GTBT - The New Geopolitics of Oil.

: Jakub Knopp; Created: 09 September 2024

The end of oil, or just the beginning?

“The best business in the world is a well-run oil company. The second best business in the world is a badly run oil company” - supposedly said John D. Rockefeller. Founder of Standard Oil Company, the first hegemon of the oil industry.

Throughout human history, energy has always been an integral factor in the growth of quality of life and economic development. Changes in civilization have largely been driven by the discovery of new, more efficient energy sources. In the era of fossil fuels and industrial revolutions, access to raw materials determined the outcome of wars, while also determining the cycle of rise and fall of superpowers, as Paul Kennedy describes well. Central to this story is oil, which helped build modern civilization throughout the turbulent 20th century.

Nevertheless, after 150 years of spectacular success, according to many, oil is entering its decline. What was a great innovation for Rockefeller and brought him wealth, is today considered a fuel of the past - damaging the global climate and powering autocratic regimes.

Like coal in the past, oil must reckon with the coming energy transition motivated by climate policy and the search for alternatives to fossil fuels. Demographic growth along with improved quality of life and industrialization throughout history have always been associated with increased energy consumption. Meanwhile, for decades, the global economy has become accustomed to unlimited access to relatively cheap, readily available and cost-effective hydrocarbons, which have become a symbol of prosperity and civilizational development. Pulitzer Prize winner and author of the book "The Prize" Daniel Yergin argues that the impact of black gold on the growth of humanity's prosperity has contributed to the phenomenon of the "hydrocarbon man," which reflects the dependence on the resource.

But can we blame ourselves? The world is still full of places with energy deficits, and cheap energy is an essential part of development. High energy density, ease of transportation, developments in extraction technology, diversification of suppliers, significant reserves, and existing infrastructure continue to argue for the continued use of oil in the economy, from transportation to chemicals to industry. Today, the global oil market is worth $2 trillion per year, more than the next 10 commodities combined. Oil accounts for 30% of the world's energy mix, with fossil fuels accounting for nearly 80% of energy consumption.

A relic of the past or a stable foundation for the future? What is the truth about oil?

Oil as a new Gold

Oil achieved remarkable success in the past 150 years. For decades it has provided the right balance between security of supply, cost effectiveness and, especially compared to coal, environmental impact. Replacing such a competitive energy source is extremely difficult. But oil has now a rival, or a group of rivals, under the common banner of green energy from the sun, wind or water. These sources do not guarantee such good energy conversion, but climate awareness, along with technological development, is improving the situation of renewable energy sources, practically every year.

While rejecting such absurd ideas as "degrowth", i.e. halting development and reducing energy consumption, it should be noted that ambitious climate policies and the growing competitiveness of renewables are creating a new dynamic that is changing the structure of global energy demand to the detriment of fossil fuels. In anticipation of the next energy transition in human history, the importance of oil, which fueled post-war prosperity and the era of hyper-globalization, is therefore evolving in the eyes of consumers, producers and policymakers.

The modern history of oil began in the second half of the 19th century, when the Western world, in the spirit of positivism, experienced unprecedented economic development, fueled by urbanization and the growth of industrial production. From the beginning, this revolution was driven by the invention of the steam engine and the use of fossil fuels. Initially, it was coal that became the symbol of the industrial revolution. Over time, however, it was replaced by oil, which, in the form of kerosene, made it possible, among other things, to light growing cities more efficiently and cheaply.

The oil fever started mainly in the United States. One of the “oil pioneers” was Pennsylvania resident Edwin Drake, walking symbol of the Pennsylvania oil revolution. It wasn't long before the 1880s. Pennsylvania produced nearly 80% of the world's oil. Later, refineries and oil wells began to mushroom across the country. This was also the time of Rockefeller, who by the end of the century had become the richest man in the U.S. and perhaps the world. However, his monopoly was broken in 1911 through the efforts of Theodore Roosevelt, but its remnants in the form of ExxonMobil and Chevron still play a leading role in the global oil market.

The Americans' success was undeniable and led Europeans to explore and exploit deposits in their own colonies. In 1907 the British formed the Anglo-Persian Oil Company (APOC) after obtaining a license to explore for oil in Iran. The oil would prove essential to consolidate the dominance of the Royal Navy, led by Admiral Jackie Fisher. In the year of the outbreak of the First World War, London pushed through the nationalization of the company, which only confirmed the strategic nature of the oil. One of the main proponents of this move was Winston Churchill. The Lord of the Admiralty recognized that naval supremacy, on which the power of the British Empire depended, ultimately depended on access to oil. Lord Curzon, on the other hand, even declared that the Entente had ridden to victory on a wave of oil.

Even more than on the sea, it was evident in the land domain. In 1914 the British Army began the war with fewer than 900 internal combustion vehicles and ended it with nearly 80,000. Another 50,000 were delivered to the U.S. Army in April 1917 alone. The advent of the internal combustion engine and the enormous potential of civilian transportation gave impetus to the next stage of oil fever and the search for new deposits of the resource. Yergin believes that the invention of the internal combustion engine marked a new stage in human civilization in which oil would play a primary role.

After World War I, the 1930s were marked by a series of discoveries in the Middle East and the granting of more concessions to Western companies. In 1938, oil was discovered in the Al-Ahsa region of Saudi Arabia, which was to become the most important producer of black gold in the Middle East. The first half of the 20th century was thus marked by the growing strategic importance of oil in the eyes of the world powers. During the world wars, the black gold served as the driving force behind maneuver warfare, a revolution in military aviation, and naval battles on an unprecedented scale. Access to the raw material was essential to gaining dominance over maritime communication routes and to mechanizing the largest armies in human history. Among many other factors, the lack of raw materials was one of the main reasons for the defeat of the Third Reich and Japan in the war against the Allies. On the other side of the Atlantic, the U.S. supplied 6 out of every 7 barrels of oil used to defeat Germany. The war of attrition, from North Africa to the Eastern Front to the Pacific War, would be decided by access to the raw materials that fueled the Allied war machine.

The story of post-war economic miracles is also very much the story of fossil fuels, particularly oil, which has become a symbol of prosperity and success for Western democracies. Between 1960 and 1972 alone, demand for black gold rose from 19 to 44 million barrels per day (bpd). In turn, from 1948 to the early 1970s, oil consumption in the US, Europe and Japan increased 3, 14 and 137 times, respectively! During the same period, the number of cars on the road globally increased from 19 million to 161 million.

The transformation from coal to oil took place in just two decades. While back in 1955 coal accounted for 75% of Western Europe's global energy consumption, by 1972 the share was only 22%. At the same time, at that time oil accounted for 60% of the global mix. Demand for oil was so great that it soon became apparent that domestic production, especially in the United States, could not meet the needs of the post-war economic boom.

In 1973, just before the first oil shock, more than ⅓ of the oil was imported from abroad, largely from the Middle East. Concerns about the stability of the region were also exacerbated by the Suez Crisis of 1956. The West, recognizing the instability, the ever-increasing importance of oil and the increasingly audible talk of unequal profit sharing, bet on consolidation. This is how an agreement was reached between the major Western oil companies. "The 7 Sisters" - this is what the agreement reached between the largest Western oil magnates was later called. The sisters indeed shook the global oil market. 5 American and 2 European companies, thanks to concessions and the support of Western politicians, skillfully manipulated oil production in order to maximize profits, often at the expense of the countries where the production took place. However, global trends were already playing against them.

Beginning in the 1950s, with a rising tide of nationalism, oil-producing countries began to demand greater flexibility in managing their resources. That's why, in 1960, Venezuela, Saudi Arabia, Kuwait, Iraq and Iran formed the OPEC cartel to coordinate their activities and increase their bargaining power. This event laid the foundation for the era of National Oil Companies (NOCs), which would eventually dominate the global market. The processes of decolonization, combined with growing nationalism, contributed to fierce conflicts over the control of natural resources, especially oil, which became a symbol of sovereignty for many countries.

As a result, the balance of power began to shift dramatically against the seven sisters in the 1970s. One of the first signs was the imposition of an oil export embargo by Arab countries as a result of the 1967 Six Day War, and one of the first countries to make new demands on Western companies was Muammar Gaddafi's Libya. Eventually, in 1972, an agreement was signed in Tehran to change the division of ownership, with countries taking majority stakes in domestic oil production. Unlike the OPEC cartel, Western companies were unable to coordinate and lacked the support of their own governments. Significantly, by 1980 the share of reserves under private sector control had fallen from 85% to only 12%, and the imposition of the oil embargo in October 1973, which began the first oil shock of the decade, caused prices to rise 400% in just six months.

A key factor in the first oil crisis was the supply deficit in the West, which partly explains the fact that by the early 1970s the available oil fields were almost 99% depleted. This situation, in contrast to the failure of the embargo, enabled the Arab countries to exert pressure on Israel's allies during the Six Day War. It should be remembered that from 1949 until the outbreak of the oil crisis, world demand for oil increased more than fivefold.

The oil shock led the Jimmy Carter administration to make energy security one of its top priorities, and one of the measures taken was the announcement of the Carter Doctrine on freedom of passage through the Strait of Hormuz and an increased U.S. role in the region. This was largely in response to another oil shock that erupted in 1979 in the wake of the Iranian Revolution. In this case, as in later years, it was OPEC that stabilized the market by increasing production. The energy crises of the 1970s vividly demonstrated what a powerful geopolitical coercive tool oil could be.

The West had to learn the right lessons, and it did. To prevent a repeat, Western countries, led by the United States, invested in creating strategic oil reserves and developing new extraction technologies. Some countries, such as France, decided to develop nuclear power in order to achieve energy independence. It was the oil shocks that defined global energy policy for decades to come. Geopolitical uncertainty motivated countries to secure their supplies and increasingly drove technological development.

The 1980s, in contrast to the previous decade, was a period of overproduction and falling prices that largely toppled the communist regime in Moscow and triggered debt crises in the global South. The first Gulf War and U.S. Operation Desert Storm were also driven by the desire to secure the region and stabilize the oil market, as well as to strengthen the U.S. military position in the region. It can be said that the post-Cold War interventions in the Middle East were, to some extent, a continuation of the Eisenhower and Carter doctrines.

Then, at the turn of the 20th century, came the era of "hyper-globalization," which triggered a boom in the oil market, with crude prices rising from $35 to $147 per barrel in just eight years, peaking on the eve of the financial crisis. The post-2008 price collapse prompted intervention by the OPEC cartel, which, as in the past, stabilized the market. The situation became even more tense when oil revenues proved necessary to bring the situation under control after the Arab Spring and the wave of protests in 2011. It can be said that the beginning of the 21st century reflects well the cyclicality that has always been inherent in the oil market.

The inherent part of the market was also United States’ continued importance. The Americans dominated oil production at the beginning of the century, but over time their position as the leading producer was trumped by Saudi Arabia and the USSR, and then by Russia. Meanwhile, in the second decade of the 21st century, the U.S. re-emerged as the largest producer of fossil fuels, reclaiming the palm of energy primacy. The key to this success turned out to be the shale revolution, which, according to Larry Summers, was one of the most important spurts of growth after the banking crash. And Daniel Yergin, in his latest book, New Maps, calls it the most important energy innovation of the 21st century. In addition to energy independence, the U.S. shale rush has revolutionized the global oil market and weakened the OPEC cartel.

The old maxim about oil flowing from east to west was slowly becoming history. As recently as 2005 the U.S. was importing as much as 12 million bpd, accounting for half of the country's budget deficit. 10 years later, after a wave of investment in the Permian Basin fields, production jumped nearly 100% to 15 million bpd. Across Texas, production even tripled in the five years to 2014. However, despite its status as an energy superpower, the lack of spare production capacity makes it difficult to actively shape and stabilize the market in case of sudden crises. The aforementioned Strategic Petroleum Reserve is helpful, but it is the collective policy of the OPEC cartel that has the ultimate power to influence the world oil price. All the more so because, in response to the American revolution and the sudden drop in crude oil prices in 2016, OPEC+ was formed, i.e. an OPEC cartel supplemented by the second largest oil producer after the United States - the Russian Federation.

However, OPEC+ is by no means a solid creation. The outbreak of the Covid pandemic reduced the demand for oil by up to 30%. This led to a situation in which the Saudis and the Russians were at each other's throats in the spring of 2020. As a result of the price war that ensued, oil prices even went into negative territory. The ensuing months of crisis demonstrated the fragility of OPEC+ and the problem of reconciling conflicting interests, which to this day makes it difficult to define a common strategy.

New challengers on the block

But even Covid was not as devastating to the energy market as what happened two years later. The year 2022 and the outbreak of war in Ukraine caused the first "global energy crisis," according to the International Energy Agency (IEA). The following months brought a surge in oil prices, providing exporting countries with historic revenues from the sale of black gold.

The global state of the market was so important to the guarantor of the system - the USA, in order to protect it, was willing to allow the player with whom they were waging a proxy war - the Russian Federation - to keep its share in the profits. Washington and the G7 put an ineffective price cap on Russian oil at a high of $60, and what's more, it has constantly opposed Ukrainian missile attacks on Russian refineries. 2022 was also a record year for OPEC+ countries, which sold $888 billion worth of oil. The cartel controls more than 40% of the market and 80% of the oil reserves, while having some of the lowest production costs. This share can only grow. Projections show that by 2050, up to 60% of the oil in a shrinking market could be supplied by cartel members alone.

If it survives until then... The stability of the organization is not guaranteed and could be shaken by the significant differences in production costs between OPEC members. For example, while Saudi Arabia spends only $3-4 to produce 1 barrel of oil, Venezuela pays up to 5 times as much. Outside OPEC, the largest reserves are in Europe’s North Sea, Canada's tar sands, the Gulf of Mexico, and Brazil's offshore deposits. However, their future exploitation is in question and will depend on the pace of the green transition.

Indeed, the renewable energy revolution poses a formidable challenge to each of the major oil producers, and an almost existential challenge to those whose economies are entirely based on hydrocarbons. How do the major players in the oil game see their future?

Let's start with the country that probably comes to mind first when you think of oil. Saudi Arabia is almost synonymous with oil. Since the 1970s, the Saudis have generated an estimated $10 trillion-plus in revenues from oil sales, laying the foundation for their regional power and the wealth of what was once an extremely poor society. Today, rather than burying its head in the sand, Riyadh is looking for solutions to the uncertain future of its "golden goose".

Overarching the kingdom's strategy is Saudi Aramco, which produces up to 11 million bpd, or 10% of global demand. What's more, until recently, the company planned to increase its production capacity to 13 million bpd by the end of the decade. In the historic year of 2022 Saudi Aramco reported profits of $161 billion. The conglomerate's strength comes in part from cost-cutting. The Saudis' goal for the coming decades is to produce the cleanest and cheapest barrel of oil possible in the face of weakening demand. Today, production costs are estimated to be as low as $3 per barrel, or just 10% of the cost of North Sea operations.

But with big margins come big plans. In order to sustain the ambitious plans to diversify the Saudi economy and cover the rush of public investment, with projects like Neom at the forefront, the oil price needed to balance the budget is set closer to $80. After 2022, this ceiling was generally reached, but before that, oil cost around $40 for many years. Overall, the financial health and profitability of the oil sector has a critical impact on the fiscal stability and legitimacy of the monarchy in the eyes of the public. Over the years, Riyadh has provided tens of billions of dollars in fuel subsidies to its citizens. It should come as no surprise, then, that despite its average size, Saudi Arabia is the world's 11th largest energy consumer.

To continue the poultry analogy, the Saudis also try not to put all their eggs in one basket. Therefore, the new strategy is to diversify and use renewables to meet domestic demand, while reorienting the oil sector towards exports to capture the shrinking market. In addition, Saudi Aramco wants to focus on decarbonizing oil production by developing CO2 capture and storage technologies and investing in green hydrogen. Experts point out that Riyadh is well positioned to become a leader in the new era of electrification, thanks to favorable conditions for solar power, investment capital, available technology, and favorable geology. The ambitious goal is to generate 50% of its electricity from renewables by 2030, a more than 50-fold increase from today. The Saudis are aiming to join other powers such as the US and China as the top three countries in terms of new renewable capacity. In total, the Saudi Green Initiative is expected to allocate $200 billion for this purpose by 2030. Another way to decarbonize production is through the planned planting of 10 billion trees. In addition, unlike other exporting countries in Africa or Latin America, Riyadh has hedged against a commodity bust by creating a $620 billion public investment fund to help meet the monarchy's ambitions outlined in its Saudi Vision 2030 plan.

Looking more broadly at the Middle East region, relatively successful diversification has been carried out by the UAE, where the share of oil and gas sales in GDP over the past 20 years dropped by half. The Emirates, like Saudi Arabia, also has an $800 billion sovereign wealth fund, as well as a separate company, Mubadala, which manages $300 billion in green investment assets. Other Gulf countries aware of the transition challenges, such as Qatar and Oman, have focused on CO2 sequestration - or carbon capture - as well as hydrogen development. Oman is also a country worth watching, as it looks to leverage existing transportation infrastructure, ports and storage facilities used in fossil fuel production to gain market advantage.

This, however, does not mean that the entire region is doing well. The share of hydrocarbons in the structure of each country's economy continues to be alarmingly high, and diversification is going slowly. Moreover, solar energy, which seems to be the main hope for the region still accounts for less than 3% of energy production, and fossil fuels remain a cheap and quick source for legitimizing autocratic regimes, accounting for 90% of the Middle East's electricity generation.

In addition to the cost of production, the carbon intensity of production will play an important role in the future of oil producers. While Saudi Arabia and other Gulf countries stand out in a positive light, other exporters such as Algeria and Venezuela emit up to 4 times more CO2 throughout the oil extraction and processing process.

Less expected winners of the next decade may be Brazil and just 800,000-strong Guyana, where oil production is expected to rise to as much as 1.5 million bpd in the next few years, thanks to investments in offshore fields. Argentina, suffering from a chronic economic crisis, on the other hand, has the 4th largest shale oil fields in the world. It is this type of crude that will become increasingly important due to production flexibility resulting from the short life of new fields. Overall, Latin America will be one of the few regions where oil production is expected to increase in the coming years., but the prospects are mixed Unlike the Middle East, the continent seems less prepared for long-term changes. The sector is dominated by national energy companies, which are the backbone of economies and have a decisive influence on the fiscal health and, thus political stability - we can see this, for example, from events in Venezuela.

Corruption, inefficient management and lack of technology have not only prevented the use of profits for economic development, but have also weakened the competitive position of many countries. Examples include Ecuador, which depends on oil revenues for ¼ of its budget, or Colombia, where 50% of exports are fossil fuel sales. Another victim of the lack of competence is Mexico's Pemex, which is struggling with a $100 billion debt and lacks the technology to exploit new deposits. That is why, in the long run, Latin America will lose market share and budget revenues. According to one forecast, oil export revenues across the continent could fall by as much as $6.8 trillion by 2035. The lack of a diversification strategy and a cushion of foreign exchange reserves could lead not only to debt crises and a decline in the quality of life, but also to political instability and migratory movements.

But the crises caused by the energy transition might be most acute elsewhere. Namely in Africa.

The main problems of the countries of the black continent suffering from the commodity disaster are similar, only on a larger scale. They include corruption, political instability, lack of a diversification strategy, and dependence on subsidies. Nigeria, with a population of 220 million, where 40% of people still live in extreme poverty and where the population is expected to nearly double by 2050, is a prime example of a country suffering from the paradox of oil wealth. For decades after oil was discovered in the 1950s, this former British colony held the title of Africa's largest oil producer, peaking at 2.5 million bpd in 2005. After years of exploitation, corruption, mismanagement and rampant oil theft, production has nearly halved. Revenue from the sale of black gold accounts for more than 50% of the national budget and up to 80% of exports, which are also the main source of hard currency.

Political instability has forced most Western companies, such as Shell, to abandon wells in the Niger Delta and focus their attention on costly but safer offshore deposits. The problem stems largely from the activities of terrorist and criminal groups that take advantage of the weakness of the Nigerian military. According to one estimate, oil theft by organized groups may be as high as 20% of total production! As a result, crude oil extracted from Nigeria's offshore fields is up to twice as expensive as in traditional fields, where the cost per barrel is about $15. In addition, years of exploitation have caused irreversible environmental damage that continues to affect local communities. Analysts at Rystad Energy expect Nigeria's oil production to decline by as much as 70% by 2040.

One immediate solution may be to diversify into liquefied natural gas (LNG), demand for which is also expected to grow over the next decade. The transition will also be particularly acute given the existence of some of the largest fuel subsidies in the world. One striking statistic shows that by 2022, the Lagos government will have allocated more resources to this sector than to education, health, and social welfare combined. In sum, Nigeria is an example of a country suffering from a resource debacle that, over the years has weakened state structures, exacerbated corruption, and made political legitimacy dependent on access to cheap oil. This phenomenon is sometimes referred to as Dutch disease. Given its demographics and the degree of dependence between oil export revenues and economic growth, Nigeria could become a major source of instability in Africa and a geopolitical challenge for the entire world in the coming years.

All this shows that most oil-producing countries, especially those in the early stages of economic development, are the most vulnerable to the consequences of the green transition and the potential twilight of the oil era. OPEC defends itself against the "green trend" by claiming that instead of improving the global situation, the revolution will increase global inequality through a deficit in access to cheap energy. But energy poverty remains widespread. While the examples of Nigeria, Venezuela and Iran show that instead of improving the domestic situation oil more often than not leads to cementing dysfunctional autocratic regimes, providing them, with fuel for decades of rule.

Standard Oil of the XXI century

But the oil market is not just made up of state actors - oil-rich heavens like Arabia. It's also the companies that manage upstream production and production, as well as refining and distribution - downstream.

Above all, to understand the sector's characteristics, it is crucial to distinguish between national and private transnational oil companies, which lost their market position in the wave of nationalization and decolonization of the 1960s and 1970s. Looking at the figures, it seems that the national oil companies, which control about 50% of oil production and 60% of reserves, will play a major role in the era of declining oil. The dominance of national companies is illustrated by the fact that, on average, 50% of global oil revenues have gone to national budgets in recent years.

Prior to the 2022 energy crisis, the oil sector appeared to be in serious crisis. Since 2014, declining demand has led to a steady decline in the level of investment in field discoveries and new technologies, which has affected the size of available reserves. Over the past decade, the oil and gas sector has been the worst performer in the entire New York S&P 500 Index, while green technology and energy companies have reached historic valuations. The fortunes reversed with the onset of the 2022 energy crisis and the return of the primacy of energy security over climate issues.

Despite the increased interest in renewable energy, the fossil fuel sector accounts for less than 3% of global green technology investments, which totalled $1.8 trillion in 2023. In addition, despite its technology and capital resources, the sector has only 2% of offshore wind installations. Only 20% of companies in the sector have announced climate targets to reduce CO2 emissions. In other words, just as state actors are more or less successfully trying to diversify their revenue sources, the oil sector is clinging to its "holy grail".

Nevertheless, there is a clear transatlantic divide in assessing the impact of the green transition and in forecasting the future of oil. Again, financial indicators seem to best reflect this phenomenon. Only four European companies cover 60% of the total green investment in the oil sector in 2022.

Meanwhile, the largest U.S. companies, like their common ancestor Standard Oil, continue to cling to fossil fuels and, like their 7 sisters, renew their strategy of consolidation. 2023 is marked by historic acquisitions and the consolidation of the dominant positions of Chevron and ExxonMobil. Acquisitions of smaller oil producers, most notably Hess and Pioneer Natural Resources for $53 billion and $60 billion, respectively, are expected to increase holdings in Texas shale fields and provide access to new fields off the coast of Guyana. As a result of the acquisition, Exxon has become the largest oil producer in the U.S., with production of more than 800,000 bpd.

Thus, it is not difficult to see that the strategy of American companies is quite different from the actions of European companies such as BP, France's Total Energies and Norway's Equinor. And this … pleases investors. It is American companies that are much more popular on the world's major trading floors, mainly because of the disappointing returns on green investments and the slowing pace of change. The main goal of the Americans is simply to increase competitiveness in the face of increasing competition from Middle Eastern exporters.

European oil majors, on the other hand, face not only shareholder pressure but also tighter regulation at the EU and national levels. The energy crisis and the high cost of renewable energy investments have led both Shell and BP to reduce and abandon some of their climate targets. After announcing historic results in 2022 due to rising oil prices, Shell's CEO said that setting targets in the face of uncertainty around the transition could prove disastrous. It should come as no surprise, then, that Shell is a major proponent of increased LNG production, which is seen as a cleaner and more efficient energy source. Its report predicts that demand for LNG will grow by up to half by 2040, while LNG supply is expected to increase by as much as 80% by the end of the decade, thanks to new investment, particularly in Qatar and the US. The British, like the Americans, are considering a merger between Shell and BP as one of the solutions to maintain the market position of the British companies.

The benchmark for European oil and gas companies could be France's Total, which is trying to combine the exploitation of oil and gas resources with the development of renewable energies. In recent years, the conglomerate has allocated up to 30% of its budget to green investments, up to three times more than its competitors, and has achieved returns of 20%. Today, up to 90% of Total's revenue still comes from the sale of fossil fuels, although this percentage is expected to fall to just 25% by 2050. A similar strategy has been adopted by Norway's Equinor, which is investing in floating wind farms and hydrogen, in addition to its goal of carbon neutrality by 2050 and a 50% reduction in emissions by the end of the decade. Together with Shell and Total, Equinor is also working on an international CO2 capture and storage infrastructure.

But the green transition is not just about investing in technologies to harness solar, wind or hydroelectric power. It's also about the elements needed to produce all the necessary components-and that's where big oil has an opportunity to find a soft landing. Many companies already have the technology, the know-how and the necessary capital resources to enter new markets. Lithium, in particular, deserves special attention, with demand expected to grow by as much as 800% by 2050, according to a BP report. Nearly 80% of the raw material is expected to be used in battery production, a key component of the green transition. In addition, the sector has the expertise to develop offshore wind, biofuels, hydrogen, geothermal energy, and the still largely uneconomical CO2 capture and storage. However, a closer look at the plans published so far suggests that the sector's strategy is more akin to hedging than a full commitment to a green transition.

To sum up the market champions are not going anywhere. Private oil majors and national oil companies will continue to be the basis for the functioning of many economies and thus for the legitimacy of regimes. Increasingly, however, they differ in their strategies, which often denigrate the policies of the country in which they are located. In theory, the big oil companies have everything they need to play a decisive role in the energy transition: technology, financial capital and know-how, but many of them are increasingly hesitant and are going back to the matter they know best: oil.

Oil - the future or the past?

The industry's reluctance to embrace the energy revolution is understandable, but it does not necessarily mean the change is reversed or stopped. The aforementioned author Daniel Yergin, currently an expert at S&P Global, believes that 25 years is not enough time to complete the energy transition of the global economy and move away from hydrocarbons. It is important to remember that most of the increase in CO2 emissions in the coming decades will be the responsibility of the countries of the global South, which still suffer from energy poverty. So while the West will gradually move away from oil, and is already doing so, the losses will be somewhat offset by the developing world.

In its report, BP predicts that oil consumption in Europe will fall to 1960s levels as early as 2035, while peak oil demand in the West has already passed - having occurred at the beginning of the last decade. The situation in emerging markets is different. To illustrate, in 2019, per capita oil consumption in the US was 15 times that of India and still 6 times that of the PRC. Per capita energy consumption is a reflection of a nation's level of development and has always determined the quality of life, which is well reflected by differences in GDP per capita.

Analysts at the OPEC cartel estimate that by 2045 oil demand in non-OECD countries, i.e. developed countries, will increase by 25 million bpd, or nearly ¼ of current demand. The BP report indicates that in 2050 up to 70% of oil supplies could go to early-stage countries. In the next 20 years, China and India are expected to account for 60% of the increase in demand. What's more, by the mid-2030s, the two countries are expected to import 75% and 90% of their oil demand, respectively, which will exacerbate existing dependencies, especially in the context of supplies from the Middle East. According to McKinsey & Company, by the mid-21st century, Asia is expected to account for up to 60% of total crude imports, which will further increase the importance of Indo-Pacific sea lanes, as well as bottlenecks such as the Strait of Malacca.

Nevertheless, when talking about geography, one should be aware of another phenomenon. BP chief economist Spencer Dale, among others, points out that extraction and production are no longer just the stereotypical petromonarchies of the Middle East. In the 50 years since the oil crisis, production in OECD countries, i.e. developed countries, has almost equaled that in OPEC countries, approaching 1.5 billion tons per year. Mostly thanks to the United States, of course, but not only. Canada produces more than Iraq, Iran, the UAE, or Kuwait. Norway and Mexico produce more than Nigeria, Libya, or Algeria. Colombia, or the UK, are also significant producers. Overall, since 1974, the share of the Middle East in global production has fallen from 37% to 29%. In other words, competition in the market for oil producers is increasing, and the OPEC cartel's monopoly is being weakened.

Another very important "green" trend is also against oil: the electrification of cars. Just as the massive demand for automobiles during the First World War drove up the demand for oil, the massive growth of electric cars today could be its guillotine. This is for a simple reason - cars are responsible for more than 30% of all oil consumption - about 30 million bpd.

In just 25 years, according to BP, this figure is expected to drop from 16 million bpd to just 4 million bpd, depending on the success of technological development, especially battery efficiency. There is no clear geographic division in this space. The race to build the best electric car is being attempted by Americans at Tesla, by Europeans at German or French companies, or by Chinese at electric champions like BYD or Geely. But we are still at the beginning of this journey, with electric cars still accounting for only 2% of cars on the road, although according to BP, EVs are expected to account for 20% to 35% of the total car fleet by 2035, depending on the pace of decarbonization.

In the IEA's carbon-neutral 2050 scenario, 85% of cars would have to be electric, but this currently seems impossible. Oil demand would then fall by as much as 75% in 2050, and by as much as 25% in 2030. OPEC's Secretary General naturally criticized the IEA's announcement, calling it a continuation of the anti-fossil fuel narrative that could destabilize the market. The cartel has a completely opposite forecast, and of course believes that oil demand will grow steadily for decades to come, increasing by as much as 16% by 2045, pointing to the OECD agency's previous and wrong predictions of a global peak in oil demand in 2019. These were debunked after the end of the pandemic.

Although it should be noted that sceptical about the pace of decarbonization of transport is also the analysis of Goldman Sachs, according to which demand will certainly remain above 100 million bpd until 2040, with a peak in 2034 and 110 million barrels per day. The bank's analysts believe that most of the additional oil on the market will be used in the petrochemical industry, which produces plastics and fertilizers, among other products. In contrast, Mckinsey's Global Energy Perspective report suggests that demand in the XXI century will range from 54 million bpd to as much as 97 million bpd. Overall, the number of EVs shall increase from 1.2 billion to as many as 2.1 billion new vehicles by 2050. However, many argue that the number of internal combustion vehicles will also increase dramatically due to global population growth and economic development in poorer countries.

A competitor to black gold is another element that has been rather dormant lately - uranium. Nuclear power was at the height of its popularity during the Cold War years, but Chernobyl and, inevitably, the oil lobby put the kibosh on "nuclear excitement." Today, however, nuclear power is making a comeback in many parts of the world, with new reactors popping up on every continent. If this new nuclear spurt is successful, even more countries may follow the nuclear path. And then the energy to power electric cars, alongside volatile renewables, may not necessarily come from oil and gas plants, but from nuclear power plants. One example comes from France, which made a sharp nuclear turnaround on the wave of the 1973 oil crisis, based on the Messmer plan. France built 60 nuclear units in 25 years, and the share of nuclear in the national mix rose to 74% and has remained at a similar level for 30 years. Whereas the construction of a nuclear power plant in Egypt shows that nuclear power need not be reserved for highly developed countries. It is estimated that nearly 10% of the world's population still does not have access to electricity. Paradoxically, about 40% of the population of Nigeria, one of Africa's largest oil producers, suffers from this problem. So perhaps the future is not oil, but nuclear?

A new era of oil is coming, and it will be much more difficult than the last 100 years when black gold was synonymous with wealth, a sophisticated geopolitical tool, and economic development all in one. Today, oil has many rivals the green transition, renewable energy, electrification, nuclear power, or changing social and even ideological trends. The new geopolitics of oil will be characterized by increased competition among energy powers, attempts to concentrate crude oil production and refining, and struggles between private and public interests over a shrinking market. But can we already today declare the death of oil?
To answer the question with a question. Can one talk about the oil death when the largest power in the world is its largest producer and the second largest power is its largest importer? In other words, it's far too early for that, oil will continue to play a key role in the coming decades, but a relatively smaller one compared to the past decades, while its biggest beneficiaries will try to delay its final twilight as long as possible.

Sources:

Jakub Knopp

Analyst at the New Europe Institute. Student at the Collage of Europe. Specialises in US foreign policy in the Indo-Pacific region and military rivalry with the PRC, member of OSW.

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The New Geopolitics of Oil.

Oil as a new Gold

New challengers on the block

Standard Oil of the XXI century

Oil - the future or the past?

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