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What should an oil company like ExxonMobil do about the alarming spate of heatwaves, rainstorms and wildfires raging across the world?
How should Shell or Saudi Aramco respond to the record-shattering rise in global temperatures we are seeing at what appears to be just the start of a serious warming El Niño event?
These questions are more acute than ever for any company whose financial lifeblood comes from fossil fuels — the oil, gas and coal that are by far the largest contributors to global warming.
The answers are messier than they often seem. Oil and gas companies may not sell coal, the dirtiest fossil fuel. But as the world blasts through ever more climate records, such firms face pressure to upend their business models by shifting to cleaner revenues, without upsetting those owners or shareholders who want no such thing.
Many investors bought into an industry offering historically healthy financial returns, thanks in part to a cartel, Opec, that could support or stabilise prices in a difficult market.
Why switch to the uncertainty of a renewables sector with no cartel, no comparable record of returns and, for some green firms, no stonking profits like those made last year as the war in Ukraine supercharged fossil fuel prices?
It’s true this may not last. The International Energy Agency says a much-anticipated peak in global oil demand could come before the end of this decade. That’s partly because of what the agency calls the “explosive” growth of electric car sales — a reminder that technology can move in ways investors don’t expect.
In the early 1980s, when the US telephone giant, AT&T, asked consultants at McKinsey to predict how many cell phones would be in use worldwide by the turn of the century, it was told the total market would be about 900,000. But 900,000 new subscribers were joining mobile phone services every three days by 1999, according to a report on the advice that year in The Economist.
This story is instructive. Oil company leaders could use it to try to persuade shareholders of the need to shift. Alas, too many are doing the opposite.
Some run firms that lobbied for years against cutting emissions they knew were harmful, on the grounds this would hit the world’s poorest hardest. “What good is it to save the planet if humanity suffers?” Exxon’s former chief executive, Rex Tillerson, memorably told a company annual meeting in 2013.
Tillerson’s tactics live on. On July 6, as scientists confirmed Earth had just had its hottest June on record by a “substantial margin”, the BBC broadcast an interview with Wael Sawan, Shell’s chief executive, who said cutting oil and gas production would be “dangerous and irresponsible”. Children in poor countries such as Pakistan had to “study by candlelight” when their nations lost a bidding war for gas supplies after war broke out in Ukraine, he said.
This would be the same Pakistan that is still recovering from devastating floods caused by massive rainfalls last year, probably intensified by global warming.
Yet Sawan’s comments are helpful. They serve to distinguish Shell from other oil and gas companies that appear to take climate change more seriously, such as BP.
BP may have cheered some shareholders this year by deciding to slow the pace at which it lowers its oil and gas output this decade. But the 25 per cent reduction it is aiming for by 2030 is still more than most of its rivals have pledged and it is sticking with a plan to develop 50 gigawatts of renewable power by the same year.
This is just a plan and it’s nowhere near enough. There is a strong case for oil majors to break themselves up into separate green and fossil fuel businesses to better expose the value of green ventures. At the very least they should do more to stop leaks of methane, a powerful greenhouse gas.
Ultimately though, we should not expect the fossil fuel industry to lead us out of a crisis caused by fossil fuels. Only governments have the power to cut demand for these fuels, and their job has barely started.
Coal’s share of G20 countries’ electricity fell from 43 per cent in 2015 down to 39 per cent in 2022 as initially subsidised wind and solar power ate into its market. Electric cars are set to do the same for oil. Heat pumps could do it for gas. But both need to become even cheaper and easier to use, and fast — which requires a big helping hand from the state.
That may seem politically impossible. But so does life in a world where fossil fuels have altered the climate system in ways we are now struggling to understand.