Outlook bleak for the oil industry

When oil prices were rising fast, some 10 years ago, the idea of ‘peak oil’ re-emerged – the (false) idea that the world’s oil supplies were about to run out. Several recent publications now hint at an entirely different kind of ‘peak oil’ – one caused by shortfall in demand, not supply.

The financial ratings agency Fitch says the future of the oil industry is very precarious, and could be in serious trouble if there are rapid advances in battery technology. Although Fitch says the growth in electric vehicles will be held up by several aspects of EV infrastructure, it says the renewable energy industry stands to gain from improved batteries, which in turn could threaten industrial sectors dependent on oil.

Batteries are the subject of the first in a new series by Fitch Ratings looking at ‘disruptive technology’ – disruptive in the sense that it changes the technological and financial landscape. It says the decline of oil has been long expected, but the speed of that decline could leave a number of investors in a bad way if advances in battery technology allow for more climate-friendly technologies to gain quicker acceptance.

The report Disruptive Technology: Batteries points out that transport accounts for 55% of oil consumption, so a surge in EV sales would threaten oil investments. It adds that the problem of inconsistent supply is holding back renewable energy, but that if improved batteries allowed for a back-up option in cases of intermittent energy, this could accelerate the move away from oil. It warns that this could have ‘significant implications’ for global credit markets given the continued confidence in oil sector investment in recent years.

Fitch’s conclusions are consistent with a new study from an American research institute IEEFA, which suggests the oil giant ExxonMobil may be in ‘irreversible decline’. IEEFA’s Red Flags on ExxonMobil report identifies ‘deep financial weaknesses’ and ‘signs of significant deterioration’. It says: ‘The company’s financial performance alone suggests an enterprise facing a much smaller market for its product.’

ExxonMobil is the last of the oil giants to appear in the Standard & Poor 500 top 10 stocks by market capitalisation. There were once seven oil companies in the list, but these days it is populated by technology, consumer goods and telecommunications firms. Commenting on the report, a spokesperson for Goldman Sachs said: ‘Companies such as ExxonMobil, which focus on large, expensive, long-horizon extraction of oil from expensive sources such as oil sands and Arctic and deep-sea drilling, are at risk from declining demand and plentiful low-cost supply.’

ExxonMobil is also facing a major legal investigation into whether it knew that climate change was a real threat many years before it became public knowledge, and whether its financial activities therefore amount to fraud. Last month the New York Supreme Court ordered the company to hand over documents which ExxonMobil said were confidential.