We will never stop the fossil fuel industry by banning it. It will only stop itself when its business becomes unprofitable.
And that may happen sooner than you think
The fossil fuel industry is a nasty business. Its leaders knew 50 years ago they were poisoning the planet. They chose to hide that knowledge, lie to the world, and maximize profits at all costs. Today, if you ask why they are continuing to promote fossil fuels over electrification (e.g., source), the answer is again profits. As one industry analyst has noted, the internal rate of return (IRR) for money invested in oil and gas projects today is between 20–50% (assuming oil remains at $75-$85 per barrel, where it sits today). Investing in renewable energy projects, in contrast, would only yield an IRR of about 5–10% (source). So its a simple business decision for the oil giants. They pursue the path that leads to the highest profits, any externalities or environmental damage inflicted along the way is someone else’s problem.
But that unrelenting focus on profits is also the key to how the age of fossil fuels will end. Because when oil becomes unprofitable, the oil and gas giants will stop producing it. They didn’t care about the damage back when they learned they were causing global warming. They don’t care about the damage they are causing today by trying to disrupt the transition to renewable energy. And they won’t care about the damage they will be causing the global economy tomorrow when they turn off the spigots. It will be a simple business decision.
The end of oil will be the greatest disruption in the history of human civilization, and it will only happen when the fossil fuel industry decides fossil fuels are no longer profitable to produce.
A recent conversation between oil industry analyst Art Berman and climate activist Nate Hagens, available here, provides some insights into how this descent into unprofitability might play out. Based on a comprehensive analysis of US oil production from 1950 to the present, Berman discovered an apparent paradox: while per-well performance of US oil production has declined steadily since the 1950s and 1960s — from an average of 150,000–200,000 bwd (barrels per well per day) back then to around 20,000 bwd since the turn of the century — overall US production is higher today than ever before. Looking at US production in global context, Berman found that almost all growth in world oil production since 2010 has come from the US alone. How can this paradox be resolved?
To illustrate a possible explanation, Berman presents this timeline of US oil production from 1900–2023, classifying output into four categories: Conventional Lower 48 Oil, Alaskan Oil, Offshore Oil, and Tight Oil.
Conventional oil in the lower 48 states clearly peaked around 1970. This peak appears to have spurred the move into offshore production, followed by an expansion into Alaska right around the time of the first Arab-OPEC oil embargo in 1973. By 2008, overall US production was down to about half of what it had been in 1970 — America was in an oil squeeze. Its response to that squeeze was to move into tight oil, the exploitation of oil embedded in shale and limestone rock, which can only be extracted from underground deposits using hydraulic fracturing, aka “fracking”. Thanks to the shale oil “boom” starting at that low point in 2008, the US has managed to increase its output to nearly 13 million barrels per day, its highest rate ever.
Superficially, this looks like there is no shortage of American oil for the US and the rest of world to burn well into the foreseeable future. Assuming the oil industry remains impervious to governmental regulation, this means we should expect ever-increasing concentrations of CO2 and other GHGs in the atmosphere, leading to a continuation of the twin results that have defined our era: uninterrupted profits for the oil industry and immeasurable damage to the planet and all the species occupying it, including us.
But Berman’s analysis digs deeper into this tight-oil revolution and says “not so fast”. Looking closely at where tight oil production is concentrated and how those wells are performing, Berman notes that while the average well in 1990 was producing a mere 20,000 barrels per day, these newer shale oil wells operating today are producing around 325,000 barrels per day each, a massive productivity gain of over 15x per well. This extremely high productivity, exclusive to shale oil wells, is being driven by what Berman suspects is short-term overproduction. Because the overall lifetime productivity of these wells continues to decline compared to earlier, pre-peak wells, they are being depleted at a much faster rate. Berman’s conclusion:
That’s what’s responsible, I believe, for the 13.1 million barrels a day … even though the wells are going to perform more poorly in terms of their lifetime recovery, they’re front-end loaded and we’re getting exceptionally high rates early on, and that’s what’s boosting US production. (Berman-Hagens podcast at 17:03)
So American oil companies are apparently not showing the world a new high-level baseline for oil production for the coming decades. Instead, they’re trying to suck 20 years worth of oil out of their shale oil wells in 3–5 years. Why are they doing this? An average new well today imposes upfront costs of $6–10 million. To break even on that investment, taking into account operating costs, overhead, interest on debt, and an 8% future discount rate, a well must produce about 300,000 barrels per day over its lifetime. So it’s no coincidence that 300,000 bwd is pretty close to what these shale oil wells are producing today. But the longer-term implication is that these wells are going to deplete much faster. Technology can get the oil out more quickly, but it can’t increase the amount of oil to be gotten. (For more details, see this more recent post by Berman on his blog.)
What Berman’s analysis tells us is that tight shale oil, the only source of oil in the world that has not yet hit its peak, can be expected to begin its post-peak decline and eventual abandonment much sooner than many analysts anticipate, probably well before the end of this decade. Berman’s guess, which he acknowledges comes with a high degree of uncertainty, is that there is not much commercially-viable (aka profitable) tight oil left to be discovered, so when these fields start to deplete, there will be no new discoveries in the US or elsewhere to take up the slack. The result could be a return to the precarious position the US found itself in back in 2008: panic over the possibility of inadequate supply, a sudden spike in oil prices, a subsequent contraction of economic activity and GNP growth, recession, a steep decline in demand for oil in commercial, industrial, and transportation sectors, and a collapse in oil prices from record highs to unsustainable lows (source).
This is how the fossil fuel industry is likely to be “phased out” (to use the term still banned by the oil executives now running the UN’s COP process). In addition to the ongoing decline in per-well productivity identified by Berman and others (e.g. source), the industry faces additional challenges of declining investor interest, growing regulatory restrictions, and increasing competitiveness of alternative solutions. As renewable energy production and storage become not only more accessible, but also significantly cheaper than comparable fossil fuel solutions, demand for fossil fuels will continue to fall (source). Eventually, probably well before 2050, the oil and gas giants we know today will either be out of business or will have transitioned themselves into renewable energy companies (source).
That’s when our problems will really begin.
Without fossil fuels, growth will end. Without growth, capitalism will end. And without capitalism, the world’s most wealthy capitalists will see their fortunes dwindle and possibly disappear altogether.
When that happens, the formerly rich North may be ready to accept degrowth principles and policies, or it may continue to resist. Either way, levels of consumption and waste will fall, not because people voluntarily recognize their over-consuming ways and lower their demand for goods and services, but because the supply of those goods and services will shrink as climate catastrophes disrupt agriculture, manufacturing, and supply chains around the world.
How things play out at that point will be a function of how deeply (and where) we have embedded alternative energy solutions into key sectors of the economy: primary energy production, electricity generation and storage, residential heating and cooling, decarbonization of buildings and construction, industrial high-temperature heating and manufacturing, upgraded electric transmission grids, and electrification of all forms of transportation, from cars to trucks to trains to ships to planes. This will determine how much energy our descendants will have at their disposal in a post-oil world, not only for the rest of this century, but for thousands of years to come.
