New Oil? The Energy Revolution in Reverse

We may be at the start of a new energy transition, but a very different one from the one that most of us imagined — or, until recently, have even read about. This revolution is so dramatic that it promises to take us back full circle to where we were only a few decades ago.

The age of “new oil” is upon us. The oil companies have shed all inhibitions and given us a glimpse of the bright new future. They promise a world with low-risk oil exploration, decreasing prices and ramped up adaptation to climate change.

We should be so fortunate! Ominous signs appear as soon as one realizes that the promised “low-risk” environment for exploration really means “manageable” risks. In an industry that has always been long on promise but, at critical moments, short on risk management capability, that does not bode well.

Not to worry, though. The oil industry is leading the revolution by “virtue” of a charm offensive that includes four broad messages aimed at the general public:

Message No. 1: We know what we are doing.

Led by Shell, the industry’s strategy is to focus on the Arctic. Shell, however, has faced many hurdles, including “equipment problems, regulatory hurdles, persistent sea ice and legal challenges from Alaska Natives and environmental groups,” as the New York Times has noted.

Other industry “players” make the case that lessons from the Gulf of Mexico have been internalized and that risks of exploration — wouldn’t you know it? — are indeed manageable.

The search for new oil is taking a major turn towards some of the last outposts of our planet. Alaska, Northern Canada, Russia’s Far East, Greenland and Norway are all targets for major exploration and development.

Other fragile sites are also under serious consideration by the oil industry. These frontiers include the tropical forests of Latin America, the coastal waters off Brazil, Argentina and Libya.

The oil companies have little doubt that developing substantial oil in these places and producing and shipping it is a significant part of our common global energy future.

Even if all the ecological and other risks relating to the exploration of these energy frontiers could be properly minimized, there remains the issue of greenhouse gases and their containment. Not to worry, though. The industry knows what it is doing. Case closed.

Message No. 2: Climate change is manageable. We just need to adapt.

Speaking at an event at the Council on Foreign Relations in June, ExxonMobil CEO Rex Tillerson said that the consequences of climate change are “manageable.”

The overall suggestion was that of an oil industry that is prepared to recognize climate change as a fact, but remains skeptical about some of the science. In any case, it also believes firmly that any potential negative problems are “solvable.”

“We will adapt to this,” Tillerson emphasized. In Exxon’s mind, it all boils down to “an engineering problem with engineering solutions.”

Of course, what is far less clear is how much it will cost, who will pay and by when. In fact, all of that is not just left unstated, but unaddressed. It is clearly an issue oil companies do their utmost to shy away from.

At a time when consumers all around the world feel constrained in their ability to spend, and the price of gasoline is high-ranking concern, it is no real surprise that the industry tends to get away with its preferred stance.

Gone are the times when it was accepted thinking that a carbon tax could dampen the demand for oil. Gone also is the idea that such a tax could provide some level of funding to help countries — and not just the poorer ones — adapt to climate change.

Remember the times when there was a common belief in the idea that the polluter pays? Why is it that the oil companies aren’t held responsible for the damage they cause?

Message No. 3: The era of cheap oil is about to be unleashed.

And now for the really good news: New technologies can cut the costs of extraction and development. Led by the forever dynamic oil industry, the world may be moving back down the cost curve.

The promise that oil prices will no longer keep rising is an especially appetizing one to the automotive industry. Less expensive oil helps boost the sale of cars and, hence, production prospects.

Oil production is set to grow as well. Some analysts estimate that global oil output will grow from the present 93 million barrels a day to around 110 million barrels a day by 2020, the largest increase in a single decade since the 1980s.

But here is the rub: Do we know what it really costs to produce a barrel of oil? Economists have long demonstrated the difference between two crucial dimensions.

On the one hand, there are the financial costs. Those are the costs faced by an oil company, including all the internal costs of production, plus adjustments for the taxes it pays and the subsidies it receives.

Then there are the economic costs. These include the total costs to society at large from the production and distribution of oil (the internal costs as well as those external to the company).

Increasingly, we are facing a situation with regard to the exploitation of our natural resources in which the external costs far outweigh the internal costs.

Of course, the oil analysts and the industry generally care only about the financial costs of extraction, although some allow for small offerings for the real economic costs. This usually comes in the form of paying for some very limited “social and environmentally responsible” activities in and around local production sites.

But what about the value of the land and water used, the potential local ecological damage, the social and economic costs due to the displacement of local people — and the costs to the planet of additional greenhouse gases? Those costs are on society, stupid!

No wonder then that these costs are not featured in any of the corporate cost calculus. The paradox is obvious: Moving down the companies’ financial cost curve may occur at the same time as we move up societies’ economic cost curve.

As costs of production decrease, increased profits are ploughed back into moving up the exploration cost curve, which results in investment in new oil fields. The industry heralds that as a virtuous circle. But is it?

It is not hard at all to realize that “lower prices” end up increasing our dependence on, and use of, oil. Through the impact of increased greenhouse gases, more consumption also massively increases both ecological risks as well as the costs of adaptation.

Cheaper for whom you might ask: Certainly not for our environment.

The United States and Canada’s vast sand and shale oil and gas reserves are a case in point. Can you list all the items on the “fallout” list? How about damage to freshwater systems? How about toxic and potentially carcinogenic sludge management?

Or the obliteration of pristine biologically important wilderness areas? The high energy needed for extraction? Does the potential movement of local people matter little to the industry?

Aside from the highly improper cost accounting for all that, are those risks really “manageable,” as Exxon’s CEO claims?

As a global issue, a recent report released by Cornell University estimated that shale gas extracted through fracking contributes as much to global warming as coal, if not more.

Message No. 4: We believe in social and environmental responsibility.

Those risks notwithstanding, the public relations departments in many oil companies have busily transformed themselves, as if by magic, into new centers of social and environmental responsibility.

Now, a few of them are serious about the claimed transformation and deserve huge credit for leading the corporate sector toward a more enlightened era of corporate responsibility and accountability.

The oil industry as a whole, however, appears at best to have a mixed record. Certainly, some good works have been funded by the oil industry, but grant budgets have been minuscule.

Awards of $50,000 to think tanks or NGOs are hardly generous, or even meaningful, when contrasted with the annual revenues of over $450 billion for a company like Exxon.

The industry’s constant hyping notwithstanding, the reality is that we may have actually entered a new era of “uneconomic” oil where the full social, environmental and economic costs of oil extraction are larger than the benefits from oil use.

Furthermore, the risks of exploration in highly fragile ecosystems could cause unimaginable and costly ecological and economic damage. And then there is the small matter of the true costs of global damage resulting from a planet remaining addicted to fossil fuels. In the oil industry’s happy scenario, this addiction would be extended well into the middle of this century.

The reassuring message we are being fed is that we can, or at least think we can, adapt at reasonable cost to a two- or three-plus degree possibility. But is this the risk we want to take?

Would the oil companies be willing to put their money where their hungry mouth is? Are they willing to be taxed to cover the full costs to the globe of incremental oil output? I doubt it.

What to do?

The hope for a massive fuel switching from fossil into non-fossil fuel sources of energy is in for a major set-back.

Given the constant barrage by the industry, shouldn’t we create an independent global commission on the future of oil — for nothing short of humanity’s sake?

Such a commission could look, in a professional and detached manner, at the real costs and the real benefits of oil extraction. By placing reasonable and understandable numbers on the table, including the value of ecosystem destruction and the range of values for the damage caused by greenhouse gases, an informed debate could ensue.

It would have to answer, with authority and full transparency, questions such as: What is the economic relationship between emissions and adaptation in order to price and tax carbon correctly?

Would this not be a promising special theme for the Intergovernmental Panel on Climate Change (IPCC) to tackle in its forthcoming global assessment? It would surely be refreshing new way to use the brainpower of all those scientists, rather than “engaging” them in the umpteenth edition of a more-of-the-same exercise.

If that does not happen, are we in for a new level of activism and social disruption as the oil companies remain deaf to the voices of reason and blind to the consequences of their actions? Only time will tell.

Editor’s note: This essay was adapted from the author’s presentation at the 2012 Salzburg Trilogue. Hosted by the Bertelsmann Stiftung in Germany, the Salzburg Trilogue facilitates international cultural dialogue by bringing together recognized public figures to consider matters of global importance.