Will they still make Hess toy trucks?
That was the first question put to oil industry executives John Hess and Mike Wirth in an interview I listened to on the way to work Monday morning.
It was the first question I would’ve asked.
Because if you’re my age or anything close to it, you’re very familiar with the toy trucks, helicopters and rescue vehicles that Hess Corp. (NYSE: HES) has released every Christmas for more than 50 years. These vehicles have lights and sirens and seem to get more interesting every year.
I and many others of my generation would be very sad to see the end of this wonderful tradition.
The concerns about the Hess toy trucks were prompted by the announcement this week that Chevron (NYSE: CVX) will acquire (the much smaller) Hess for $53 billion in an all-stock transaction.
Thankfully, Hess CEO John Hess and Chevron CEO Mike Wirth assured listeners that the toy series would continue uninterrupted by the energy sector mega-merger.
That’s the second massive merger in the sector this month. A few weeks ago, Exxon Mobil (NYSE: XOM) agreed to buy Pioneer Natural Resources (NYSE: PXD) in a $60 billion stock deal.
Beyond the fate of the beloved Hess toy series, the two mergers raise an important question about energy: If oil and other fossil fuels represent the energy of the past, why are the oil majors ponying up billions to acquire new sources of the stuff?
Put another way, shouldn’t they be investing in renewable energies – the energy sources of the future – like wind and solar and biomass?
Well, they’re doing that too.
In July, Chevron and agricultural commodities firm Bunge (NYSE: BG) together acquired Argentina seed business Chacraservicios. The acquired firm cultivates Camelina sativa, a flaxlike cover crop with a high oil content that can be used to make renewable fuels.
But as this month’s huge energy sector deals suggest, we’re a long way from turning off the oil and natural gas spigots.
According to a recent report by the International Energy Agency, which tracks the global energy sector, global oil demand will continue to rise in the coming years, growing by 6% by 2028.
And while oil use for transportation will shrink due to the growth of electric vehicles and biomass fuels and better fuel economy, demand for oil from the petrochemical and aviation industries will remain robust.
To put it more bluntly, demand for oil will slow – and may even peak in the next decade. But the use of oil and other fossil fuels will continue for many years to come.
Here’s how oil major BP (NYSE: BP) sees it…
As you can see in the chart below from BP’s “Energy Outlook 2020” report, there are several scenarios for predicting the date global oil use peaks. These are largely dependent on government policies.
In the net-zero scenario, governments enact tough laws to enforce net-zero emissions. That cuts oil use rapidly (green line). In the rapid scenario, government policies on climate and emissions are more moderate (blue line).
The third scenario (orange line) depicts what will happen if governments basically continue what they’ve been doing on oil policies. After watching energy policy for two decades, I’d bet on that “business as usual” course of action. In that case, oil use peaks around 2030 and then begins to decline very gradually for decades.
And the oil majors are betting on that too. That’s why they’re writing massive checks to secure supplies for decades.
Don’t count oil out just yet. New fuel sources will arrive and change the mix, but it will take a while.