Guest post by Tilka Doshi, originally posted at Forbes.
In the high road of the climate crusade, marked by corporate brochures extolling social responsibility and environmental sustainability, BP was first past the post among the big oil majors. Its legendary then-CEO John Browne – now Lord Browne — had declared in a speech at Stanford University in 2002 that “We need to reinvent the energy business. We need to go beyond petroleum”. With hindsight, it may seem that BP’s $200 million re-branding exercise heralded the onset of the cultural revolution by rejecting not just the demonized fossil fuel in its hitherto marquee name but also the ‘British” qualifier, which now stands among the chattering class as a signifier of nationalism and xenophobia.
The shock announcement two weeks ago by BP’s newly-appointed CEO Bernard Looney to slash oil and gas production by 40% and boost capital spending on low-carbon energy tenfold to $5 billion a year – a plan that “even Greenpeace is cautiously praising” — signifies another milestone in the familiar narrative of corporate environmental redemption. This comes after BP had sold off its US solar assets in 2011 as Chinese competition, falling prices and reduced government subsidies made it a losing proposition. And in 2013, the company disposed its US wind business worth some $3 billion as it tried to financially recover from its disastrous oil spill in the US Gulf Coast.
Drill, Baby, Drill!
Yet this tale of “woke” corporations, inexorable as it seems with other European oil giants such as Shell and Total also committing to the “net zero by 2050” carbon emission targets of the non-binding Paris Agreement, is not without its detractors. Almost 2 decades after Lord Browne’s speech and a few weeks before BP’s latest announcement, in a speech delivered (virtually) in the heart of US oil and gas boom, in Austin, Texas, the CEO of Chevron Corporation Mike Wirth spoke to the theme of “Powering Forward – Texas Oil & Natural Gas”. With remarkable candour – and to the dismay of news outlets such as Bloomberg News – Mr. Wirth told his audience that the global push for clean energy “doesn’t mean the end of oil and natural gas…it will be a part of the mix, just as biomass and coal are still enormous parts of the mix today”. Chevron, he assured his audience, would “find ways to make oil and gas more efficient, more environmentally benign”.
Under Mr. Wirth, Chevron has emerged as a leading player in the shale sector in the US. Last month, the company acquired Noble Energy in an all-stock $5 billion deal. Mr Wirth’s audience of some 1,000 participant at the Texas Oil and Gas Association summit, which included United States Under Secretary of Energy Mark Menezes, Texas Governor Greg Abbott and Chairman and CEO Willie Chiang of Plains All American Pipeline, would need little reminding of the extraordinary role played by the US “shale revolution”. It made the US the world’s leading oil and gas producer within an astonishing short time span of a decade or so. The surge in US crude oil production from its shale basins, particularly the Permian across Texas and New Mexico, have had significant impacts on both Middle East oil producers and on Asian net oil-importing nations.
The Shale Revolution Legacy
The impact of the shale revolution has been transformational on the Middle East. After decades of increased consumption and reduced output of crude oil in the US, the conventional wisdom since the oil price shocks of the 1970s saw the country as increasingly dependent on the Middle East for its source of crude imports. The opposite has occurred. With its new-found unconventional oil and gas resources, the US is no more the energy supplicant in its relationship with the region’s oil producers. Saudi Arabia and other Middle East oil producers still constitute the world’s major source of low-cost conventional oil reserves. However, their overwhelming dominance is no longer a defining feature of global oil markets.
For Asia, the primary impact of the US surge in crude oil exports has been on lowering the cost of oil imports. Global oil prices would have been higher by up to $50 per barrel if there had not been a shale boom in the US. Given the scales involved, even with conservative estimates on the price impact, the US upsurge in unconventional oil production has arguably led to the biggest transfer of wealth in modern economic history. Largely at the cost of reduced oil revenues to OPEC and Russia, the benefits of lower oil prices have largely flowed to Asia: China, India, Japan and South Korea constitute four of the world’s five largest oil importing markets. Given that over 60% of Asia’s total oil imports are sourced from the Middle East, the US oil production surge has led to a massive foreign exchange transfer in favour of Asia’s current account balances at the expense of the Middle East and other oil exporters. The fall in oil prices spurs economic growth by lowering costs. It is estimated that a $10/barrel decrease in oil prices leads to a 0.15% increase in GDP for China, and 0.25% increase in GDP for India. In any credible scenario where governments retain legitimacy by delivering higher standards of living for their people, the Asian developing countries’ appetite for oil, gas and coal will mount for at least a few more decades to come.
What it Means to Most People
But perhaps the unapologetic remarks by Mr. Wirth mean most to the wretched of the earth, those without, or with limited means, to access fossil fuels-based energy. Some 940 million people in the developing countries, constituting 13% of the world’s population, do not have access to electricity. Three billion people, 40% of all people alive, do not have access to clean fuels for cooking, leading to the high health costs of indoor air pollution which kills almost 4 million people every year. These people need access to affordable gasoline to power their cheap motor-cycles to bring them to work or their children to school (yes, they ride their families of three or four kids on a two-seater bike), and they need LPG canisters to cook cleanly without resorting to cow-dung, foraged wood and crop residues – mankind’s oldest dirtiest fuels from time immemorial. They need cheap power from coal or natural gas to escape grinding poverty. If they have competent governments, they would be doubly blessed as clean power generating plants with low emission technologies would mitigate ambient air pollution.
For the third of the global population struggling up the economic development ladder, and for the many more who live from monthly paycheck to paycheck, stern lectures from a privileged teen-aged prophetess preaching impending global doom, or from those who dabble in complex ‘hockey-stick’ models of global warming 50 or 100 years hence, seem callous. For them, the words of an old-school oil man in Texas ring truer today than those habitually delivered to the initiated well-off in uber-green California. The difference between BP and Chevron is indeed one of substance, and of huge consequence to the welfare of countless individuals.