Fossil Fuel Industry Dilemmas – Part 2: When Will We Hit a Time When Pumping Oil Will No Longer Be Worthwhile?

April 26, 2018 – There will come a time when exploring for more oil and gas, and continuing to extract these fuels, will no longer make economic sense. What’s the magic date? If you talk to oil magnates it’s far in the future. Maybe the end of the century. Talk to climate scientists and environmentalists, and that date is far sooner. But the truth is, economics will dictate the date. And that economics will be dominated by a new factor, pricing carbon. Or will it?

If carbon pollution were priced at $250 per ton today, fossil fuel companies would be looking at the energy mix in their business model and adjusting it to include a significant amount of alternative energy products. A carbon tax of that size applied at the pump would negatively impact diesel and gasoline sales. Add to this progressive climate policy bans on vehicles using these fossil fuels, and the fossil fuel industry would largely have to reinvent itself. And the last straw could be the removal of the billions spent by governments to subsidize the industry, and fossil fuel companies, in the interest of their shareholders and business viability, would move away from exploring for and pumping oil.

But none of that is happening.

In Canada where I live, our federal government is considering a new subsidy to underwrite the expansion of the existing pipeline infrastructure, in particular, the Trans Mountain pipeline, aimed at giving oil sands producers, currently landlocked with only the United States as a customer, the opportunity to ship their heavy oil product overseas to Asian markets. At the same time, the federal government is implementing a $10 per ton carbon pollution price that will escalate annually to $50 by 2022. At $50 per ton for carbon, a number that ExxonMobil has used in its private accounting for risk now for more than a couple of years, there is little in the way of a disincentive to stop the company from continuing to make further investments in exploration and extraction.

In Europe, nations are passing legislation to end the use of fossil fuel burning vehicles on roads. None of the countries are banning diesel and gasoline or asking vehicle owners to stop using cars with internal combustion engines. Policy restricting new builds of fossil fuel-burning vehicles refer to dates beginning in the mid-2020s to 2040.

In the United States, the country is conflicted by a federal government attempting to deconstruct progressive energy policy in light of the evidence of climate change, while a number of states and cities forge ahead with a smattering of programs aimed at damping down fossil fuel use.

In China, a centralist government continues to use state enterprises to drive aggressive policies aimed at tipping the country away from its heavy fossil fuel dependence. But that hasn’t stopped the country from continuing to feed energy demand by building more fossil fuel intensive power plants.

The truth is there appears to be no national jurisdiction or any future date horizon for the end to the pumping of oil and gas.

Fossil fuel companies can continue to merrily drill and pump away. Fracking technology has created significant new land-based fossil fuel reserves. New techniques for offshore exploration have added to the global oil and gas reserve. And in the absence of environmental stewardship, areas of the planet once considered too fragile for fossil fuel exploration (the Arctic in particular) is on the radar screens of Russia and the United States as the next new oil and gas frontier. One can conclude that there is no end to oil and gas in terms of supply well into the next century and beyond.

Is Demand the Ultimate Inhibitor?

Demand may be the only threat to fossil fuel companies in the foreseeable future. A public fearful of rising carbon emissions may act in its own best interests by using less oil and gas. Governments may be under siege in time as public awareness leads to wholesale changes in terms of who gets elected to govern.

No doubt the energy companies will continue to pay billions to lobby existing legislators to disinhibit demand-based policies that can impact their business models.

Even heavily taxing product at the consumption level through a carbon levy is something for which current governments collectively have demonstrated little appetite. And even when a levy on carbon is applied it is done incrementally so there is no sticker shock, no moment in time when consumers and the industry are suddenly confronted by negative-impacting economics. Governments collectively would rather stay in power than create unpalatable, yet ultimately necessary policy to drive down demand.

Will Environmental Shockers be the Ultimate Inhibitor?

Not likely is the answer to that question. That’s because climate change works slowly and insidiously. Even if extreme weather event frequency increases in a warmer, more turbulent atmosphere, the changes will be marginal, a little each decade, a little each year. Humans will adjust to this and governments will count on this even as they end up spending billions annually to clean up climate change messes. As long as there is no taxpayer revolt and governments have access to debt financing, the status quo will remain.

We’ll continue to see more renewable energy. We’ll see more innovation in transportation. But mass adoption of EVs isn’t going to happen. Diesel and gasoline cars will still be on the world’s roads for many decades to come. For the fossil fuel companies that gives them lots of time to keep finding and pumping oil and gas for decades to come.