By David Yager
May 20, 2022
The continued inability of fossil fuel producers or climate changes crusaders to read the crowd during this period of turmoil in energy, financial markets and the rising cost of everything is amazing.
Because if there anything the captains of industry and advocates for decarbonization must concede after the events of the past few years, it is that the customer – and/or voter – is always right.
As their products become increasingly expensive or even unavailable, producers keep messaging about their new-found infatuation with financial discipline and limited capital expenditures.
As the reliability flaws of renewable energy become increasingly obvious, the climate crowd stubbornly insists that the best solution is more of the same.
The world of energy is changing much more quickly than the messaging of those who have shaped it in recent years.
Let’s do something else.
Industry executives and directors have scratched their heads in disbelief as the people who refuse to quit buying their products increasingly vilify them.
This is because consumers, also voters, apparently live in an alternate universe. Comfortable with unlimited supplies of cheap energy and the necessities of life – and alarmed about climate change – people shifted their attention to issues and policies focused on the future, not the present.
This was facilitated by the continued urbanization of the population which is characterized by more consumers than producers. There is a growing number of younger urban voters who don’t understand where the essentials of life came from, or how they are produced. The ubiquitous penetration of fossil fuels into the production and delivery of almost everything is not understood.
From food to fuel to plastics to clothing, everything urban dwellers need is simply there, allowing people to switch their concerns from personal survival to bigger picture issues like the environment. As a result, until recently climate’s political juggernaut was unstoppable in Europe, the US and Canada.
To survive, the industry was forced to literally reinvent itself to adapt to the realities of commodity prices, capital markets and public opinion.
The historic business model of ensuring long-term reserves of the lowest cost oil and gas possible was replaced with survival and a major rethinking about the future. The pandemic two years ago forced the industry to ratchet the business down even further.
In 2020 European supermajors BP and Shell announced their intention to move away from their historic business model to lower carbon energy sources.
Compared to when oil prices collapsed in late 2014, there wasn’t much left of E&P and OFS companies when the recovery began in mid-2020.
As for climate change, the path of least resistance for the survivors was to chant “Net Zero By 2050” without actually knowing if and how this would ever be achieved.
Climate crusaders endured a different but equally sobering confrontation with reality. Despite well-publicized and widely accepted assertions that civilization was a one-way path to disaster because of fossil fuels, global demand for oil, gas and coal remains extremely difficult to reduce without denying supply or subsidizing alternatives.
It is obvious that pundits, opinions shapers and the growing number of politicians exploiting the shift in public opinion overlooked or ignored the sheer power of 7.9 billion consumers refusing to quit making purchasing decisions in their own self-interest.
Because whatever consumers were told, when it came to energy or the myriad of products that exist because of coal, oil and natural gas, their primary considerations remained cost, availability and reliability.
That is why after 30 years of warnings about the perils of fossil fuels and carbon emissions, global consumption has continued to grow with population and incomes.
And whatever renewables could or should be, their commercial shortcomings as measured by application, total price, availability and reliability are obvious. Solar electricity cannot replace the vast array of products or transportation fuels derived from oil, gas or coal. Renewable capacity has not expanded enough to materially replace the carbon-based incumbents.
So to push decarbonization forward in light of market and scientific realities, the focus has been on fossil fuel supply, not demand.
Combined with the geopolitics of Russia’s actions in Ukraine, restricting or discouraging supply has resulted in significant economic challenges leading to major increases in the cost of energy and everything else associated with fossil fuels, including food.
The advertised seamless and economically attractive energy transition has suffered a material setback and requires significant recalibration.
The spike in coal, oil and gas prices has resulted in a windfall of cash flow and profits for producers. But these companies have achieved current levels of profitability in part because of their adaptation to difficult market conditions since 2015. They have been cutting costs, staff and spending to reach levels of operating efficiency once thought impossible.
But their ability to ramp up production has also been materially reduced.
That’s what the tall foreheads of climate protection wanted, and notwithstanding the current significant consumer cost increases and supply disruptions, this may be their only success.
As energy and fuel prices rise, the profitability of producers has again become a political target. Governments and leftist politicians are floating windfall profits taxes, price caps and direct subsidies to consumers to help offset the significant transfer of funds from customers to suppliers.
And in response to the Russia/Ukraine conflict, there is strong interest among western nations to replace Russian oil and gas as quickly as possible. While renewables continue to be pitched, the most effective solution is enough new hydrocarbon production to materially reduce prices.
This will also reduce the input and delivery costs of renewables, the energy cost of energy. The energy transition discussion cannot continue without including this essential element. In the absence of new and low-cost energy technologies, fossil fuels remain an essential component of their own replacement.
But who can and will rise to the challenge? In the high price eras of the 1970s and from 2004 to 2014, the major sources of increased oil production have been from outside Russia and OPEC. These included the North Sea, North Slope of Alaska, Canada’s oil sands and US light tight oil basins.
Today, these regions are in the countries that have been the most aggressive with polices, programs and capital restrictions to turn their oil and gas producers into shadows of their former selves.
The reality is that these companies couldn’t quickly increase their output if they wanted to.
Yes, they have more cash from existing production.
But what they no longer have is the same internal exploration and development teams and programs, long term and meaningful support from capital providers, a service and supply chain able to quickly increase capacity, or the elusive “social license” among too many influential stakeholders to expand, not reduce, oil and gas output.
But due to an extraordinary and largely unexpected turn of event, what the oil industry has for the first time in years is an opportunity to sway public opinion in its favor.
Because voters are getting an unwelcome crash course in the cost of energy and where it comes from.
And what they want most is reliable and affordable supplies.
Fossil fuels have always done that. That’s why they became so ubiquitous and are so difficult to replace. Society exists in its current form only because of fossil fuels.
As for oil’s opponents, will public opinion shapers continue to deny billions of people what they need for their own good?
No. Because fewer people are listening. What may happen in 20 years has been replaced to what will happen tomorrow.
What matters most today is how and when prices for energy and other essentials will come down.
Because unless something material changes soon, the situation for energy and food costs and supplies will not improve this year or next. It could easily become much worse before it begins to improve.
Public opinion research has repeatedly revealed that support for climate change is a mile wide but an inch deep. Financial or lifestyle sacrifices for anti-fossil fuel policies and programs are not popular. That’s why the advocates for the Great Reset, Build Back Better and Resilient Recovery consistently push for more government policy and funding to advance their cause.
But if the oil industry’s behavior and messaging does not change with society’s rapidly changing expectations, expect more attacks from vote-seeking politicians under the guise of “fairness.”
Oil company executives and boards have proven to be the last to figure out which way the wind is blowing. Due to a century of increasing demand for the products no matter how poorly the business has been operated or how awful public communications have been managed, the industry has forgotten that our customers are the broader public, not politicians or investment bankers.
But perhaps something has rubbed off regarding external communications in the past ten years.
Here’s what the industry should do.
First, change the message. Don’t utter another word about “capital discipline.” What this really says to customers is how little of the windfall of their cash producers are enjoying is earmarked to solving their problems. Instead, state how deeply concerned oil companies are about the global supply/demand dynamic and how they’re going to help change that. Commit to increasing capital spending on oil and gas production as quickly as possible. Drill baby drill. The oil industry can and will solve this problem with more supply.
Second, telegraph the increased spending plans to former workers and the service and supply sector. Focus on job creation. The federal government will welcome more money through payroll remittances and increased economic activity. Telling the world how little you intend to reinvest is hardly a magnet to convince displaced oil workers to return to the industry, or for oil service companies to invest in increased capacity.
Third, explain in detail why producers can’t do more sooner. Talk about ESG investing, pipeline blockades, regulatory overkill, and all the other hurdles that make increasing oil and gas production difficult if not impossible. People who weren’t paying attention to energy before are all listening now. Voter sentiment is what politicians respond to, not physics, science or even common sense. The oil industry is not to blame for this mess.
Fourth, continue to embrace emissions reductions and the energy transition. The industry can do both, but do it properly. Decarbonization must be done at an affordable cost and achievable pace. Ensure that whatever production is added will be the most environmentally benign in history. Bring emerging emissions reduction technologies and monitoring and measurement systems along for the ride, and help them grow.
Last, talk directly to consumers and less to politicians and investment bankers. History has proven that compared to customers these folks are fair weather friends. Surely, the industry must have figured out by now that 21st century party politics is about achieving and retaining political power, not the best possible public policy. Boil it all down to the price at the pump. Highlight the tax burden that makes energy prices higher than they would be otherwise.
It is incomprehensible that in 2022 there would be energy rationing or supply restrictions in Europe and the U.S. Or global food shortages in the wealthiest world in history.
But here we are. Wars, pandemics and political incompetence will certainly mess things up.
Right now consumers and voters are laser focused on solutions, not dogma.
The fossil fuel industries have a tremendous legacy of helping advance the world’s population, prosperity, health, nutrition and life spans.
Maybe talk about this instead of how much money producers are making and how little of it they intend to spend on what people really need.
David Yager is an oil service executive, oil and gas writer, energy policy analyst, and author of From Miracle to Menace – Alberta, A Carbon Story. Find the book to www.miracletomenace.ca.