The Death of Big Oil, foretold in 1960.

Crude oil prices are at near-record lows.  Selling for $100 a barrel a little over a year ago, it is selling at this moment for $34.96 a barrel (West Texas Intermediate). On CNBC yesterday, hedge fund manager Jim Chanos said, “I think if you were to look out five or 10 years, if I was a member of OPEC I would be pumping as much as I could today while it’s worth something because it might not be worth a whole lot by 2030.” He goes on to say that the rise of electric vehicles and the increasing portion of power generation from solar are the major contributing factors to the decreasing relevance of oil.

This has profound implications. About 70% of oil production is consumed by transporting people and goods. If a significant portion of that energy consumption shifts to electricity (generated by solar, wind, hydro, nuclear, or even coal), the need for oil drops. There is already oversupply; the future portends shrinking output from wells; entire fields closing; massive worker displacement; cessation of exploration; political upheaval in countries strongly (or totally) dependent on oil sales; and a massive shift in wealth.

In 1960, Theodore Levitt wrote “Marketing Myopia”, a seminal Harvard Business Review article in the then-nascent field of business strategy.  In the paper, he used the petroleum industry (what today we call “Big Oil”) to demonstrate the failure of management to respond to change. He has excellent insights into what people are really buying when they think they are buying gasoline, and what the real “job to be done” is for motorists:

Would not chemical fuel cells, batteries, or solar energy kill the present product lines? The answer is that they would indeed, and that is precisely the reason for the oil firms’ having to develop these power units before their competitors do, so they will not be companies without an industry.

Management might be more likely to do what is needed for its own preservation if it thought of itself as being in the energy business. But even that will not be enough if it insists on imprisoning itself in the narrow grip of its tight product orientation. It has to think of itself as taking care of customer needs, not finding, refining, or even selling oil. Once it genuinely thinks of its business as taking care of people’s transportation needs, nothing can stop it from creating its own extravagantly profitable growth.

Since words are cheap and deeds are dear, it may be appropriate to indicate what this kind of thinking involves and leads to. Let us start at the beginning: the customer. It can be shown that motorists strongly dislike the bother, delay, and experience of buying gasoline. People actually do not buy gasoline.  They cannot see it, taste it, feel it, appreciate it, or really test it. What they buy is the right to continue driving their cars. The gas station is like a tax collector to whom people are compelled to pay a periodic toll as the price of using their cars. 

…Hence, companies that are working on exotic fuel substitutes that will eliminate the need for frequent refueling are heading directly into the outstretched arms of the irritated motorist. They are riding a wave of inevitability, not because they are creating something that is technologically superior or more sophisticated, but because they are satisfying a powerful customer need. They are also eliminating noxious odors and air pollution.

Once the petroleum companies recognize the customer-satisfying logic of what another power system can do, they will see that they have no more choice about working on an efficient, long-lasting fuel (or some other way of delivering present fuels without bothering the motorist) that the big food chains had a choice about going into supermarkets or the vacuum tube companies had about making semiconductors. For their own good, the oil firms will have to destroy their own highly profitable assets. No amount of wishful thinking can save them from the necessity of engaging in this form of “creative destruction.”

Adrian Slywotsky wrote about “Value Migration”, in which evolving customer needs require reinventing business models.  Clayton Christensen introduced disruption in “The Innovator’s Dilemma” where he showed that management was making excellent management decisions in abandoning low end markets to disruptors (at least excellent management decisions as measured against short term financial metrics.) Rita McGrath wrote forthrightly about “The End of Competitive Advantage”, in which companies stay in the “exploit” phase of the wave of transient advantage because that is where stability lies.  All these frameworks and models are very valuable, and reinforce what Ted Levitt said sixty-five years ago.

Will Big Oil see what is coming and adjust? Or will this be the death of Big Oil?