The Implications of Oil's Surprising Collapse: The new threats are global warming, fracking, and electric vehicles.

• Author: Verleger, Philip K., Jr.

IBM celebrated its centennial in 2011 by noting, "Nearly all the companies our grandparents admired have disappeared. Of the top twenty-five industrial corporations in the United States in 1900, only two remained on that list at the start of the 1960s. And of the top twenty-five companies on the Fortune 500 in 1961, only six remain there today."

And further: "The demise of most came about because they were unable simultaneously to manage their businesses of the day and to build their businesses of tomorrow." With respect to its own business, IBM warned, "The technology field is cruel to those who fail to make the leap from era to era, but tech firms are hardly alone. The hand of commoditization spares few."

The world's oil industry was exempted from the forces of commoditization for decades. Seven oil companies were among the top twenty-five firms on the Fortune 500 in 1970. Half of the top twenty-five companies in 1980 were oil companies. But in the 2019 list, just Exxon Mobil, Chevron, Phillips 66, and Valero were present in the top twenty-five. Only Exxon Mobil made the top ten.

Even Exxon Mobil is being buffeted by the "brutal forces of commoditization." The firm had been one of the largest on the S&P 500 until August 2019. At the end of that month, Bloomberg reported that "Exxon Mobil Corp. is poised to drop out of the S&P 500 Index's ten biggest companies for the first time since the index's inception some ninety years ago."

The oil industry's rapid fall from its commanding position atop the world's financial markets can be attributed to three developments: global warming, fracking, and electric vehicles. Increased public concern regarding the effects of global warming led to pressures on fossil fuel producers, pressures the industry ignored until it was too late. Fracking brought the forces of "relentless commoditization" as described by IBM to the oil sector, dooming companies to no-profit futures. Finally, the introduction of electric vehicles created an opportunity for consumers to free themselves from the gasoline station, an institution described by marketing guru Theodore Levitt as a "tax collector."

The loss of investor support matters to those in the oil industry. It should also worry policymakers, those in other sectors, politicians, and the public because investor disdain for oil could cause significant oil price increases over the next few years. Such increases will occur if oil supply falls faster than consumer demand. Those in the industry would solve the problem through increased investment in drilling--thus boosting emissions of the harmful gases that cause global warming. A majority of the world's citizenry would no doubt prefer that measures to replace oil with conservation or renewables be accelerated, effectively speeding the industry's demise.

CIRCUMSTANCES CHANGE

The momentum to slow and then reverse anthropogenic global warming began slowly forty years ago but has gained momentum, especially following the 2015 United Nations' climate change conference in Paris. Governments across the world have stepped up their efforts to restrict hydrocarbon use, including petroleum. Volkswagen's emission-cheating scandal accelerated the introduction of measures to block vehicles with internal combustion engines from some areas. Such attempts to slow warming have received support from an increasingly large group of investors. Today, the managers of more than $7 trillion in assets have divested or threatened to divest shares in the oil industry. In March, for example, Norway's trillion-dollar sovereign...