, they led the industry in promising to reach net zero emissions by 2050. And as a result of the pandemic, they announced 10,000 job cuts, along with plans for a near ten-fold increase in electric vehicle charging points. The reasoning behind these plans can be partly explained by pressure from shareholders over the climate crisis; they want to see oil companies do more to tackle climate change.
But the main reason is of course a profit-motivated one. BP believes that oil demand may have peaked in 2019, a radical shift from its earlier belief in 2019 that oil demand would continue to grow in the 2030s. With the pressure from governments and investors to tackle climate change, BP also believes that certain trends, such as remote working, will be accelerated by the pandemic; this would lower demand for oil more rapidly than previously thought. Aside from BP, other European companies are taking action. Shell is moving away from fossil fuels, and towards hydrogen and biofuels. France’s Total quit the American Petroleum Institute (API), citing the API’s resistance towards tackling climate change and its support for Donald Trump quitting the Paris Climate Agreement.
The plan for these European countries is generally to keep oil production as their main revenue drivers over the next decade, while using the profits from oil to invest in cleaner forms of energy. So it’s not going to be an immediate shift away from fossil fuels, but rather a period of high investment in clean energy, followed by a slower shift towards these forms of cleaner energy. The outlook still seems positive for climate activists though; European firms are clearly taking action.
The mood in the USA, however, is exactly the opposite. While Europe has betted on oil demand falling away over the following decades, American companies expect oil demand to rebound, especially as they see developing economies like India picking up soon. And as such, ExxonMobil and its rivals Chevron haven’t made any big investments in renewables. But activist investors and large pension funds are pressuring American oil companies to do more. In fact, the world’s largest biggest investment fund, BlackRock, has threatened to sell its shares in the worst polluting businesses, demanding that companies disclose their plans to achieve net zero emissions.
Exxon in particular, is under increasing pressure from shareholders over the climate crisis. It was once the most valuable public listed company in the world, and didn’t really have to bother about shareholder discontent. But since 2014, it’s lost a huge $266 billion in market value and made multiple costly investment errors. And once a company starts to struggle, activist investors come along. Exxon is even facing a campaign to take over board seats to drive change from within. There are signs of this pressure having an effect; they’ve created some small emissions targets, but they simply don’t go far enough.
Goldman Sachs and JP Morgan analysts have pointed to recent news that oil prices have recovered to pre-pandemic levels, as a reason to be optimistic about Exxon’s future. But this wouldn’t quite be accurate. While oil prices may have recovered, demand hasn’t. Indeed, the rise in oil prices is partly explained by expectations of a quick, successful vaccine rollout and economic recovery. This is by no means guaranteed. The price rise can be significantly attributed to supply constraints; the prestigious OPEC group cut its oil production and African producers have seen declining output recently. So the price rise isn’t down to a recovery in the oil sector, but rather a continuation of its struggles in supply, and some hopeful expectations.
So who is pursuing the better strategy: the American or European producers? The answer to that question will determine the future of the energy sector. At this stage, the Europeans seem to be the more prudent side in trying to diversify away from oil. Governments are slowly starting to take the climate crisis seriously; the UK will stop the sale of diesel and petrol cars from 2030, which will hugely reduce demand for oil in the UK. The arrival of President Biden in the USA poses a big challenge to the current thinking of American oil companies. He’s already rejoined the Paris Climate Agreement and stopped the leasing of federal land for oil and gas. It’s looking increasingly likely that the American companies will be left behind in the race to diversify.
The oil industry has suffered repeated, painful shocks in recent years. In 2007, prices plummeted due to the recession, in 2015 OPEC flooded the market and depressed prices once again, but the pandemic has been the most brutal of all. However, it has offered the perfect storm for a shift to clean energy. The Europeans have seized it. It’s time for the Americans to do the same.