Biofuels and electric cars pose threat to transportation fuels industry

The trillion-dollar oil industry, which gets 80 percent of its revenues from transportation fuels, needs to diversify into adjacent areas to counter a serious threat from alternative fuels and battery technologies, according to Lux Research. While rumours of oil’s demise have been around for decades, the threats are becoming much more real. 

Even in the case of moderate adoption, biofuels would be a $ 220 billion industry worth a 13 percent share of transportation fuels in 2030. Meanwhile electric vehicles are approaching an inflection point between 2035 and 2040 where half of all cars sold will be plug-ins. All told 31 percent of global vehicles will be running on alternative fuels in 2030, and the drop in demand will make typical oil production in the UK, Brazil, Canada and parts of the US uneconomical.

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“Oil’s dominant position in transportation fuels has proved impregnable for more than a century, but real threats abound now. Government regulations have had a profound impact on the transportation fuels, catalysing gasoline and diesel substitutes like biofuels and electricity, and major players need to diversify to maintain their long-term competitiveness,” said Brent Giles, Lux Research Director and lead author of the report titled, ‘Dealing with threats to the transportation fuel oil industry’.

Upstream costs in 2014 were 25-30 percent below 2012 highs, largely driven by a collapse of demand. Costs can be lowered further over the next decade, thanks to advances like robotics, improved fracturing methods, lean engineering and treatment solutions for flowback water, said Lux Research.

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With global commitments targeting 35 percent cuts in gasoline and diesel consumption, oil companies need to diversify. Natural gas and bio-derived natural gas offer opportunities. Bio-fuels are another area, as exemplified by advances made by Neste and Valero Energy. 

Specialty chemicals could make a difference between profit and loss for oil majors, and steer them into an industry that is less vulnerable to regulatory limits. But, according to Lux Research, oil companies need to position themselves well to manufacture unusual, high-value chemicals rather than just the commodities most produce today.