It is oil over. Or is it?

Energy & Emissions

Mar 5

An interview about the future of fossil fuels with Daniel Yergin, combined with perspectives from Mr. Sustainability

At the start of 2021, an interview with Daniel Yergin appeared in the Financieel Dagblad. Mister Yergin is the author of the well-known book the Prize, for which he won the prestigious Pulitzer prize, and is considered an authority in the field of energy. In this interview he claims that ‘the Oil Age will not be over for a long time’. About three weeks later, both Shell and BP announced they have reached peak oil, which means that their oil production has peaked and will fall every year. Curious.

It seemed prudent to translate this interview and provide some perspectives. My intention is not to argue or discuss one of the greatest thinkers in the energy sectors of the 20th century. We understand that oil - not just olive oil but all kinds of hydrocarbons - will be needed for as long as humanity will exist. At the same time, we see that oil majors are reaching peak oil and writing off billions of dollars of assets. Why? Due to forecasts by accountants that global oil demand may never recover to levels reached before the pandemic, amid permanent changes to how people work and travel and growing concerns about the climate crisis. Despite these clear signs on the wall, why are people like still claiming the oil age will not be over for a long time? Why do some still say fossil fuels are a necessity, while all products of crude oil can be made from renewable biomass or synthetically?

Let’s take a deep dive and try to understand why this is such a delicate issue.

Daniel Yergin

Daniel Yergin (73) is considered an authority in the field of energy. His standard work The Prize (1), about the history of the oil industry, won the prestigious Pulitzer Prize. His latest book The New Map comes just when the industry is turned upside down. But Yergin warns: the world is not getting rid of oil that quickly. He has been advising the United States government on energy for decades and founded a successful company (2), but in his act Daniel Yergin still resembles a somewhat absent-minded professor. As is so often the case in the corona era, the interview takes place via a video connection. His desk is full of papers and books, and he takes the time to introduce his cat (3), who jumps in front of the camera halfway through the conversation. Yergin phrases thoughtfully and carefully, but when it comes to the raw material he has studied for most of his working life, he is certain.

Mr. Sustainability’s view

(1) I read the book, it is a great work. It provides a clear geo-political overview of energy in the 20st century.

(2) The most amazing track record in the past however does not guarantee a good prediction of the future. The past can actually work to obstruct someone’s view on of the present or future. A well-known example is Kodak who could not cope with the rise of digital photography, which they helped to create. A similar story is unfolding with ExxonMobil, who invented the lithium-iron battery and is still focused heavily on fossil fuels. It goes to show that it not always helps to have a great deal of experience.

(3) Seems like a lovely cat.

The oil price collapsed this year and has still not returned to its previous level. Even oil company BP is now coming up with scenarios in which demand will never return to the old level. Is this the end of the oil age?

Daniel Yergin

'There are a lot of people who don't want to hear this, but it is really too early to say that (1). The demand for oil in China is now higher than a year ago. Everything depends on the economic recovery. If the world economy recovers quickly, the demand for oil will also return. One day the growth in demand for oil will come to an end (2). But I still think, based on everything we know now, the most likely scenario is that that moment won't be until about ten years from now. Around 2030. And that does not mean that demand suddenly collapses. It is more of a gradual decline from a high level (3) ’.

Mr. Sustainability’s view

(1) Both Shell and BP announced they have reached peak oil, which means the only way their production will go is down. Shell made a 22 billion dollar loss in 2020, though this was mostly due to write-offs. It is the end, of that I am sure, however the end may take ten years or more as entire industries - and mostly the money behind it - need to transform.

(2) That ‘one day growth in demand for oil will come to an end’ apparently already happened for Shell and BP at the time of this interview. National oil companies might however be able to quickly fill in the gaps for the majors.

(3) A gradual decline is preferred, because the alternative is a carbon crunch scenario.

Aren't you overly optimistic about oil demand? More and more electric cars are being sold, the stock of car manufacturer Tesla has exploded.

Daniel Yergin

'People always forget everything that is made from crude oil, except gasoline. Plastics, for example (1). The body of a Tesla is made of plastic. Protective clothing against corona contamination is made of plastic. Wind turbines are partly made of plastic. The sale of electric cars is indeed going up, but all petrol cars have not been replaced just like that. That will take decades. Oil will remain an important part of the energy mix for a long time to come, despite the emergence of sustainably generated energy '.

Mr. Sustainability’s view

(1) I used to believe this was a valid argument in favor of fossil fuels as well, until a took a look at the numbers. Only about 10% of all crude oil is used as feedstock in industry, which could all be replace by renewable biomass. Also, who said we need crude oil for plastics? Chemical companies such as DSM are switching to bio-based sources for all their products. Last year they provided Heerema with circular ‘dyneema slings’ made from plants. Everything we make can be made from biomass or synthetic sources.

Check this video to see how every building block in the chemical industry can be made from renewable and circular ‘waste’.

A man working at the Neste renewable diesel plant in Rotterdam. The production of renewable products at the Rotterdam refinery in the Netherlands started in 2011. The production capacity of the refinery is over 1 million ton per year. No crude oil needed here!

And what about politics? The world is facing a climate crisis. Politicians are pushing for a green recovery of the economy. Won't government intervention dramatically speed up the transition to clean energy?

Daniel Yergin

'Politics certainly has a lot of influence on that, especially in Europe, but there are limits to that too. An important question is who will pay for the energy transition (1). Government resources are also finite. Government debt has skyrocketed to combat the corona crisis, and it's not even over yet. Choices will have to be made and that goes hand in hand with political struggle. A telling example was the rise of the yellow vests in France in 2018 (2). This movement started after an increase in fuel tax ’.

Mr. Sustainability’s view

(1) I have not yet figured out how much the transition to a fossil fuel economy in the 1950s and 1960s cost, but that might be because we have simply forgotten and see it as investment rather than cost. I do not like the narrative of ‘how much the energy transition cost’. My narrative is it that the energy transition a wise and cheap investment which will generate millions of jobs and a more stable political climate. In addition it is one of the most exciting challenges an engineer can think of.

(2) I agree that those who already struggle, like the yellow vests, need to reap more of the benefits of the energy transition. That is definitely a task for politicians.

Investors now seem to be done with oil. Oil companies' stock prices are still very low. If oil is still needed and there is no investment in new fields, will we have a shortage of oil and huge price increases in a few years?

Daniel Yergin

'You can never rule that out, history has taught us to be careful with predictions about the oil price (1). But I consider it unlikely that oil prices will remain very high for long. On the supply side, a lot has changed with the rise of US shale oil. High prices will quickly result in extra supply, which will level off that price increase '.

Mr. Sustainability’s view

(1) Absolutely true; price predictions for oil are pretty much always wrong. I do agree that it is more likely prices do not remain high for long. Then again, especially in these times of negative oil prices, corona and geo-political instability, all bets are off.

Hasn't something changed in the countries where the oil industry is in the hands of the government? Consider, for example, Saudi Arabia. That country is now limiting production along with the other oil states to keep prices up, but will they continue to do so when demand falls?

Daniel Yergin

'The chorus in the oil-exporting countries used to be: we have to save the oil for our grandchildren. Now those grandchildren are in power and they want to sell as much oil as possible while they still can. Until a few years ago, the thought was that demand would always keep growing (1), but now everyone realizes that demand will eventually spike (2). Prices could skyrocket for a while due to a geopolitical conflict. That is not unlikely (3). Before I became fascinated with energy, I studied the history of international politics and the conflicts between countries. The language that some political leaders now use is reminiscent of the period before the First World War (4). That is certainly cause for concern. Look at the clash between China and the US. Democrat Joe Biden comes to power in the United States, but Republicans and Democrats alike see China as a strategic rival at best. I recently heard a senator say that the US has not had an equal competitor since World War II, and that competitor is now China (5). We have lived in a globalized world until now. When it comes to supply lines, efficiency and the economy mattered, not geopolitics. If that changes, it will also have consequences for the supply of raw materials. Other countries don't want to get stuck between China and the US '.

Mr. Sustainability’s view

(1) Weird thought in hindsight as nothing grows forever, but ok.

(2) Like for Shell and BP.

(3) Sadly enough that is entirely possible.

(4) I agree; the South China Sea is becoming increasingly like ‘the Balkans’ before the first World War;' a powder keg ready to go off and take everyone with them.

(5) It is unfortunate ‘those people in power’ are so fixated with their number 1 status and think in terms of zero-sum games. There are still plenty of ways to be perfectly happy as the number 2 (or the number 17th, speaking as a Dutchmen).

Will this also have consequences for the supply of raw materials for the energy transition?

Daniel Yergin

'Sure. If we want to replace the existing electricity generation capacity entirely with wind and solar energy, the world's generating capacity must be doubled. These are a lot of metals and minerals that have to be extracted from the ground, with a lot of mining and a lot of movements of those raw materials from one continent to another. That is another argument that may cause the energy transition to proceed slower than many people hope (1). On the other hand, I believe that technology can provide many solutions. My favorite example is the lithium-ion battery, which is now used in electric cars. It was invented in the 1970s in a laboratory of the oil company ExxonMobil. Technology can solve a lot, but it takes time '.

Mr. Sustainability’s view

(1) Everyone underestimates the speed of the energy transition, including the IEA as you can see below.

You have been driving a petrol car, an old Volvo, for years. Do you still have it?

Daniel Yergin

'Indeed. Volvos are very popular in my Washington neighborhood. But I recently talked about it with my wife: maybe it is time for an electric car '.

Mr. Sustainability’s view

Electric Volvos are coming your way my friend.

> Personal Note

I bet Mister Yergin is a great guy. I bet I could spend hours philosophizing with him. I also bet his knowledge of the past might obscure his view about the extraordinary developments in the renewable industry. His experiences make him biased, just as my experiences (and desires) make me biased. The experiences I have gained in the offshore industry and Heerema over the last few years, tell me that change is coming faster than some of us realize.

Since I started as sustainability advisor in 2017, Heerema went from a marine contractor that focused on oil and gas to become the first carbon neutral marine contractor in history. That happened in 2020. I was part of making the bold plan to fully prevent, reduce or compensate all carbon emissions towards 2025. This could not have been possible without the daring vision of Heerema leadership, which I am thankful for.

This amazing story of Heerema not only shows how fast things can go. It also shows to me, that if it is possible to transition the largest crane vessels in the world from fossil to being carbon neutral and eventually zero emissions, anything is possible.