There is a simple reason why oil and gas companies keep investing in new projects

Many question why oil and gas companies are still investing in the sector, at a time when the fight against global warming is intensifying and the world is keen on transitioning to greener sources of energy. The plain fact is that those companies continue to invest simply because there is a demand for their products and they are able to secure desirable rates of return – the most powerful driver of an investment decision.

Although the share of oil in the primary energy mix peaked in 1973 at nearly 50 percent, after the first oil shock, oil continues to be the largest contributor to the world’s primary energy needs with a share of 32 percent, and if one adds natural gas, that share increases to 55 percent.

As the energy transition accelerates, demand for hydrocarbons is bound to peak though there is no consensus about when the peak will happen nor the speed at which demand will decelerate afterwards. As the International Energy Agency puts it “the demand outlook will not be linear in practice. There will inevitably be spikes, dips and plateaus along the way.”

The OECD region provides a good example; there oil demand peaked in 2005 then 17 years later it is only 11 percent below that peak. As long as there is demand for oil, supply will be available and investment will continue in the sector. Curtail the latter, supplies will dwindle and prices will increase subsequently. From a climate perspective, that ought to be an acceptable outcome, but….

Although demand eventually responds to prices, that adjustment does not happen instantly, especially when the alternatives are not readily available at scale, which is still the case at the moment. And it is not just about basic economics. The energy crisis of 2022 has reminded us that it is not only customers who dislike high energy prices, governments are equally sensitive to that. So, this conclusion may not be to everyone’s liking, but it does seem that we can’t just leave the oil and gas era behind, yet.