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The disruptive forces that could suddenly displace oil

It's the last question at the end of every investor meeting. A deadpan shareholder asks the chief executive officer, "What keeps you up at night?" Feigning concern, the sweaty-palmed business leader identifies nightmarish business threats, demonstrating alertness to competitive risks that may destroy the company.

Surely typewriter moguls had frightful moments in the early 1980s, tossing, turning and sweating under their bed sheets. They couldn't avoid bad dreams with visions of competitors in werewolf outfits selling dot-matrix printers and personal computers booted up with the pioneering word processing software WordStar.

Are oil executives sleeping well today? Or do they have nightmares about Tesla electric vehicles? Or illusions of ghoulish automotive engineers improving fuel economy? Or scientists holding test tubes with bizarre life forms that secrete synthetic gasoline? Can the leaders of today's oil companies count barrels and go to sleep soundly, or is a WordStar moment looming in the business?

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The major threats to the oil business revolve around transportation. Two-thirds of every barrel is burned to move people and goods. Restless insomnia may be triggered from four main categories below.

1. Efficiency gains

The University of Michigan Transportation Research Institute (UMTRI) reports that the fuel economy of vehicles in American showrooms today are up an average 27 per cent since 2007. But it will be a couple of decades at least before the world's legacy fleet of one billion gas guzzlers is turned over to greater efficiency. In the meantime, roughly 1.5 million new drivers still get shackled to gasoline every year. Gains in vehicle fuel economy will moderate the growth rate of oil consumption globally, but not displace it soon.

2. Fuel substitutes

Blended products like ethanol immediately come to mind. However, the economics of farmed biofuels are suspect and the ethics of the food-for-fuel debate are touchy. Future biofuels from genetically engineered microbes in vats are possible substitutes, but scaled-up operations are years away. Converting natural gas or coal into synthetic petroleum substitutes is also possible. But not much sleep is to be lost here; none of these masquerading fuels are likely to displace a meaningful portion of the world's 90-million-barrel-a-day addiction.

3. System substitutes

How many ways can a set of wheels be turned? The dominant system starts with a barrel of oil at a well site and ends up in an engine under the hood. But there are many other pathways that can take a primary energy source through to a set of blinged out rims. For example, the wheels of an electric vehicle can trace their rotation back to many primary sources, including wind turbines, solar panels, hydro dams, nuclear reactors and fossil-fuelled power plants. Natural gas can be piped from a well into a natural gas vehicle (NGV). While NGVs are not a hot commodity in North America, they are experiencing exponential sales in some countries, notably China. Hybrid energy systems are finding their way to the wheels too. Plug-in hybrid electric vehicles tap into all types of primary sources, effectively diluting the oil monopoly. Early adoption of electric vehicles, either pure or hybrid, should be on the radar of every oil executive. Yet the fleet turnover issue is still a big impediment to rapid change. It was cheap and easy to take typewriters to the dump. A billion cars will take a lot longer.

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4. Transportation substitutes

Biking, walking, busing and van-pooling are commuter substitutes. But let's think outside the wheel: Changing the physical paradigm of "going somewhere" is potentially the wake-up-in-the-middle-of-the-night moment. The emerging trend of human "virtualization" is a substitute for going places on wheels or wings. Products such as Skype, Google's Chromebox for Meetings, Cisco TelePresence and many others displace the need to burn petroleum to get somewhere. These technologies are taking the edge off of oil growth, and their potential adoption rate is far faster than substituting entrenched fuels, vehicles and systems. The 2-D HD experience is increasingly compelling, but it's the 3-D virtual reality (VR) meeting that may be the game changer. That day is coming sooner than we think. The Oculus Rift, a VR technology recently acquired by Facebook for $2-billion, will be a profoundly disruptive technology on many fronts, including transportation. Within a decade, it's likely that we will be experiencing virtual reality so real that we will feel in the presence of others, but not physically so. It all sounds sci-fi, but so did the personal computer in 1981. And while current generations still feel the need to press the flesh in person, it's hardly the case for emerging youth who are increasingly loath to getting their drivers licence.

Is it time to type up an epitaph for oil? Not yet. In reality (not virtual reality), there is no one disruptive force from any of these four categories that will suddenly displace oil. But over the next couple of decades the cumulative impact of all the above – and much more not mentioned – could significantly affect the share of oil in the transportation market.

The real nightmare for the industry will be if oil prices rise quickly again because, unlike past price shocks, there are now enough germinating alternatives to cumulatively start a WordStar moment.

Peter Tertzakian is chief energy economist at ARC Financial Corp. in Calgary and the author of two best-selling books, A Thousand Barrels a Second and The End of Energy Obesity.

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About the Author

Peter Tertzakian is chief energy economist and managing director with Arc Financial Corp. in Calgary and provides analysis on technology and energy-related businesses to fund managers and portfolio companies. More


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