The New York Times recently carried a front-page story asserting that Saudi Arabia planned to “keep oil at the center of the global economy” for decades. Other Mideast Gulf countries no doubt share this goal. This effort will fail, however, because the supply chain linking oil producers to consumers is breaking down. Indeed, several important intermediary players have interests that directly oppose the producers' objective. Their growing power will make petroleum the first key fossil fuel to be dismissed from the global economy. Consequently, oil producers should prepare for a faster-than-expected stranding of their reserves.

Vaclav Smil has written extensively on how the world’s transition from fossil fuels to renewables will happen slowly. He bases this view on the belief that the companies and countries that have poured trillions into coal mines, power plants, oil and gas wells, and other capital-intensive facilities will resist abandoning these investments. Many have echoed his assessment, including former Microsoft CEO Bill Gates and Lord Stern, chair of the Grantham Research Institute on Climate Change and the Environment at the London School of Economics.

Such analyses are likely correct when it comes to coal and natural gas. Coal producers and users have a symbiotic relationship. Investors who build coal-burning power plants are unlikely to shut down voluntarily. Steel mill owners, too, will probably want to continue using coal. Thus, coal producers have an assured market.

Smil’s “slow transition” thinking applies to natural gas for similar reasons. Companies and nations that have invested heavily in power plants that require natural gas will not obligingly shut them down if they can continue to operate profitably. Large utilities that distribute gas to homes, offices and plants will also stay in business as long as their customers keep demanding service. That demand will not decline quickly.

Petroleum is different. None of its three largest consumer groups — surface, air and marine transportation — have any loyalty to it. Furthermore, the key supply-chain intermediaries linking oil producers to consumers, refineries, can and are being repurposed to produce renewable fuels. Unlike oil reserves in the ground, refineries can pivot to alternatives and will not be stranded assets when petroleum product consumers decide to shun oil entirely.

Marine Fuel

Marine fuel could be the first oil use category to vanish. The regulatory authority of the International Maritime Organization (IMO) extends widely. In 2020, it forced the world’s shipping industry to shift to very low-sulfur bunker fuel or install scrubbers on ocean-going vessels. Owners had to comply to avoid being barred by ports across the globe.

The IMO is now moving rapidly to introduce rules that in essence will require shipowners to abandon fossil fuels. Very large shipping companies such as Maersk, seeing an opportunity to strengthen their market power, are strongly endorsing the changes. Oil-burning ships will be scrapped early or have their engines replaced. Petroleum will lose the market.

Jet Fuel

Petroleum use by airlines is also threatened. The industry accounts for between 2% and 3% of greenhouse gas emissions. Of late, these emissions have increased with the post-Covid-19 upsurge in travel despite improved aircraft efficiency. The International Civil Aviation Organization has now agreed to reduce airplane emissions to zero by 2050. While they will likely miss this target, air carriers are still rushing to replace petroleum-based fuels with sustainable jet fuel, while simultaneously looking for alternatives such as hydrogen. Again, the oil producers are being left behind.

Firms that own refineries producing jet fuel, marine fuel, gasoline and diesel are responding to the environmentally conscious plans of their aviation and marine customers by repurposing oil refineries to produce sustainable fuels. Finnish refiner Neste is leading the way. In the US, Marathon Petroleum and PBF have shut down and begun converting large refineries in California to produce sustainable jet and diesel fuel. Other firms will follow. In five or 10 years, a significant share of current world refining capacity may not be available to process crude oil.

Retail Marketers

Retail gasoline and diesel fuel marketers also have no loyalty to petroleum. For example, Carrefour, the hypermarket giant in France, markets a large share of the retail gasoline and diesel sold in that country. Previously, the firm had pioneered selling gasoline at its stores in France, using lower prices to capture a significant market share quickly. Costco and Walmart have done the same in the US.

No retail marketer will stick with petroleum when vehicle owner preferences change. Carrefour, Costco and Walmart will be the first to abandon it if electric vehicles become dominant. Indeed, these three firms, along with smaller retailers in numerous locations, are very likely hard at work developing plans to provide affordable, rapid electric vehicle charging facilities as soon as EV use expands.

Firms that supply the trucking industry also have no loyalty to oil. They will quickly adjust to their customers’ needs, whatever they may be.

Telecoms Parallel

Petroleum producers thus face the “last mile” problem, which was once a major issue for the telecommunications industry. For the latter, the issue referred to the gap or distance between service providers’ infrastructure and consumer homes. Previously, many in the world could not get good service because phone companies avoided the uneconomic practice of stringing wires over long distances. Satellites and cell towers have resolved the problem. Consumers get high-speed connectivity without having to depend on conventional “landline” providers.

As the energy transition progresses, the forced symbiosis between oil producers and their downstream customers — refineries, airlines, ships, truckers and individual motorists — will cease to exist as customers switch away from burning jet fuel, bunker fuel, diesel or gasoline.

US President George W. Bush once fretted that “America is addicted to oil.” That addiction is being broken while, so far, natural gas and coal consumption for power generation and the production of certain metals remains immune.

Philip Verleger is an economist who has written about energy markets for over 40 years. A graduate of MIT, he has served two presidents, taught at Yale and helped develop energy commodity markets since 1980. Kim Pederson is editorial director of PKVerleger LLC. The views expressed in this article are those of the author.


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