The Oil Industry: Exaggerations of Demise
Category: Oil & Gas...
Posted Thursday, March 25, 2004 at 03:00 PM [GMT-6]

Today's Wall Street Journal has an interesting interview with Amory Lovins, an energy analyst and think-tanker whose upcoming book, "Winning the Oil End Game: Profitable Energy Security by Mobilizing American Innovation," is co-funded by the Pentagon. In that book, Mr. Lovins will make the argument that oil companies can move away from their main product (crude oil) and still make a profit.

Mr. Lovins has some intriguing insights into the future of the "awl bidness," which he says is a great industry but a bad business. Some of his observations...

• China is now the second-largest buyer of oil in the world, and is attempting to address the situation by imposing car efficiency standards which are stricter than the US. He thinks they'll have only marginal success with this approach.
  
  Unfortunately, the implications for the failure of this strategy are global, and generally of the "not good" variety.


• Mr. Lovins points out that crude oil is a fungible commodity and it really makes no difference to the US whether we're producing our own oil or importing it...we'll still be at the mercy of price volatility. (My observation: It may make no difference to macro-economists and politicians, but it makes a huge difference to the people who live and work in the Permian Basin.)


• The preceding fact does provide incentive for the US to reduce its reliance on crude oil, "even if the security, economic and environmental costs of oil dependence were zero."


• Asked about the overall state of the oil business, he observes: "The upstream and downstream [margins] have increasingly been squeezed out. You're a price-taker in a volatile market. It's a very capital-intensive business. Combine those three and it's a recipe for unhappiness. Then add to that, oil companies tend not to be popular and tend to be the target of unwelcome political attention." But, other than that, it's a great way to make a living! He goes on to point out that "the smartest oil companies have been trying gracefully and gradually to get out of the oil business since the '70s." In his view, hydrogen is the killer component of the hydocarbon equation; that's where the future lies.


• Here's where he really goes out on a limb, with a prediction of how effective substitute energy sources will be: "I think over the coming decades oil will probably become uncompetitive even at low prices before it becomes unavailable even at high prices. And although the conventional projections of demand growth may happen, there is a substantial and rising likelihood that the reverse will happen – that demand will go down because the substitutes work better and cost less." The real x factor is what "coming decades" means.


• As it turns out, Mr. Lovins is the creator of the "Hypercar" concept, a carbon-fiber vehicle powered by hydrogen fuel-cells. According to him, widespread production of such a vehicle (configured such that it displaced light trucks and SUVs, which is where most of the projected growth in energy consumption will come from) would eventually save the US the equivalent of eight million barrels of "product" per day, or, as he puts it, the "equivalent to discovering a Saudi Arabia under Detroit." (Come to think of it, putting Saudi Arabia under Detroit today sounds like an excellent idea, albeit for reasons that have nothing to do with energy consumption.)


• In a couple of closing observations, he opines that Shell's recent reserves booking woes were most likely due to the SEC's changing interpretations on how to define recoverable reserves (along with Shell's apparent bureaucratic inability to adapt to those changes), and he believes that nuclear energy is a non-starter: "It has no future in a market economy because it fails by factors ranging from roughly two to roughly 30 to compete on the margin with efficient use of electricity, with gas-fired co-production of heat and electricity and with wind power.

I'm looking forward to his new book. I think Mr. Lovins is ultimately optimistic about the future of the oil business, but based on what I read here, it's a future that will look very different from the present. But, then, isn't that what we all hope for?