Oil companies have a secret. Or rather, there's a crucial fact that they'd prefer you didn't know. Right now it's taken as gospel that America needs increasing amounts of oil, and that drilling here in the U.S. will help provide it. Even people who are concerned about spills and climate change will often concede that the oil industry is a necessary evil, like stealth bombers or regular dental appointments.
But the basis for this argument -- that oil demand is rising and will continue to rise -- is simply not true. In fact, oil demand in the United States has been falling for the last five years and will continue to do so. In 2010 the now infamous BP boss Tony Hayward told an audience of oil executives that "none of us will sell more gasoline than we did in 2007". As energy analyst Tim Evans from Citi Futures Perspective told Reuters last month:
"This is an established, ongoing long-term trend. U.S. gasoline demand appears to have peaked in 2007 and over time we've been consuming less."
Evans points out that this cannot be explained by the recession alone, and that a number of elements are coming together which put gasoline (and by extension, oil) demand on a permanent downward curve. One of the main factors is increasing engine efficiency and the arrival of cleaner vehicles. But there's an interesting cultural trend at work here, identified in a new report from the UK's respected Chatham House think-tank:
"The fall in the demand for private vehicles in younger age groups predated the economic decline since 2008, and can be sustained when the economy recovers because mobile phone apps make it easier to identify and use public transport options, with social networking on the internet also substituting for car trips."
We are entering a new American era where the symbol of adulthood and identity is not the automobile but the iPhone. In dense, congested urban areas the car is losing its allure, and clean alternatives like cycling and digital interaction are on the rise. Automakers are worried about this and have responded by putting docking stations above horsepower statistics in their brochures. But how can the oil companies respond? Could the most reliable gasoline market in history be on the verge of revolution? The industry's top lobby group, the American Petroleum Institute, doesn't think so. It attributes falling oil demand to one thing and one thing only: the economic slowdown:
"While retail sales for July are up and housing has improved" said John Felmy, chief economist for the API. "The weak petroleum demand numbers are a strong indication the economy is still faltering."
International oil companies have a major problem on their hands. As consumers respond to high gas prices and manufacturers bring more hybrids and electric vehicles to market, a business plan based on inexorable growth in oil demand begins to look a little shaky. Some of them tried, briefly, to flirt with alternatives that would have diversified their product range - witness BP's cheery green sunflower or Shell's half-hearted investments in wind power. But since the turn of the millenium all the majors have gone back to basics, convinced that political efforts to reduce carbon emissions and wean our economy off oil have failed and will continue to do so. But as engine technology improves and public perceptions of the car industry change we're seeing signs that this could be a major strategic mistake.
The oil majors still have one trick up their sleeves. The developing world promises to be a rich seam of demand for many years to come, albeit under certain conditions. Just last week Shell applied for a license to export crude in response to the glut of oil now languishing in American reserves. It's a highly controversial move amidst the frenzied political posturing over energy independence on our television screens. The motivation is clear -- while U.S. oil demand may be declining, the Chinese, Indians and Brazilians are developing a taste for personal transport and will be willing customers whatever happens.
There are two obvious problems with this approach. The first is that as the U.S. continues to develop viable alternative vehicles (and young people stop relying on big engines for their sense of self-worth) the world's standard bearer will be leading in a new direction. The BRIC nations have a habit of copying the smartest ideas to come out of America and using them to grow their own economies. Already Chinese engine efficiency standards are some of the toughest in the world, and new cities offer great opportunities for electric charging points and public transport without the baggage of outdated fossil fuel infrastructure. And then there's the cultural leadership that the West has always provided, which also appears to be moving in a new direction. Add together pop stars driving electric vehicles, the explosive growth of virtual interaction and fashion magazines featuring Stella McCartney on a bicycle -- and Houston has a major problem.
The second issue is political. As oil companies like Shell push into remote parts of the United States like the Arctic to maintain their proven reserves, they're going to be increasingly risking environmental disaster on behalf of foreign economies. That's a tough sell to voters of any political hue, and one that threatens to undermine their social license to operate. The only reason you need Arctic oil in 2030 or 2040 (the timescale of Shell's current investment in new production) is if the developing world fails to take meaningful steps to reduce oil demand, something that is already looking uncertain. Either way it won't be the U.S. that is using the bulk of that oil but countries outside our borders. We're risking America's last pristine environment to generate profit for our mostly foreign shareholders and then selling the resulting oil to China. I'd offer that to Shell as an advertising slogan, but my guess is they wouldn't take it.