AT THE TURN of the 20th century, the most malodorous environmental challenge facing the world’s big cities was not slums, sewage or soot; it was horse dung. In London in 1900, an estimated 300,000 horses pulled cabs and omnibuses, as well as carts, drays and haywains, leaving a swamp of manure in their wake. The citizens of New York, which was home to 100,000 horses, suffered the same blight; they had to navigate rivers of muck when it rained, and fly-infested dungheaps when the sun shone. At the first international urban-planning conference, held in New York in 1898, manure was at the top of the agenda. No remedies could be found, and the disappointed delegates returned home a week early.

Yet a decade later the dung problem was all but swept away by the invisible hand of the market. Henry Ford produced his first Model T, which was cheap, fast and clean. By 1912 cars in New York outnumbered horses, and in 1917 the last horse-drawn streetcar was retired in Manhattan. It marked the moment when oil came of age.

That age has been one of speed and mostly accelerating progress. If coal drove the industrial revolution, oil fuelled the internal-combustion engine, aviation and the 20th-century notion that mankind’s possibilities are limitless; it flew people to the Moon and beyond. Products that have changed lives—from lipstick to CD players, from motorcycle helmets to aspirin—contain petrochemicals. The tractors and fertilisers that brought the world cheaper food, and the plastics used for wrapping, are the progeny of petroleum products.

Oil has changed history. The past 100 years have been pockmarked with oil wars, oil shocks and oil spills. And even in the 21st century its dominance remains entrenched. It may have sped everything else up, but the rule of thumb in energy markets is that changing the fuel mix is a glacial process (see chart). Near its peak at the time of the Arab oil embargo in 1973, oil accounted for 46% of global energy supply. In 2014 it still had a share of 31%, compared with 29% for coal and 21% for natural gas. Fast-growing rivals to fossil fuels, such as wind, solar and geothermal energy, together amounted to little more than 1%.

Horses for courses

Yet the transition from horse power to horsepower, a term coined by Eric Morris of Clemson University, South Carolina, is a useful parable for our time. A hundred years ago oil was seen as an environmental saviour. Now its products are increasingly cast in the same light as horse manure was then: a menace to public health and the environment.

For all its staying power, oil may be facing its Model T moment. The danger is not an imminent collapse in demand but the start of a shift in investment strategies away from finding new sources of oil to finding alternatives to it. The immediate catalyst is the global response to climate change. An agreement in Paris last year that offers a 50/50 chance of keeping global warming to less than 2ºC above pre-industrial levels, and perhaps limiting it to 1.5ºC, was seen by some as a declaration of war against fossil fuels.

That agreement has been thrown into doubt by the election of Donald Trump, who has dismissed climate change as a “hoax”, as America’s next president. But if big energy consumers such as the EU, China and India remain committed to curbing global warming, all fossil fuels will be affected. The International Energy Agency (IEA), a global forecaster, says that to come close to a 2ºC target, oil demand would have to peak in 2020 at 93m barrels per day (b/d), just above current levels. Oil use in passenger transport and freight would plummet over the next 25 years, to be replaced by electricity, natural gas and biofuels. None of the signatories to the Paris accord has pledged such draconian action yet, but as the costs of renewable energy and batteries fall, such a transition appears ever more inevitable. “Whether or not you believe in climate change, an unstoppable shift away from coal and oil towards lower-carbon fuels is under way, which will ultimately bring about an end to the oil age,” says Bernstein, an investment-research firm.

Few doubt that the fossil fuel which will suffer most from this transition is coal. In 2014 it generated 46% of the world’s fuel-based carbon-dioxide emissions, compared with 34% for oil and 20% for natural gas. Natural gas is likely to be the last fossil fuel to remain standing, because of its relative cleanliness. Many see electricity powered by gas and renewables as the first step in an overhaul of the global energy system.

This special report will focus on oil because it is the biggest single component of the energy industry and the world’s most traded commodity, with about $1.5trn-worth exported each year. Half of the Global Fortune 500’s top ten listed companies produce oil, and unlisted Saudi Aramco dwarfs them all. Oil bankrolls countries that bring stability to global geopolitics as well as those in the grip of tyrants and terrorists. And its products fuel 93% of the world’s transport, so its price affects almost everyone.

Since the price of crude started tumbling in 2014, the world has had a glimpse of the havoc a debilitated oil industry can cause. When oil fell below $30 a barrel in January this year, stockmarkets predictably plummeted, oil producers such as Venezuela and Nigeria suffered budget blowouts and social unrest, and some American shale companies were tipped into bankruptcy. But there have been positive effects as well. Saudi Arabia has begun to plan for an economy less dependent on oil, and announced it would partially privatise Aramco. Other Middle Eastern producers have enthusiastically embraced solar power. Some oil-consuming countries have taken advantage of low oil prices to slash fuel subsidies.

Western oil companies have struggled through the crisis with a new cross to bear as concerns about global warming become mainstream. In America the Securities and Exchange Commission and the New York attorney-general’s office are investigating ExxonMobil, the world’s largest private oil company, over whether it has fully disclosed the risks that measures to mitigate climate change could pose to its vast reserves. Shareholders in both America and Europe are putting tremendous pressure on oil companies to explain how they would manage their businesses if climate-change regulation forced the world to wean itself off oil. Mark Carney, the governor of the Bank of England, has given warning that the energy transition could put severe strains on financial stability, and that up to 80% of fossil-fuel reserves could be stranded. The oil industry’s rallying cry, “Drill, baby, drill!” now meets a shrill response: “Keep it in the ground!”

Which peak?

This marks a huge shift. Throughout most of the oil era, the biggest concern has been about security of energy supplies. Colonial powers fought wars over access to oil. The Organisation of Petroleum Exporting Countries (OPEC) cartel was set up by oil producers to safeguard their oil heritage and push up prices. In the 20th century the nagging fear was “peak oil”, when supplies would start declining. But now, as Daniel Yergin, a Pulitzer-prizewinning oil historian, puts it: “There is a pivot away from asking ‘when are we going to run out of oil?’ to ‘how long will we continue to use it?’ ” For “peak oil”, now read “peak demand”.

Oil to fuel heavy-goods vehicles, aeroplanes and ships, and to make plastics, will be needed for many years yet. But from America to China, vehicle-emissions standards have become tougher, squeezing more mileage out of less fuel. Air pollution and congestion in big cities are pushing countries like China and India to look for alternatives to petrol and diesel as transport fuels. Car firms like Tesla, Chevrolet and Nissan have announced plans for long-range electric vehicles selling, with subsidies, for around $30,000, making them more affordable. And across the world the role of energy in GDP growth is diminishing.

Analysts who think that the Paris accords will mark a turning point in global efforts to reduce carbon-dioxide emissions say global oil consumption could start to wane as early as the 2020s. That would mean companies would have to focus exclusively on easy-to-access oil such as that in the Middle East and America’s shale-oil provinces, rather than expensive, complex projects with long payback periods, such as those in the Arctic, the Canadian oil sands or deep under the ocean.

Yet many in the industry continue to dismiss talk of peak demand. They do not believe that governments have the political will to implement their climate goals at anything like the speed the Paris agreement envisages. In America they ridicule the idea that a nation built around the automobile can swiftly abandon petrol. And Khalid Al-Falih, Saudi Arabia’s energy minister, estimates that the world will still need to invest in oil to the tune of almost $1trn a year for the next 25 years. Oil veterans point out that even if global oil consumption were to peak, the world would still need to replace existing wells, which deplete every year at the rate of up to 5m b/d—roughly the amount added by America’s shale revolution in four years. Demand will not suddenly fall off a cliff.

A number of big oil companies accept that in future they will probably invest less in oil and more in natural gas, as well as in renewable energy and batteries. Rabah Arezki, head of commodities at the IMF, says the world may be “at the onset of the biggest disruption in oil markets ever”.

This report will argue that the world needs to face the prospect of an end to the oil era, even if for the moment it still seems relatively remote, and will ask three central questions. Will the industry as a whole deal with climate change by researching and investing in alternatives to fossil fuels, or will it fight with gritted teeth for an oil-based future? Will the vast array of investors in the oil industry be prepared to take climate change on board? And will consumers in both rich and poor countries be willing to forsake the roar of a petrol engine for the hum of a battery?