• Sunday, July 14, 2024
businessday logo

BusinessDay

The diminishing relevance of oil in global energy markets (I)

Nigeria’s ambitious growth goal hinges on surge in oil output

Oil is regarded as a global mainstay in the world of energy consumption and use. But its relevance has been receiving increasing contention among various stakeholders, given the economic, health, political and climate change concerns that come with the much-priced resource.

Before now, there have been several talks across international jurisdictions about shifting the global energy system away from the carbon-denominated energy industry towards a more friendly, low-carbon future. Now, with COVID-19, the Ukrainian war and other incidences – all of which have worsened the conditions surrounding oil and gas production, supply and prices globally, the cause for a global energy transition has become more valid.

Rigidities within the oil business have for long bothered the minds of active players in the sector and the need to accommodate a shift onto newer folds with less operational and functional severities is now becoming a more popular vote among national decision-makers across the globe. The obstinacy with anticipating often shifting prices, annual production volume, and demystifying the basic ingredients that determine the aggregate demand and supply schedules for the product is doubtless, a cumbersome task. Much more frustrating is the murky nature of correctly modelling a market structure that is heavily unionised and highly influenced by strong heads within cartels.

Although globally, oil efficiency is observed to be on a path of steady improvement, the emergence of the global pandemic and the ongoing Russia-Ukraine strife has reversed the trend, thus making the oil market a seemingly less desirable energy alternative in recent times. In 1973, for instance, when global oil intensity was at its peak, worldwide energy use per GDP was less than one barrel. More specifically, $1,000 worth of aggregate (global) production (based on 2015 prices) was achieved with less than one barrel of oil. By 2019, global oil intensity had dropped to 0.43 barrels per $1,000 of global GDP, thus representing a 56 per cent decline in oil intensity and in favour of improved efficiency by the same percentage.

Read also: FG shifts to cautious mode on 2023 oil projections

This means that while the world has become more efficient in the use of oil in production, the resource itself is becoming less significant as an energy alternative. This trend isn’t a new one, since experiences from the early 1980s have occasioned a gradual but linear percussion in the oil intensity decline path, year-on-year. Global experiences with wars, political and civil unrest, economic cycles and other regulatory imbalances over the past thirty-five years have beaten hard on the fossil energy market but without any impact on global oil intensity decline. Regardless, oil prices have always come in the way of easy oil use, as its prices are dominated by idiosyncrasies that are difficult to parameterise.

Therefore, as global oil consumption seems to saddle up in absolute terms, more forward-looking economies continue to seek ways to boycott fossil fuel consumption in place of more affordable, cleaner and certain energy alternatives that pose little or no consequence to economic, health, and environmental balance. Also, global energy investors are seeking ways to reduce risks due to hydrocarbon-based oil production and consumption.

According to a Wall Street Journal analysis, oil and gas industries in North America and Europe wrote down asset values of $145 billion, which roughly equates to 10 per cent of their total asset values in the first three quarters of 2020. Also, an investor initiative called Climate Action 100+ has pledged to ensure that major companies take necessary actions on climate issues. Already, the initiative has gathered over 500 signatories worldwide, which, combined, has a total value of over $50 trillion in assets under management. Many other companies and nations have voted in to hit a net-zero emission target by 2050.

Denmark, for instance, has pulled the plug on all expected deals surrounding the North Sea licensing rounds with the hope of terminating oil and gas production activities in the North Sea by 2050. Major energy companies in the US and some infant carbon engineering industries in Canada have secured deals to build a plant that will capture and bury up to 500,000 metric tonnes of CO2 annually.