BP plc And Royal Dutch Shell plc After Peak Oil

royal dutch shellThe oil industry used to be a no-brainer investment. There seemed to be an infinite supply of oil, and with more and more people owning cars, demand — and thus oil prices — were rocketing. This meant that oil companies would be booming.

But has anyone asked the question: what happens when the oil runs out? Oil companies such as BP (LSE: BP) (NYSE: BP) and Shell (LSE: RDSB) (NYSE: RDS-B.US) are already finding that their production is falling. They are now scouring the furthest reaches of the planet for oil, from the Artic to the Gulf of Mexico and the South Atlantic.

Oil is increasingly difficult to extract

But any oil they do come across is increasingly difficult, and expensive, to extract. And the Macondo tragedy shows what can happen when the oil industry tries perhaps a little too hard to find more oil.

The world is already beginning to adjust to life after oil production has peaked. 25% of Toyota Yaris’s sold are now hybrids. We have already seen the hybrid go from being a glimpse of the future to entering the mainstream of motoring today.

This is all part of a trend towards higher fuel efficiency and finding ways to reduce our reliance on oil — this is a trend that is just getting under way. The days of the gas guzzler are long past.

The next step is the plug-in hybrid, and we are just seeing the first cars offering this technology appear on the market. The advantage of plug-ins is that we already have the infrastructure in place, in terms of a national electricity network. We just need to provide accessible sockets.

A future of more choice

Alongside this other technologies, such as fuel cell cars, are also being developed. What is emerging, I think, is a future where people have more choice about what sort of car they will drive. Some people will own hybrids. Some will own plug-in hybrids. Some will own fuel-efficient diesels. And, if you’re feeling nostalgic, wouldn’t it be great to drive a traditional petrol-driven sports car?

That’s why I think that oil prices, and oil demand, won’t suddenly fall off a cliff. But this is an industry in transition. I suspect that BP and Shell are retrenching, reducing the amount they spend on exploration and refining, and focusing more of their attention on areas of growth: gas, fracking, oil sands and perhaps renewables.

But, just as the TV industry had a future even after the dawn of the internet, the oil industry certainly has a future as well. But this is a future where they will no longer have the road to themselves.

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Prabhat owns shares in neither BP nor Shell.