The future of oil

Electric Cars, Plastic bans, a crash in demand, and a fervent concern for the environment, are chipping away at the petrochemical industry rapidly. Dr. Ramesh Ramachandran, former CEO of Equate, shares his unique perspective on Oil’s current standing and what is soon to come.

The other day, while picking up my daughter from the salon I stumbled upon a fascinating sight. A woman, perceivably in her golden years, was scanning her young daughter’s face. Perplexed, the woman asked “Is that make up under your eyes?”, “It’s so bright?”… the girl, unabashedly responded, “Yeah, it’s called youth Mom and you can’t buy it!”    

Looking at the oil industry today, I am reminded of that woman.

Clearly, obsolescence is staring at it, however, I believe those who foretell its early demise are overreaching. The same applies to plastics. Often derided as an industry in decline, reality paints a very different picture. Sure, they may face severe headwinds, but the devil thrives in the details.

To paraphrase famed strategist and theorist, Kenichi Ohmae, "When demand is on a sharp decline, prices will drop.  Increasing supply is not a way to solve the problem and strategy has to accept that reality."

Yes, demand for oil is coming down.

About 25 percent of that demand is based on transportation, with EV (Electric Vehicle) adoption increasing at a rapid pace. In fact, as a new owner of a Tesla, I can tell you, I do not see myself ever buying a gasoline-based vehicle again and that shared sentiment is growing.

However, while I do not see demand for transportation increasing, it will assuredly never drop to zero. That is because the pace of change cannot be as fast as some doomsayers believe. You have to consider the severe social implications as well.

One cannot simply eliminate all gasoline vehicles. The entire eco-system of production, distribution, ports, ships and gas stations involve jobs and taxes, that will and must, influence policy makers. Just look at the United States – EV plans for infrastructure have already riled up the politically connected ethanol industry. Any move to reduce gasoline vehicle demand will invariably run up against these social pressures, regardless of the country.

My optimistic view is that growth of oil demand for transportation will probably drop to zero and trend negative in 5 years, but complete transformation is easily 15 to 20 years away.

But how do you respond to this downturn? I am afraid the answer is not so pretty.

Countries and industries will have to diversify at a highly accelerated pace. Imagine you are a butcher in a vegetarian village, the strategy of increasing demand will not save you. You have to grow vegetables.

Politicians and consultants grossly underestimate the level of difficulty involved in making skills transferable. For example, the skills required in oil extraction and refining are not easily applicable in other industries.

However, you cannot stick your head in the sand and hope things will blow over. Start now and convert. I believe, wherever possible, policy makers must force EV manufacturers to source from the industries they are displacing. A simple approach might be to put all EV charging stations at gas stations that are willing to shut down and clean up their site. We can also encourage refineries to build batteries. While these strategies can help industrial clients, sovereign nations have a much bigger challenge. They will have to transform their entire source of income.

Luckily, we have historical precedent, through a country that has proven otherwise… Singapore.

Singapore is not an oil rich country, but it provides safety, the possibility to obtain permanent residency and an environment for innovators to thrive in. New industries will find a way – but time is not your friend. Dubai is another great example that has followed this model. The ability to grow GDP is a policy and political imperative for each country.

Those that are not blessed with natural resources have several options. The best option is to let the people find it attractive to live there and build new businesses. This eco system can be built when you offer people an environment that is the best place to live – security, happiness, good health, a low tax frame, and a very reliable fair judicial system all contribute to that. Once that is in place, people will want to immigrate and work there. The US has perfected this model. If we open all the embassies in the world today and offer free passports, just imagine where the longest lines will be. Therein lies your answer to building the best eco system to grow GDP, accrue talent and reduce brain drain. 

The next wave of “new builds” that use oil as feedstock are going to probably be based on solar generated hydrogen. This approach can be followed in any country. So Middle East producers, unfortunately, do not have a competitive advantage in green hydrogen. The end use markets will drive this use but source locally. So, for the Middle East producers, the obvious solutions lies in changing the composition of GDP.

As we look into the future, let us not miss the forest for the trees. A sudden switch from fossil fuels can devastate economies in several countries – the Middle East, Canada and notably in the United States. Texas, Dakotas, Wisconsin, Iowa - are all states with powerful lobbies and constituencies in Washington. So, although I expect the pace of change to be slow – the only issue is ‘when’, and not ‘will they’. 

Lastly, we need to address the pollution that stems from the byproducts that use oil as feedstock. Plastic pollution is a clear and present danger to the world. Solving it is imperative. Thankfully, the technical solution has been found but these solutions cost money to implement. 

The debate on who should pay for it is raging - Should it fall to the producers? the consumers? or the government?

However, the real challenge lies in the collection of waste and the conversion of it into usable products. If we want to live in a cleaner world, we must find a way to pay for this solution. I expect a combination of taxes, levies, fines and industrial engagement will eventually be able to solve this.

So, as we look at the future, the short term will look less painful than some of the current predictions – but the long term is not pretty for oil.  While a 5- or 10-year bond is probably a safe bet, a 30 year bond on income based on oil is definitely high risk.