A new report from the nonprofit As You Sow analyzes the state of the oil industry. And researchers found several trends that should alarm global energy investors. Oil could follow the same path as coal, they predict, albeit slowly.
If this sounds far-fetched, just remember that coal also seemed unstoppable only a few years ago. But cracks in the industry's armor quickly turned into all-out financial turmoil. This shift led the way to the stunning bankruptcy of America's biggest private coal company, Peabody Energy, earlier this year.
So, is oil really on the same path?
“Only a few years ago, coal was seen as being able to weather the economic changes that are now dragging it down,” said Danielle Fugere, president of As You Sow and a co-author of the report, in a press statement. “That is why investors need to understand the deepening structural risks in the oil industry, which have become more pronounced over the last decade.”
The report found that, while oil remains profitable, some of its key fundamentals are weakening. For example, while capital investments from the oil majors grew massively from 2000 to 2014, production still shrank. Profit margins are also lower, even during the era of ultra-high oil prices, due to oil resources becoming more and more difficult to exploit. And debt levels are rising while cash reserves shrink.
“Independent oil companies, including the majors, are ... becoming the world’s high-cost producers, making them less competitive,” said Amelia Timbers, As You Sow energy program manager and a fellow report co-author, in a press statement. “This trend has been broadly masked by the past decade’s record-high oil prices.”
Another major issue, according to the report, is that oil companies refuse to adapt to the modern reality – a world where climate change is accepted by everyone (except the Republican presidential candidate). This scenario also sees energy sources are becoming more diverse and a world committed to climate action. Yet many in Congress think it is still the 1980s. Perhaps all that funding from climate deniers groups has turned the whole industry one that just denies all reality.
“The future is not set in stone for oil companies, but their failure to acknowledge signs of change and plan appropriate action could be disastrous,” Fugere said.
The contrast with clean energy – which is growing in leaps and bounds – could not be starker. Oil, like coal -- and, soon, natural gas -- are not safe investments. It's time for everyone, everywhere, to shift to clean energy and hasten the end of the fossil fuel era. With the planet regularly breaking warmth records, the sooner, the better.
Image credit: John Hill via Wikimedia Commons
Nithin Coca is a freelance journalist who focuses on environmental, social, and economic issues around the world, with specific expertise in Southeast Asia.