Before moving on, we have to address the role of biofuels in the future economy. Because biofuels are very similar to petroleum both technologically and economically — that is, biofuels are high volume, low margin commodities that are burned at low efficiency — they will generally suffer the same fate, and from the same competition, as petroleum. The probable exception is aviation fuel, and perhaps maritime fuel, which may be hard to replace with batteries and electricity for long haul flights and transoceanic surface shipment.

But this likely fate for biofuels points to the use of those atoms in other ways. As of 2019, approximately 10% of U.S. gasoline consumption is contributed by ethanol, as mandated in the Renewable Fuels Standard. That volume is the equivalent of 4% of a barrel of oil, and it is derived from corn kernels. As ethanol demand falls, those renewably-sourced atoms will be useful as feedstocks for products that displace other components of a barrel of oil. The obvious use for those atoms is in the biological manufacture of chemicals. Based on current yields of corn, and ongoing improvements in using more of each corn plant as feedstock, there are more than enough atoms available today just from U.S. corn harvests, let alone other crops, to displace the entire matter stream from oil now used as petrochemical feedstocks.

Beyond Petrochemistry

The economic impact of biochemical manufacturing is thus likely to grow significantly over the next decade. Government and private sector investments have resulted in the capability today to biomanufacture not just every molecule that we now derive from a barrel of petroleum, but, using the extraordinary power of protein engineering and metabolic engineering, to also biomanufacture a wide range of new and desirable molecules that cannot plausibly be made using existing chemical engineering techniques. This story is not simply about sustainability. Instead, the power of biology can be used to imbue products with improved properties. There is enormous economic and technical potential here. The resulting new materials, manufactured using biology, will impact a wide range of industries and products, far beyond what has been traditionally considered the purview of biotechnology.

For example, Arzeda is now scaling up the biomanufacturing of a methacrylate compound that can be used to dramatically improve the properties of plexiglass. This compound has long been known by materials scientists, and long been desired by chemical engineers for its utility in improving such properties as temperature resistance and hardness, but no one could figure out how to make it economically in large quantities. Arzeda's biological engineers combined enzymes from different organisms with enzymes that they themselves designed, and that have never existed before, to produce the compound at scale. This new material will shortly find its way into such products as windshields, impact resistant glass, and aircraft canopies.

Similarly, Zymergen is pursuing remarkable new materials that will transform consumer electronics. Zymergen is developing a set of films and coatings that have a set of properties unachievable through synthetic chemistry and that will be used to produce flexible electronics and displays. These materials simply cannot be made using the existing toolbox of synthetic chemistry; biological engineering gives access to a combination of material properties that cannot be formulated any other way. Biological engineering will bring about a renaissance in materials innovation. Petroleum was the foundation of the technology that built the 20th century. Biology is the technology of the 21st century.

Financing risk

The power and flexibility of biological manufacturing create capabilities that the petroleum industry cannot match. Ultimately, however, the petroleum industry will fade away not because demand for energy and materials suddenly disappears, or because that demand is suddenly met by renewable energy and biological manufacturing. Instead, long before competition to supply ergs and atoms displaces the contents of the barrel, petroleum will die by the hand of finance.

The fact that both ends of the barrel are facing competition from technologically and economically superior alternatives will eventually lead to concerns about oil industry revenues. And that concern will reduce enthusiasm for investment. That investment will falter not because total petroleum volumes see an obvious absolute drop, but rather because the contents of the “marginal barrel” – that is, the next barrel produced – will start to be displaced by electricity and by biology. This is already happening in China and in California, as documented by Bloomberg and by Gregor Macdonald. Thus the first sign of danger for the oil industry is that expected growth will not materialize. Because it is growth prospects that typically keep equities prices high via demand for those equities, no growth will lead to low demand, which will lead to falling stock prices. Eventually, the petroleum industry will fail because it stops making money for investors.

The initial signs of that end are already apparent. In an opinion piece in the LA Times, Jagdeep Singh Bachher, the University of California’s chief investment officer and treasurer, and Richard Sherman, chairman of the UC Board of Regents’ Investments Committee, write that “UC investments are going fossil free. But not exactly for the reasons you may think.” Bachher and Sherman made this decision not based on any story about saving the planet or on reducing carbon emissions. The reason for getting rid of these assets, put simply, is that fossil fuels are no longer a good long-term investment, and that other choices will provide better returns:

We believe hanging on to fossil fuel assets is a financial risk [and that] there are more attractive investment opportunities in new energy sources than in old fossil fuels.

An intriguing case study of perceived value and risk is the 3 year saga of the any-day-now-no-really Saudi Aramco IPO. Among the justifications frequently mooted for the IPO is the need to diversify the country's economy away from oil into industries with a brighter future, including biotechnology, that is, to ameliorate risk:

The listing of the company is at the heart of Prince Mohammed’s ambitious plans to revamp the kingdom’s economy, with tens of billions of dollars urgently needed to fund megaprojects and develop new industries.

There have been a few hiccups with this plan. The challenges that Saudi Aramco is facing in its stock market float are multifold, from physical vulnerability to terrorism, to public perception and industry divestment, through to concerns about the long-term price of oil:

When Saudi Arabia’s officials outlined plans to restore output to maximum capacity after attacks that set two major oil facilities ablaze on Saturday, they were also tasked with convincing the world that the national oil company Saudi Aramco was investable.

The notion that the largest petroleum company in the world might have trouble justifying its IPO, and might have trouble hitting the valuation necessary to raise the cash its current owners are looking for, is eye opening. This uncertainty creates the impression that Aramco may have left it too late. The Company managers may see less value from their assets than they had hoped, precisely because increased financial risk is reducing that value.

And that is the point — each of the factors discussed in this post increases the financing risk for the petroleum industry. Risk increases the cost of capital, and when financiers find better returns elsewhere they rapidly exit the scene. This story will play out for petroleum investments just as it has for coal. Watch what the bankers do; they don’t like to lose money, and the writing is on the wall already. In 2018, global investment in renewable electricity generation was three times larger than the investment in fossil fuel powered generation. Biotechnology already provides at least 17% of chemical industry revenues in the U.S., and is growing in the range of 10-20% annually (see the inset in Figure 2). If you put the pieces together, you can already see the end of oil coming.