02/07/2021
Our economic shift away from fossil fuels to cleaner energy sources has been underway for some time. For me, one key tipping point was when Jim Cramer, the host of CNBC’s Mad Money, a stock market infotainment program, referred to the oil industry as uninvestable. He’s since backtracked a bit, making an exception for Chevron as a value play, but the thesis holds.
An article in The Guardian reports on the distress in the oil industry, citing BP’s loss of $18 billion, ExxonMobil’s first ever annual loss of $22.4 billion, and Shell cutting its dividend for the first time since WWII after racking up $20 billion in losses and a $22 billion write-down in the value of its oil and gas assets. The fossil fuel industry would be even worse off if not for the nearly $5 trillion in subsidies it receives from governments around the world. The IMF published a report detailing that number.
Another good example relates to the Biden administration’s cancellation of the controversial Keystone XL pipeline, a project planned for the purpose of transporting Canadian tar sands crude oil from Alberta to refineries on the US Gulf Coast. KXL, famously referred to as the “dirty needle of an oil addict” by leading climate scientist Prof. James Hansen, was an ill-conceived project for any number of reasons. It’s been a zombie project for some time, existing on its own inertia helped by a $1.5 billion cash infusion from the good citizens of Alberta, whose government appears to have succumbed to the siren call of the oil companies who bought up leases in the province’s tar sands region. Protests from Alberta’s government aside, President Biden did Canada’s taxpayers a long-term favor as development of the tar sands would likely have required additional ongoing public subsidies as the cost of production seems to have consistently exceeded the market price for that type of crude oil.
There will continue to be a market for oil. Lubricants and some petrochemicals for plastics come immediately to mind. But it is a significantly diminished market as the transportation sector transitions to alternative energy sources with EVs. We’re even seeing renewed interest and developments in hydrogen fuel cells.
The oil and gas industry might take heed and instead of using their expertise in constructing offshore drilling platforms, consider building offshore wind or solar farms as opposed to developing what may ultimately become stranded assets. It will be interesting to see how these immensely wealthy and powerful companies manage to handle the transition to a clean energy economy.