Is oil the new tobacco?

Is oil the new tobacco?

Investors aren't yet rewarding big oil companies that are preparing for a greener future, but that could change

If data is the new oil, then oil is starting to look like the new tobacco.

Like cigarette makers before them, oil producers face a state-sponsored drive to drastically cut demand for their products, as governments around the globe promise to decarbonize transport and their wider economies in an effort to limit climate change.

The cars, trucks, trains, airplanes and ships that move people and things around the world contribute about a quarter of the world's greenhouse-gas emissions. Their fuel suppliers have, until recently, mostly worried about how to find and produce more oil. The big question now is when demand will peak, not when oil will run out.

Big oil producers seem to be approaching the challenge in one of two ways. Some, such as Royal Dutch Shell and France's Total, are searching for ways to transform themselves into low-carbon energy producers. Others, such as Exxon Mobil, are sticking to their knitting and remain focused on pumping petroleum.

Both approaches have logic. There is a big push to drastically decarbonize, but there is no guarantee it will actually happen. For the world to change, politicians, industries and consumers will have to make hard choices. Hundreds of billions of dollars will be needed to transform vehicles, fueling stations, power generation, grids and storage, as well as retool industries and retrain fossil-fuel workers. Airplanes present a particular challenge.

The International Energy Agency created a sustainable development scenario that predicted oil demand would peak in 2020 at 97 million barrels a day and that by 2040 demand would be down to 73% of 2017 levels. However, a separate, less ambitious scenario predicted peak oil demand in 2040 at 106 million barrels a day, which is up 12% on 2017 levels. Both, and many others, are possible.

Global forecasts consolidate important regional differences. Growing population and prosperity in Africa and Asia will increase emissions. Europe has promised to cut back dramatically. President Trump has withdrawn the U.S. from the Paris climate accord and embraced coal, but some states and cities have committed to cut their emissions.

It all makes for difficult planning, but that is something the major oil companies are used to dealing with. For decades they have built expensive, complex projects within a shifting global patchwork of regulations and political demands. They currently do everything from finding new oil reserves to selling coffee and carwashes at service stations around the world. And for most, strong balance sheets and cash flows, thanks to a rediscovered cost discipline, give them money to spend.

Experimenting with lower-carbon energy projects offers big oil companies the chance to learn new skills and influence how future markets and regulations develop. The relationship with the end customer will become more important in the kind of smarter, more connected energy-grid model that seems likely to help the world slake its thirst for oil. Some capital will be wasted in these projects, but that also happens with a dry well. What shareholders must closely scrutinize is any plans to scale them up.

For now, investors don't seem prepared to reward companies for such experiments--and for talking up the challenge posed by climate change. Shell and Total trade at a stock-market discount to their American peers.

This might seem rational in the short and even the longer term: Cigarette companies have shown that it is possible to increase profits in a declining market. But the precedent of big tobacco, which has lost a big chunk of its market value over the past two years following a new wave of U.S. regulation, also shows how fast investor sentiment can turn if policy changes.

Even if investors don't yet realize it, oil companies that are taking the global decarbonization push seriously may be on to something.

Do you like the content of this article?
COMMENT