The world oil markets are facing a perfect storm which eventually could lead to structural economic and geopolitical changes. While Covid-19 has decimated markets and slashed profits, climate awareness and a green restart are gaining momentum in most developed countries. While it remains uncertain how demand will develop over the next few decades, it is becoming more likely that the traditional economic ‘power balance’ between international and national oil companies will change.
Before the oil crisis of 1973, Western oil companies were the dominant force on the global market with drilling, logistics, refining, and downstream capabilities. The wave of nationalism that swept through producing countries in the post-war period changed the balance when nationalization policies created ‘National Oil Companies’ (NOC). Western firms were called ‘International Oil Companies’ (IOC).
Ownership is power. In that sense, NOCs are no. 1 as they control the largest share of proven oil and gas reserves. While it may seem that the economic power balance has swayed in the favour of producing countries, the technical superiority of IOCs and a massive downstream infrastructure in developed countries has ensured relative stability.
However, the Covid-19 pandemic has sped up awareness and willingness across the world to decarbonize the economy. While oil remains an important source of energy consumption, sustainable policies could decrease demand. Predictions on this so-called ‘peak oil demand’ differ. While OPEC remains optimistic in the long-term, several leading energy institutions are more gloomy. Bernstein Energy, Rystad, and the IEA expect it to occur in 2025-2030, 2028, and 2020-2030, respectively. This means that a fundamental change is underway.
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IOCs, by definition, are more flexible and willing to ride the wave of change than NOCs, whose strength is based on the massive domestic oil and gas reserves. Western energy firms are already rapidly developing a renewables portfolio that includes production (wind and solar), distribution (EV charging infrastructure), and alternative business models. NOCs, to the contrary, are doubling down on hydrocarbons.
The transformation is accelerating dramatically under pressure from the possible consequences of the Covid-19 pandemic. It can already be seen in the record low investments by IOCs in greenfield projects. Furthermore, political, societal, and technical changes are reinforcing these developments. Compared to 2013, investments in new oil and gas projects by major Western energy companies have decreased significantly.
Not only societal pressure is increasing on IOCs, but also internally from shareholders. Dutch-British Shell has been facing ‘activist shareholders’ who’re pressing the company to do more on sustainability. Recently, in a landmark ruling in the Netherlands Shell was held responsible for oil pipeline leaks in the Niger Delta. It increases the headache of IOCs as the tide is changing.
At the same time, most developed countries are best positioned to decarbonize their societies. While oil is also used in industrial applications, most of the petroleum products go to the transportation sector. These EVs are rapidly becoming a normal part of life. Although it will take years before the combustion engine is 'dislodged', oil demand is already decreasing in these countries. However, the situation is completely different for the developing world where much of the economic growth is predicted to happen over the decades.
Therefore, oil will remain an important commodity and essential for many countries for the years to come. Decreasing investments by IOCs seem logical from a Western point of view, but the structural changes could have massive geopolitical ramifications. Already two of the three largest oil producers, Russia and Saudi Arabia, align their oil policies to exert maximum control over global markets.
Two developments could ensue: first, NOCs such as Saudi Aramco and Rosneft will see their global standing grow due to their rising share of relative global oil production. This includes political influence by their respective governments. Second, the world could be divided into two parts in the medium to long-term: carbon-based economies (developing) and moderately decarbonized economies (developed).
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As the global economy continues to globalize, the relative influence of oil-producing countries will increase. Especially due to the political nature of oil trade, NOCs will increasingly become geopolitical tools. Developed countries, likely, will fare better as reliance will decrease due to less demand for petroleum products in the transportation sector.
By Vanand Meliksetian for Oilprice.com
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