The Real Reason Behind the Oil Price Collapse

“Emerging economies, notably China, have entered less oil-intensive stages of development . . . On top of this, concerns about climate change are influencing energy policies [and so] renewables are increasingly pervasive.” Maria van der Hoeven, IEA Executive Director

This article suggests that the full-steam-ahead production model Big Oil has adopted is out of date and out of touch with the realities of climate change, the impact of which has been largely ignored by the industry. The article originally appeared at TomDispatch.com. Excepts are included here, but the full article is worth reading.

“Many reasons have been provided for the dramatic plunge in the price of oil to about $60 per barrel (nearly half of what it was a year ago): slowing demand due to global economic stagnation; overproduction at shale fields in the United States; the decision of the Saudis and other Middle Eastern OPEC producers to maintain output at current levels (presumably to punish higher-cost producers in the US and elsewhere); and the increased value of the dollar relative to other currencies. There is, however, one reason that’s not being discussed, and yet it could be the most important of all: the complete collapse of Big Oil’s production-maximizing business model.

The dramatic decline in oil prices had changed the viability of the production-maximizing business model, which was first adopted in 2005. “With demand stagnant and excess production the story of the moment, the very strategy that had generated record-breaking profits has suddenly become hopelessly dysfunctional.”

“[In 2005] Only one top executive questioned this drill-baby-drill approach: John Browne, then the chief executive of BP. Claiming that the science of climate change had become too convincing to deny, Browne argued that Big Energy would have to look ‘beyond petroleum’ and put major resources into alternative sources of supply. ‘Climate change is an issue which raises fundamental questions about the relationship between companies and society as a whole, and between one generation and the next,’ he had declared as early as 2002. For BP, he indicated, that meant developing wind power, solar power and biofuels. Browne, however, was eased out of BP in 2007 just as Big Oil’s output-maximizing business model was taking off, and his successor, Tony Hayward, quickly abandoned the ‘beyond petroleum’ approach.

“The production-maximizing strategy crafted by O’Reilly and his fellow CEOs rested on three fundamental assumptions: that, year after year, demand would keep climbing; that such rising demand would ensure prices high enough to justify costly investments in unconventional oil; and that concern over climate change would in no significant way alter the equation. Today, none of these assumptions holds true.

“Demand will continue to rise—that’s undeniable, given expected growth in world income and population—but not at the pace to which Big Oil has become accustomed. . . Big Oil’s multibillion-dollar investments in tough energy were predicated on all that added demand materializing, thereby generating the kind of high prices needed to offset the increasing costs of extraction.

“. . . the International Energy Agency (IEA), an arm of the Organization for Economic Cooperation and Development (the club of rich industrialized nations), believes that oil prices will only average about $55 per barrel in 2015 and not reach $73 again until 2020. Such figures fall far below what would be needed to justify continued investment in and exploitation of tough-oil options like Canadian tar sands, Arctic oil and many shale projects.

“There is, as well, another factor that threatens the wellbeing of Big Oil: climate change can no longer be discounted in any future energy business model. Whether Big Oil is ready to admit it or not, alternative energy is now on the planetary agenda and there’s no turning back from that. ‘It is a different world than it was the last time we saw an oil-price plunge,’ said IEA executive director Maria van der Hoeven in February, referring to the 2008 economic meltdown. ‘Emerging economies, notably China, have entered less oil-intensive stages of development . . . On top of this, concerns about climate change are influencing energy policies [and so] renewables are increasingly pervasive.’”

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