Big Oil shouldn't spearhead the shift to renewable energy

 Big Oil shouldn't spearhead the shift to renewable energy

Big Oil shouldn't spearhead the shift to renewable energy

Digital photography was not invented by Eastman-Kodak, and the keyboard was not created by the Underwood Typewriter Company. It was done by the troublemakers. Those in power are not good innovators. It seems improbable that corporations such as Exxon Mobil, Chevron, and Shell will spearhead the energy revolution.

Oil and gas corporations "must play a leading role" in the shift to renewable energy, according to US climate envoy John Kerry. Setting aside the quirks of the US government dictating to the private sector how to spend its funds, it is absurd and unwise to expect Big Oil to upend the energy business.

Digital photography was not invented by Eastman-Kodak. The Underwood Typewriter Company did not design the keyboard that I am using to type on. It was done by the troublemakers. Those in power are not good innovators. Thus, it is doubtful that businesses such as Exxon Mobil Corp, Chevron Corp, and Shell PLC would spearhead the energy shift.

Not in the manner most policymakers imagine, however.

Similar to Kerry, the International Energy Agency advocated for a larger role for the fossil fuel sector in the energy transition in the run-up to the COP28 climate meeting. The oil and gas business faced "a choice" with billions of dollars in investment, according to the agency's The Oil and Gas business in Net Zero Transition study, which was published in late November. "The industry has to accept the uncomfortable reality. What is required is a very low demand for oil and gas, which implies gradually cutting down on oil and gas activities rather than increasing them, in order to achieve a successful clean energy transition.

This is not going to be a last warning. Currently, the share of oil and gas firms' investments in renewable energy globally is less than 1%. Of these, Equinor ASA, TotalEnergies SE, Shell, and BP PLC accounted for more than half.

The IEA's executive director, Fatih Birol, told me he wanted Big Oil to spearhead two areas of reform. He states that the industry must first cut down on emissions related to the extraction, transportation, and refinement of gas and oil. I agree with him. Flaring must end, as well as regular methane leaks. (According to IEA estimates, flaring produces 140 billion cubic meters of gas annually, or almost twice as much as Germany uses.) And it may end earlier than 2030, as the industry has suggested. While governments shouldn't direct businesses' spending, they may use taxes and subsidies to penalize or assist them. One sector where the government need to use a stick and carrot strategy to stimulate investment is methane.

Birol's second goal is for Big Oil to "embrace" the clean-energy economy by making investments in things like EV charging stations and offshore wind farms. He observes large oil firms allocating as much as 50% of their budget to environmental initiatives. Birol agrees that it would be problematic to underinvest in fossil fuels, but the IEA thinks that overinvesting is now the greater danger. I'm not on board.

Profits determine where to invest, and right now oil and gas are much more lucrative. BP and Shell announced significant intentions to reduce their reliance on fossil fuels and increase their investments in renewable energy a few years ago. Since then, both firms have returned to focusing on petroleum due to the disappointing results. Big Oil is unwilling to commit the funds necessary to spur innovation if it cannot generate significant profits. I can think of a few applications where it is clearly advantageous. These may be in carbon capture and hydrogen production, but I doubt their significance for the transition beyond a small number of difficult-to-decarbonize places. I doubt it even in the case of electric car charging, which is sometimes seen as a sector next to Big Oil's gasoline marketing operation. Electric vehicles will be charged both at home and on the road as battery range increases; they won't often move from gas stations to EV stations.

Secondly, I am concerned that if we transfer so much money to green energy now, when oil demand is still strong, we run the danger of extremely high and unstable prices later on, which would make the public less supportive of the switch. While most voters are in favor of combating the climate catastrophe, few are prepared to pay for it.

For the next seven to ten years, the world will still need more oil, not less, under existing policy. Following that, consumption will gradually start to decline—more like a plateau than a cliff. As I've said before, I don't think the world's oil consumption will drop as quickly as net-zero scenarios predict. The year 2024 is nearly here, and oil consumption is steadily growing.

There is no need for Big Oil to actively oppose any green disruption given the likelihood of years, if not decades, of robust oil demand. In a Harvard corporate Review essay regarding corporate disruption, professor Julian Birkinshaw of London Business School claimed that a firm should combat new technology if it "poses an existential threat to the company"—a claim that "is often not true."

Despite Birkinshaw's emphasis on digital disruption, fossil fuels are a relevant subject for his thesis. The wisest course of action for Big Oil is to revert to its areas of competence rather than taking direct aim at renewable energy. Companies like Exxon, Chevron, and, to a lesser degree, Shell are now adopting this strategy.

Big Oil is not a concern for lawmakers dealing with energy and climate issues. Allow it to continue doing what it does best, which is provide an ample amount while demand is still there. But concentrate on sanitizing that supply. In the meantime, money from its dividend to shareholders can be used to fund green investment projects. Let the innovators do their thing. The solar industry's phenomenal rise, achieved with no assistance from Big Oil, is evidence of the green industry's independence.