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Forbes: How Royal Dutch Shell Is Setting A Bad Example Amid The Peak Oil Demand Hysteria

Royal Dutch Shell chief executive Ben van Beurden speaks at a full year results conference in London on January 31, 2019. – Royal Dutch Shell today said that net profit surged 80 percent to $23.4 billion in 2018, thanks to higher oil prices and cost: AFP/GETTY IMAGES
Senior Contributor:
In 2004, a mania grew in the financial and energy circles around the idea of peak oil. The notion that the world was running out of oil became a commonly held belief, which, in turn, helped push oil prices well above $100 per barrel.

Fifteen years later, peak oil is still talked about by some, but most industry insiders pay it no heed. Instead, over the last few years, the increasingly popular concept has been peak demand. Peak demand is the idea that the demand for oil will reach an apex and then start to decrease, especially as government regulations require more use of alternative energies and as battery-powered machines, like electric vehicles, will presumably become more popular.

Peak demand may or may come to pass—that is not the concern here. What we do know is that if the peak demand idea continues to gain popularity it will lead to a shortage of oil in the coming years and decades. The idea of peak demand threatens the global oil supply because it incentivizes and even excuses oil companies to stop exploring for and producing (E&P) more oil.

But Shell is taking a major risk based on the idea of peak demand and environmentalism. Shell has decided to cut back on upstream development, the segment of the oil business devoted to finding and producing oil. Shell’s stock price results may look good now, but its decisions could lead to a major shortage of oil from Shell in the future. Oil is a business that requires long term planning, sometimes a decade or more out. Companies must commit capital expenditures to ensure long term supply of oil. Van Beurden and Shell are proudly moving away from that.

This week, Van Buerden spoke to investors in New York and London to increase interest in Shell stock, as reported by The Wall Street Journal. Shell is apparently telling investors that it is in the process of “transforming into a cleaner business centered on selling electricity,” and, at the same time, will return at least $125 billion to investors through dividends and share buybacks. This cash, which is about half the size of the company’s market cap, is supposed to come from the traditional oil business.

Even Van Buerden admits that oil demand will exist for decades, so it doesn’t make sense to take $125 billion from the oil extraction business to give to shareholders. The only way this would make sense is if the priority is raising the short-term stock price, not protecting the long-term business interests of the company. The oil business requires long-term planning and long-term investment for returns that do not come for many years down the line. Major stock buy backs and dividends help the stock price, but they do not ensure supplies of oil for decades to come.

There’s nothing wrong with Shell deciding to transition from an oil company into an electricity company, but the world will face a major crisis if other international oil companies like ExxonMobil, Chevron or BP follow suit. Peak oil demand has not come, and we don’t know if it is coming anytime soon. Meanwhile the world needs oil and will continue to need oil.

Ellen R. Wald, Ph.D. is a historian and consultant on energy and geopolitics. She is the author of Saudi, Inc., president of Transversal Consulting & a Senior Fellow at the Atlantic Council.

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