Is this the end of the oil era? And if so, what should you invest in?
Oil major BP says we may already have seen “peak oil demand”. What would that mean for your portfolio? John Stepek investigates.


The world may already have reached “peak oil demand” – the point at which annual consumption hits a plateau and is never any higher again. That’s not a hyperbolic press release from Extinction Rebellion or some other fringe environmental protest group. It’s according to none other than oil major BP. In its just-published Energy Outlook 2020 report, BP paints three scenarios for energy demand between now and 2050.
Under both its “Net Zero” scenario, in which governments and individuals take aggressive measures to reduce carbon emissions, and its slightly less aggressive “Rapid” scenario, oil consumption will never again hit the peak of 100 million barrels a day seen last year, before the coronavirus spread havoc across the globe.
BP is keen to point out that it’s not predicting the future – instead it’s engaging in scenario planning (which sounds a bit like having your cake and eating it to us, but let’s not get picky). The idea is to give some idea of just how volatile and uncertain the outlook is for energy demand over the coming decades.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
That said, even on BP’s “Business as Usual” scenario, we’re looking at a peak in the early 2020s followed by a lengthy plateau in oil demand. And while we have to bear in mind that new chief executive Bernard Looney has staked his reputation on making BP “greener”, the sheer extent of the shift in tone is striking. The 2019 outlook had “peak demand” occurring a whole decade later than the present scenarios suggest.
The idea of a world without fossil fuels – or at least, one that is moving significantly away from them – will be music to the ears of ESG investors – those who focus on a company’s impact on the environment and society, as well as its corporate governance.
But while growing attention among investors and consumers to ESG issues is a factor in this future demand shift (and BP’s reaction to it), there’s something more important going on. Today, there’s an increasingly strong business case for the idea that the returns to be had from oil simply aren’t worth the effort anymore.
Beyond petroleum (and the rest)
BP is certainly starting to put its money where its mouth is in a way that it didn’t in the early 2000s, with the “Beyond Petroleum” branding exercise. Earlier this year, Looney announced plans to slash BP’s oil production by 40%, and lift renewable investments tenfold by 2030, with the goal of becoming a “net-zero emissions” company by 2050.
Now BP has bought a $1.1bn stake in two US offshore wind projects being developed by Norwegian state oil company Equinor. The offshore wind industry is growing by around 20% a year, notes the Financial Times. Looney says the deal will help BP to its goal of “rapidly scaling up our renewable energy capacity”.
Yet, BP is late to the party. As Ed Cropley notes on Breakingviews, in 2000, when BP was first making noises about “going green”, its market value was 100 times that of Danish wind turbine maker Vestas Wind Systems, which had been public for just two years. Today, BP is worth just two-and-a-half times as much as the wind farm group. “If only BP had really gone beyond petroleum when the going was good,” as Cropley puts it.
The key is that solar and wind projects are now competitive with long-term crude oil projects in terms of return on capital employed, as the cost of solar and wind has fallen and the price of oil has dropped, say Cropley and George Hay on Breakingviews. Meanwhile, “the regulated nature of electricity provision means green projects only need to earn 3%-5% a year to generate an economic return”, according to Goldman Sachs analysts. Oil, being more volatile, requires a bigger return – closer to 10% reckon Bernstein analysts – to justify the investment.
In short, the fundamentals increasingly favour green projects. According to UK government figures, “by 2030, the costs of solar power should be lower than gas, while offshore wind should be roughly comparable”. As a result, “Looney’s pivot may increasingly become a template”.
This shift has not gone unnoticed by markets. Traditionally, high oil prices have been good for renewables because a high oil price makes renewables more competitive and encourages more investment in the sector, whereas a crashing oil price should be bad news. Yet this year’s oil price crash has not pulled down the renewables sector. In fact, as analyst Eoin Treacy of FullerTreacyMoney.com observes, “the correlation between renewable stocks and oil prices broke down last year”. This implies that “the market has moved on from thinking of renewables solely in terms of cost competition with oil”.
Several factors lie behind that. One, the assumption that the cost of carbon credits – licences to emit, effectively – will carry on rising, which seems a reasonable assumption given the political appetite. Low interest rates are helpful too in terms of encouraging investment.
But another argument is simply that technology just keeps getting better. “Tesla’s cars now have the best resale value of any vehicle. Five years ago, second-hand electric vehicles were worthless,” notes Treacy.
So, what are the implications?
To read the whole of this article, subscribe to MoneyWeek magazine
Subscribers can see the whole article in the digital edition available here
Sign up for MoneyWeek's newsletters
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
-
What is the average salary by age – and how do you compare?
Are you making more than your peers? We look at the average salary by age to see how much the typical Brit earns at different stages of their life
By Daniel Hilton
-
Tesco braces for supermarket price war with rival Asda
Tesco, Britain’s biggest grocer, has opted to cut its prices more quickly to prevent Asda grabbing market share
By Dr Matthew Partridge
-
BP's 'long, painful decline' – and why next year could be even tougher
Opinion Long-suffering shareholders in oil giant BP have been pushing for change. It won’t come soon enough, says Matthew Lynn
By Matthew Lynn
-
Investment trusts tap the profits in exotic and obscure global markets
Opinion Peter Walls, manager of the Unicorn Mastertrust fund, highlights three investment trusts as he shares where he'd put his money
By Peter Walls
-
Falling revenues and mounting debt spell trouble for Jumia Technologies
Struggling African e-commerce platform Jumia Technologies looks headed for the exit, says Dr Matthew Partridge.
By Dr Matthew Partridge
-
Why are energy bills so expensive in the UK?
Electricity bills in the UK are higher than in any comparable rich country. Some blame the net-zero zealotry of the government for that. What is really to blame for high energy bills?
By Simon Wilson
-
Next reports £1 billion in annual profits for the first time – what's next for the retailer?
Clothing retailer Next has become only the fourth member of its sector to surpass £1 billion in annual profits. What does this mean for the company's future?
By Dr Matthew Partridge
-
Best of British bargains: cash in on undervalued companies in the UK stock market
Opinion Michael Field, Chief Equity Market Strategist, EMEA, Morningstar, selects three attractive UK stocks where he'd put his money
By Michael Field
-
Building firm Keller presents low debt and ample scope for growth
Geotechnical contractor Keller, which supports vital global infrastructure, boasts rising profits and a cheap valuation
By Dr Mike Tubbs
-
PZ Cussons share price down 75% in last decade – why it's one to watch
Opinion Once-strong consumer-goods business PZ Cussons is out of favour with the market. That spells opportunity for investors, says Jamie Ward
By Jamie Ward