Leaders 11T
hedrillingofthefirstmodernwellinPennsylvaniain 1859
set oil on a path that led to the heart of economics and geo-
politics. Oil fuelled the rise of the West’s consumer culture; it
helped determine who won the second world war and prompted
a global economic crisis in the 1970s. Over the past 20 years China
has become the second-biggest consumer of crude, while Ameri-
ca’s fracking revolution has meant it is close to being a net energy
exporter for the first time since the 1950s. Now a new chapter in
oil’s story is unfolding: the prospect of stagnating or falling de-
mand as the world shifts to cleaner energy. As in the past, this era
promises startling economic and geopolitical change.
Consider the imminent stockmarket flotation of Saudi
Aramco, which produces 10m barrels of oil a day, or 11% of the glo-
bal total. As well as Arabian super-light, Aramco pumps out su-
perlatives and controversy (see Briefing). Worth well over $1trn,
it could, once listed, be the world’s most valuable public firm,
squeezing past Apple. The initial public offering has been de-
layed several times; a big Aramco processing plant was hit by a
missile strike in September and the firm is ultimately controlled
by Muhammad bin Salman, an autocratic royal with blood on his
hands. But take a moment to look beyond this. Aramco’s under-
lying strategy is to be the last oilman standing if the industry
shrinks, pointing to the upheavals to come.
The term “peak oil” was coined in 1956 by M.
King Hubbert, a geologist worried about the
stuff running out. Today the phrase is back but
for the opposite reason: the prospect of dwind-
ling demand. That may seem odd given that this
has grown by 1.4% a year since 2008. But the
people running energy companies have long
horizons, and on that timescale the picture for
oil is darkened by urban pollution and climate
change. Oil is responsible for a third of global energy use and a
similar share of carbon emissions.
Many oil firms still say that production will creep up over the
next decade, to slightly above today’s level of 95m barrels per day
(b/d), and then plateau. But output will need to drop to 45m-70m
b/d by 2050 if the world is to stop temperatures rising more than
1.5-2°C above their pre-industrial level. It would help, too, if there
was a shift to cleaner oilfields, whose crude emits a fifth less than
the dirtiest ones. Though oil bosses insist, in public at least, that
oil remains the planet’s indispensable fuel, they can feel the
growing stigma. Public opinion is shifting in the West, heralding
tighter rules on emissions. And, in a sign of jumpiness, some
Western firms have favoured short-term projects rather than
sink their capital in decades-long bets on oil’s future.
If demand does fall, some products and producers are more
vulnerable than others. Over a third of all oil is used in cars and
lorries which could eventually be fitted with electric engines. It
is harder to find a substitute for the oil in petrochemicals and
plastics. Common sense suggests that the highest-cost and dirti-
est oil firms will tend to go out of business first. If so, an industry
that has become gargantuan over 160 years will shrink to a core of
producers that fulfil the world’s residual demand at the lowest fi-
nancial and environmental cost.
Manyenvironmentalactivistsfearthisenergytransitionwill
never happen. But, in fact, it fits with Aramco’s strategy and pitch
to investors. The firm spends just $3 to lift a barrel from beneath
the desert, less than almost anyone else. The emissions from ex-
tracting Saudi oil are rock-bottom, too. Aramco is expanding in
petrochemicals and locking in customers in Asia—in August it
bought a $15bn stake in the chemicals arm of Reliance, an Indian
giant. Saudi Arabia has promised investors they will get steady
dividends whatever the weather. Implicit in the kingdom’s ap-
proach is that, if and when oil demand falters, Aramco will be the
producer of last resort.
A cleaner planet is in everyone’s interests. But a shrinking oil
industry could mean more, not less, turbulence for energy mar-
kets and geopolitics. Take energy markets first. The optimistic
case is that supply and demand will taper down in tandem, and
that the price of oil will fall along with the cost of producing the
last barrel needed to satisfy ebbing demand. But downsizing an
industry with $16trn of capital and at least 10m employees is nev-
er going to be smooth. Because oilfields naturally deplete, a
drought in capital spending could cause a price spike. Each firm
and country, including Saudi Arabia, will face a choice between
holding back supply so as to bolster profits and tax revenues and
opening the taps to grab market share and use up reserves, what-
ever the price, before it is too late. The opeccar-
tel, which combines high- and low-cost produc-
ers, could implode. And as production focuses
on fewer fields, the risk of disruption from ter-
rorism or accidents will rise.
The political implications are just as big.
Twenty-six countries rely on oil income for 5%
or more of their gdp, says the World Bank (the
average for them is 18%). If economic logic pre-
vails, producers with the dearest and dirtiest oil—including Al-
geria, Brazil, Canada, Nigeria and Venezuela—should wind
down output, but that would be painful and, for some, devastat-
ing. America, meanwhile, remains wedded to oil, which meets
40% of its energy needs. Its thirst has been satisfied by the frack-
ing boom, especially in the Permian basin in Texas. Yet fracking
is dirty and new projects need an oil price of $40-50 a barrel to
break-even, at least twice the level Aramco requires. For the sake
of the climate and efficiency, the fracking industry should even-
tually shrink. That, though, would make America more reliant
on foreigners, just as its politics have turned inward.Till kingdom come
And then there is Saudi Arabia itself. Aramco’s pitch to investors
will boast of its abundant, cheap and relatively clean oil. That
much is true. But it will not dwell on the country’s jobless youth
or opaque court politics. Perhaps the proceeds of the ipowill
help modernise the Saudi economy; perhaps not. Investors bet-
ting on Aramco as the last oil major standing in 30 years’ time
will have to consider the risk of revolution or invasion. Aramco’s
flotation is a sign that the end of oil could be in sight. But it is also
a reminder that the black stuff’s capacity to cause economic and
political havoc will be undiminished for decades to come. 7To the last drop
The message from the world’s biggest and wildest ipois that the oil industry may decline, but it won’t go quietlyLeaders