Trust the oil companies?

Monday, July 3 was the hottest day ever recorded on the planet. Then this record was beaten on Tuesday, then on Wednesday and finally surpassed on Thursday^⁠1. Every day this week in early July set a new heat record.

Hugo Cordeau

PhD student in the Department of Economics at the University of Toronto

This is disturbing and, literally, unprecedented.

The hottest place in Canada on Tuesday, July 4? Kuujjuaq, at 34.1°C!

Oil companies, through the production of fossil fuels, are the main driver of the climate crisis. However, these companies have incredible human and financial resources.

However, some believe that they could accelerate the energy transition; that’s the bet the federal government is making by subsidizing carbon capture and blue hydrogen^⁠2.

However, it is questionable whether these companies will truly make an energy transition. Whether by ideology or because they are already caught in the gears, multiple reasons can explain their low desire for action.

The theory

Indeed, the oil industry is not a competitive market, it is dominated by oligopolies. By investing, these companies can destroy their capital, ie the value of their oil reserves. Therefore, tax incentives are not guaranteed to promote transition.

Data

To know the real motivations of an individual or a company, nothing is better than to look at the actions carried out. Imagine that we offer the oil companies $1 billion, what would they do with it? If they were really allies of the energy transition, they would invest massively in this sector. Otherwise, they would continue to invest in oil projects and distribute generous dividends to their shareholders.

However, the five largest oil companies in the world generated profits of more than 200 billion in 2022, the equivalent of four REMs in the East and a TGV Quebec-Toronto. What did they do with this money?

Most of their investments have gone into fossil fuels and the rest in dividends to their shareholders.

Worse still, when it had just reaped historic profits, Shell abandoned its climate objectives for the sake of profitability.^⁠3…

The energy transition is accelerating

The irony in all of this is that the energy transition is accelerating; the gap between the decisions taken by the oil companies and the direction of the energy industry diverges.

According to the International Energy Agency (IEA), the world will add a record 440 GW of new renewable capacity this year. That’s more than double what we added in 2019, double what the IEA predicted in 2020, and 24% more than what the IEA predicted just six months ago.

Since Russia’s invasion of Ukraine, the energy outlook has changed dramatically. Europeans are accelerating energy efficiency, notably through the deployment of heat pumps, and boosting renewable energies – the latter being economically and militarily advantageous, as they offer energy independence from other nations.

In the process, the Americans launched their biggest environmental project, theInflation Reduction Act (IRA), which generously stimulates the deployment of renewable energies. This program has been emulated in Europe and Canada, where we have taken over most of the measures.

The era of oil and gas is behind us and we are entering the era of renewable energies.

Can we trust the oil companies?

However, it seems obvious that we cannot trust the oil companies to lead an energy transition. The problem lies in the market power of oil companies; the latter cannot carry out an energy transition without destroying their capital, so slowing down the action is more advantageous to them.

The solution to market powers is simple, we must regulate. To encourage these companies, responsible for 26% of GHG emissions in Canada, to reduce their carbon footprint, it is essential to impose a strict and decreasing cap on their emissions.^⁠4. The good news is that the government is planning to put such a cap in place. Moreover, the House of Commons also voted for a motion to end the subsidies granted to oil companies, which is excellent news.

It should be noted, however, that pending action commensurate with the climate crisis, we continue to subsidize oil companies through carbon capture projects and the production of blue hydrogen – processes associated with hydraulic fracturing, a technology with serious consequences for the environment and our health.