You can't make plastic from a solar panel

Lenz blog

This post is a preliminary discussion of a new report by Mark C. Lewis titled “Toil for oil spells danger for majors“. (Thanks to this tweet by Chris Nelder for the link.)

I have only read the executive summary until now, though I am looking forward to reading more.

Lewis looks at the “energy return for capital investment”, especially for driving cars and trucks.

And he reports that $100 billion invested in oil buys between 1694 and 2250 TWh, depending on the cost of the development project in question ($75 a barrel or $100), while onshore wind will deliver 2336, solar 704, and offshore wind 1246. That makes onshore wind already competitive for gross energy.*

But when looking at cars, only 25 per cent of the energy in the oil gets delivered to the wheel (the rest is lost in the inefficiency of the engine). In contrast, electrical vehicles deliver 70 per cent of the energy to the wheels.

That dramatically changes the numbers above. Oil delivers only between 424 and 563 TWh for $100 billion investment, while solar gets 475, wind 1518 onshore and 779 offshore.

And that’s assuming $3000 per kW of cost for solar. I recall that solar in Germany has been installed for less than €1000 already over a year ago.

Anyway, Lewis says that the oil industry faces a risk of “stranded assets” not only because demand may go down because of global warming regulation. He says that they also face the risk of losing out to the competition of electric vehicles because oil prices go up too high.

I certainly hope that happens. People need to stop driving stinking gasoline cars. That’s one of the big factors when pumping CO2 into the atmosphere.

And eventually it will. Already now fuel costs for electrical vehicles are much lower than for stinking gasoline cars. The only thing saving gasoline as an option is the fact that batteries are still expensive, making the electrical vehicles’ purchasing prices higher.

But I agree that this may be a problem for the oil industry. They certainly should not rely on cars and trucks staying with the gasoline option.

So what should they do? There is no way to win in the competition against electric fuel in the long run. And if the price of oil goes up and the price for renewable energy goes down even more, as Lewis thinks it will, then the above figures will look even worse for oil.

I think they should face the inevitable fact that the world is going to use less oil sooner or later. And compensate for that fact with much higher prices.

Let’s take ExxonMobil as an example case. As Wikipedia tells us, they had revenue of $420.836 billion and an operating income of $40.301 billion in 2013, selling around 3.921 million of barrels a day.

Take that number down by 80 per cent to 0.782 million a day over the next couple of decades. That would result in revenue of $84.167 billion, all things equal.

Now get the price up by a factor of three, to $300 a barrel, and take revenue up as well to $252.5 billion. Operating income should go up massively, even with revenue down, since they would get a margin of around $200 instead of one of around $20.

The higher price would in turn accelerate the transition away from stinking gasoline cars. And leave ExxonMobil without a market in the transport sector. Stinking gasoline cars would become as rare as steam locomotives are now, something for the occasional tourist attraction.

As well they should, of course. And as they will sooner or later anyway.

But the market for non-fuel use of oil will always remain. You can’t make plastic from a solar panel. You can make it from oil. That non-fuel use is about 10 per cent of all oil use right now. Add in another 10 per cent for air traffic (not suited for batteries) and other niche markets to get your goal of about 20 per cent of present oil use.

All the oil companies need to do to stay profitable is accept that they will need to sell less, at higher prices.

To come back to the report by Lewis, I agree with his conclusion: Cars will move to electric vehicles.

But I don’t necessarily agree with the idea that this is bad for the oil industry, or that this will lead to “stranded assets”. I think that if the oil industry handles the challenge from the transition to renewable energy correctly, this will be a large opportunity to increase their profits.