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Alternative energy sources threaten oil industry’s future profits

Oil is an important source of energy necessary for modern infrastructure. Some of the largest industries in the world rely on the trade of oil. Crude oil is used to power numerous means of transportation, fuel the machinery necessary to produce large quantities of goods, provide heat, generate electricity, and construct plastic. The money from oil sales has been instrumental in establishing countries like Iran and Saudi Arabia as global powers.

However, our dependence on oil has led to global warming, a problem that has only recented caught our attention. Global warming presents a serious threat to the future of our planet. In 2016, the establishment of the Paris Agreement by most of the world’s countries demonstrated careful attention to and awareness of climate change. The Paris Agreement aims to mitigate the effects of global warming. Each country that has signed and ratified the agreement is in the process of submitting its own plan to lessen greenhouse gas emissions. The main goal is to avoid using oil by opting for alternative sources, like wind and solar energy. These actions will decrease the impact of climate change tremendously.

Governments and shareholders have recently pressured the oil industry as the clamor against climate change increased in recent years. According to The Economist, “A number of big oil companies accept that in the future they will probably invest less in oil and more in natural gas, as well as in renewable energy and batteries.”

Other industries are taking heed of climate change and are propelling their own businesses to follow a more sustainable route that avoids oil usage. Take the automobile industry, for example. Volkswagen plans to produce 30 model cars that run on battery power by 2025. Volvo, a Chinese-based company, announced that all of its car models would have an electric motor by the year 2019.

In general, China has been a world leader in working toward energy sustainability. China improved, the Longyangxia Dam Solar Park, the largest solar farm in the world. According to the BBC, China installed about 34 gigawatts of solar capacity in 2016 and added eight more gigawatts in 2017. But China is not the only country trying to lessen its emissions. According to CNBC, five countries have already set dates by which they will stop selling gasoline and diesel cars. Norway vows to stop by 2025, Germany and India by 2030 and France and the United Kingdom in 2040.

As a result of this careful attention by world leaders, the oil industry has begun to suffer. In the beginning of the 20th century, oil companies flourished as there was both a heavy reliance on their products and no real alternative resources. Now, there are more alternatives than ever, and oil is trading below $50 a barrel. To survive, the oil industry needs to revamp itself and become more efficient.

According to McKinsey and Co., decentralizing corporate will prove to be key in increasing efficiency and productivity. If businesses start embodying an adaptable spirit and training their employees to interact with machinery better, the production process will become quicker and more accurate, decreasing the possibility of human error.  One engineering, procurement and construction firm discovered that using simple digital procedures can increase the firm’s productivity and results by 20 percent. The incorporation of technology will not force workers out of their jobs, either. Rather, employees will be rearranged and retrained. Although some jobs will be lost, new positions will be created and others will be improved by the efficient use of new technology.

Oil businesses need to rely less on their corporate center and instead substitute interchangeable, small teams to discuss specific assets. A hierarchical chain of command determined by age and status can be replaced by a meritocratic system composed of experts and leaders, who are evaluated by performance. Companies need to become more adaptable while maintaining standardized guidelines for procedural work. Decentralizing a company in this manner allows for the development of new perspectives and keeps it innovative and modern—something the oil industry needs right now.

Among other things, millennials value the ability to make a positive contribution to society with their work. However, the oil industry has a negative reputation among the group. According to McKinsey and Co., “14 percent of millennials said they would not want to work in the oil and gas industry because of its negative image—the highest percentage of any industry.” Establishing an environment where millennials are free to voice their opinions will improve the decision-making process and help entice them to work in the industry.

If the oil industry refuses to improve its efficiency, flexibility and image, it will be overtaken by alternatives. As people are becoming more concerned with environmental issues, they will begin to shun the sources of the problem. The price of oil is dropping with demand at a peak with an eventual decline to follow.

Only 1 percent of alternative energy is used compared to oil and oil-based sources, but over the next 30 years, that number will only increase.

September 5, 2017

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