Oil companies are engaged in a "race against time" to guard against a huge 40 per cent chunk of their business disappearing over the next 25 years, as declining renewables costs and rising demand for electric vehicles (EVs) effectively kill off the market for petrol and diesel cars.
That is the headline conclusion contained in startling new analysis released yesterday by BNP Paribas's asset management arm, which argues that in only a few years' time wind and solar will produce more energy for battery-powered EVs at a much cheaper price, than oil will for petrol and diesel cars.
The paper argues these shifting economics mean it will soon make little financial sense to produce oil for petrol and diesel cars in the coming decades, when EVs powered by renewables offer a far cheaper, cleaner, and more efficient alternative.
Comparing the investment needed at today's prices to produce oil and renewable energy over the next 25 years, the report found it would cost between 6.2 and seven times more to produce the same amount of energy for a petrol car from oil, than it would to generate renewable electricity from solar and wind for an EV. The equivalent cost for fuelling diesel vehicles, meanwhile, is still around three-to-four times higher than for EVs.
As such, while renewable energy sources such as wind and solar still need to scale up rapidly to tackle the global climate emergency, the oil sector is now in "relentless and irreversible decline", asserts the report, which was authored by Mark Lewis, the French banking giant's global head of sustainable research.
"This is a tremor portending an earthquake for the oil and gas industry," he states in the report. "40 per cent of global oil demand today is accounted for by uses that will not make any economic sense once wind and solar reach sufficient global scale and cost-competitive batteries accelerate the penetration rate of EVs."
At present, around 36 per cent of global oil demand comes from petrol and diesel cars, on top of roughly five per cent for energy production. With a significant scale up of renewables in the next decade or so, wind and solar could readily replace that chunk of the oil business, the report argues.
"On the most dramatic reading, it is only a matter of time before the economics of renewables and EVs overwhelm oil and displace up to 40 per cent of its current demand," the report adds. "For the oil majors, the challenge is on a scale that they have never faced before, and business-as-usual is simply not an option."
The report estimates that in order to compete with renewables-powered EVs in future, oil companies would need to be selling barrels of oil at just $9-10 to produce petrol, and $17-19 for diesel cars, just to break even. Today, a barrel of oil sells at roughly $55.
For a new oil-extraction project sanctioned today, that break-even point could be reached by 2035-2040, the report suggests, which is roughly the same time by which governments such as the UK and France have pledged to phase out the sale of new fossil fuel cars completely.
Comparing the production of renewables to oil over the next 25 years is, of course, complicated and subject to considerable and inevitable uncertainties. The oil industry, as the incumbent, boasts significant advantages of scale and production over renewables, which along with EVs face technical and policy challenges as they look to scale up over the next two to three decades, the report concedes.
Moreover, clean technologies have a lot of ground to make up. Today oil makes up 33 per cent of global energy supply, compared to three per cent from renewables, the report notes.
"This underlines the point that the renewable energy industry needs to scale up massively over the coming decades since on an absolute unadjusted basis wind and solar cannot deliver anything close to the energy that the global oil industry can deliver today as an instantaneous flow," the report warns.
But the energy return on capital invested (EROCI) - a term coined by Lewis - for renewables is set to only improve in even the next five years, as the costs of solar and wind continue to decline and the political and regulatory landscape shifts decisively in favour of cleaner energy sources, the report predicts. Meanwhile, unlike renewables sources, oil companies have to replace 10 per cent of their reserves annually, forcing them to continue reinvesting in new projects every year "just to stand still".
And, even if you add in the costs of power grid enhancements to balance the surge in intermittent renewables capacity and EV charging requirements "the economics of renewables still crush those of oil", the paper concludes. What is more, the analysis is based on today's prices only, and does not take into account the likely significant further cost reductions of wind and solar in the next 25 years, which it estimates could tip the price of a barrel of oil for road transport needed to remain competitive into single figures.
All in all, the findings are "stark" for oil companies, which if they continue investing to replace their oil reserves on a barrel-for-barrel basis face huge risks of being lumbered with stranded assets, Lewis warns.
"In our view, this should be an extremely alarming prospect for the oil majors," he writes. "Accordingly, we think the oil majors should be accelerating the deployment of capital into renewable-energy and energy-storage technologies and/or reducing re-investment risk via higher dividend payouts to shareholders."
To add further weight to the argument, the challenge faced by the oil industry is not unprecedented. "If all of this sounds far-fetched, then the speed with which the competitive landscape of the European utility industry has been reshaped over the last decade by the rollout of wind and solar power - and the billions of euros of fossil-fuel generation assets that this has stranded - should be a flashing red light on the oil majors' dashboard," Lewis adds.
BNP Paribas is certainly not the first to warn of stranded asset risks and forecast the death knell for a huge chunk of the oil industry's business. Lewis recently worked for Carbon Tracker, the think tank that has frequently explored the wide-ranging implications of oil demand peaking within the next five to 10 years. Meanwhile, Legal & General recently made similar warnings of an upcoming peak in oil demand.
But the findings of yesterday's analysis come from a banking giant boasting more than $400bn of assets under management worldwide, and they should sound a loud alarm for investors in the oil and fossil fuel auto sectors. The credible warnings detailing how oil demand could fall into a critical decline far sooner than many in the sector may have thought are stacking up.
Renewables advocates are taking note. Frans van den Heuvel, CEO of renewables firm Solarcentury, welcomed the report as a "gamechanger".
"This is a whole new dimension in the catalogue of advantages and benefits solar has over oil, a potential gamechanger of a report," he said. "Strong as the case already is for all who care about climate chaos to accelerate solar to planet-saving scale, this provides a further un-ignorable imperative."
Investment in renewables and EVs still needs to scale up massively if predictions about the rapid decline in oil demand are to be proven accurate, but if markets continue to move in their current direction, a cleaner, cheaper more flexible energy and transport system now looks to be very much within the world's reach. And that spells good news for the planet, and very bad news for fossil fuel companies that fail to respond.
