The reality is that no energy company will be unaffected by a renewable energy transition. Every part of the industry needs to consider how to respond. Doing nothing is likely a recipe for disaster. But not all aspects of the energy industry will be impacted equally. Additionally, many areas of the energy industry will continue to grow despite moving toward renewable energy. There is no clear-cut answer to whether oil production will be affected by a renewable energy transition.
Where Does the Market Stand
Renewable energy is on the minds of energy companies across the globe. As far as investment, by oil and gas companies outside their core business areas, the major oil companies have been less than 1% of total capital expenditure. For companies looking to diversify their energy operations, redeploying capital towards low-carbon businesses requires attractive investment opportunities in the new energy markets and new capabilities within the companies.
The major oil companies and the national oil companies account for a robust percentage of oil production. Majors account for 15% of production. National oil companies, which are wholly or majority-owned by national governments, account for well over half of the global output and an even larger share of reserves. These governments rely on the revenue they receive from oil production to provide social programs and run their governments. Unless these governments can change course and generate income from renewable sources, it's unlikely that oil-production will vary in their country. Oil production continues to benefit from the prospect of rising demand for the services that energy provides due to a growing global population – some of whom remain without access to modern energy
What Markets Might Change
In Europe and the United States, there has been a movement toward a transition for electric vehicles. Global electric vehicles surged more than 65% in 2018, year over year but slowed in 2019. Global electric vehicle sales increased by only 2.5% year over year in 2019. The European share of total electric vehicles continued to grow in 2020. In the Q1 of 2020, the European market share of electric cars increased to 26%. This growth was 44% year over year. Electric vehicle penetration globally is now 2.8%. The 2019 contraction in China's EV market's growth reflects both an overall decline in the light-vehicle market and significant cuts in EV subsidies. EV sales rose by 80% in the United States in 2018, driven by the market launch of the standard version of the Tesla Model 3. The increase slowed in 2019 because of the federal tax credit's gradual phaseout in January and July 2019.
Gasoline markets are the most likely to change over the years as governments begin to embrace electric cars and trucks further. The current market penetration is unlikely to alter this dynamic in the short-term. Still, the new administration in the United States will likely follow Europe, increasing electric vehicle sales.
Onroad diesel, which focuses on the Biodiesel and renewable diesel arena, is unlikely to change anytime soon. Renewable diesel will continue to grow, but it will be driven by government policy. If the price of alternative oils, such as soybean oil, continues to move higher, then the government subsidies needed to make this organic, renewable industry function will eventually become unprofitable.
Electricity might find its way into cars and trucks, but it's unlikely to be a driver of aircraft. There are no plans to place batteries into airplanes, which means that jet fuel will continue to require the use of crude oil production.
The Pandemic and Demand
Demand for oil products in the world's largest consumer has felt the brunt of the pandemic's spread. Total product demand in December of 2020 averaged 18.7 million barrels a day, down by 9.3% from the same period last year. Gasoline demand averaged 7.9 million barrels a day in December 2020, down by 11.8% from the same period the previous year. Distillate fuel demand averaged 3.7 million barrels a day in December, down by 0.3% from the same period last year. Jet fuel demand was down 37.6% in December compared with the same four-week period last year.
The Bottom Line
The move to renewable energy slowed in 2019, but most of the decline was due to the contraction in government incentives. The underlying issue is that the cost to produce an alternative to crude oil is expensive. Over time, these costs will decline, which will allow further penetration by electric vehicles around the globe. Simultaneously, cars and trucks will benefit from electric engines; it's unlikely that electricity will motor aircraft anytime soon. While renewable and Biodiesel continue to gain traction, these products need government regulation for success. Renewables will gain traction in 2021, but their impact on crude oil production over the next 5-years will likely be minimal.