The recent drop in oil prices from a high of $110 per barrel to $50 may signal the beginning of a long-term decline for oil. Although the price drop appears to be due to a temporary increase in US “fracking” production, there exist deep-rooted conditions that produce long-term negative effects for the oil industry.
Despite huge worldwide demand and price manipulation by OPEC, the forces of technology and market are pushing the consumption of oil in an irreversible downward direction as illustrated by the following developments:
First, the unrelenting price increases since the first oil crisis of 1973 has finally brought about a significant achievement in fuel efficiency of gasoline engines. The average passenger car nowadays can make 30 miles per gallon as compared with 15 miles in the 1970’s. Although the progress is incremental, better fuel efficiency is partially offsetting the increasing oil consumption resulting from the rising number of cars on the road.
Second, the modification of gasoline engines to run on compressed natural gas (CNG) or liquefied natural gas (LNG) is making inroads into the oil market. This is especially true for trucks, buses and taxis. Ironically, oil is facing another fossil-fuel competitor which burns cleaner for the environment. Natural gas engines are also suitable and economical for use on ships.
Third, electricity will replace gasoline sooner or later as primary fuel for land transport. The obvious reason is the higher performance of the electric motor over the gasoline engine. The steam train that burns coal is now a relic of the past. Trains running on diesel cannot beat the faster and cleaner electric trains, not to mention the bullet trains. Millions of hybrids, and electric cars, tricycles and bicycles are now operating on the roads all over the world. They will receive big boosts periodically from breakthroughs in battery technology, and efficiency improvements in solar and wind power used to generate electricity.
Fourth, the fact that oil is a dirty fuel contributing heavily to climate change is gaining recognition globally. People do not mind changing to electric cars if the cost is comparable. They will switch in droves if the cost is less, which will materialize with newer electrification technology.
Can oil maintain its competitiveness in the future? The answer is very unlikely due to three fundamental reasons. First, OPEC wants to maintain artificially high prices because their national incomes depend on expensive oil, so do the conspiring oil companies that want to fatten their own pockets. Second, the Middle East is facing rising costs in oil extraction due to their depleting reserves. There may be huge reserves of oil lying beneath the desert or ocean somewhere, but that will require huge investments first for exploration, then extraction and distribution, which will further add to the production and delivery costs. Third, the oil industry is sustained by an old technology of the past century where the possibility of innovation has nearly been exhausted.
On the other hand, the alternative fuels are only in their first stages of development. They are the fuels of the 21st century waiting to explode with each new innovation. Furthermore, alternative fuels are not subject to rising costs of production and delivery. Contrary to oil, there is no cost relating to exploration, extraction and refining in the case of solar and wind that exist in limitless abundance spread out all over the world.
In conclusion, apart from damaging the environment, oil is living out its usefulness after a century of being the dominant fuel. It is still a big industry because we are slow to find alternatives. Oil does not have a bright future taking into account all the basic economic factors. It is hard to understand why the oilmen keep saying that their slow-dying industry will create jobs. It will create some jobs but not enough even to sustain itself.