Though oil prices have notched gains since November, they’re expected to remain below levels that support attractive returns, particularly for an industry still recuperating from last year’s historic drop in fuel demand.
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As a result, companies aren’t rushing back into drilling. A third of oil producers surveyed by the Dallas branch of the Federal Reserve in the fourth quarter said they planned to raise capital expenditures only slightly this year. About half said they would either keep spending flat or reduce investments.
Exxon Mobil Corp. and Chevron Corp. cut plans to invest a combined $260 billion through 2025 to as low as $177 billion.
Over the next five years, global oil spending is projected to come to a little more than half of what companies invested in the first half of the 2010s, according to Wood Mackenzie. Last year, the pandemic had brought oil investments to the lowest levels since 2005.
The slowdown comes as investors explore alternatives such as solar and wind power, which have seen costs drop dramatically in recent years, and emerging technologies such as battery storage and biofuels.
Energy investment outside of fossil fuels, including renewables and other clean-energy technologies, is set to attract 60% of the world’s energy investment in this decade, according to the International Energy Agency.
Non-fossil-fuel investments will climb to an annual average of $1.4 trillion, the IEA says, higher than the $935 billion it has projected for oil, natural gas and coal. In the 2030s, it says, those investments will make up roughly two-thirds of energy spending.
The projected shift in investments means that, after decades dominated by fossil fuels, renewables are poised to gain ground.
By 2030, noncarbon energy—including nuclear, wind and solar—is expected to climb to almost 13% of the world’s energy demand from 9.8% in 2019, according to IHS Markit. Last year will be the first in which clean energy surpassed 10% of demand, the consulting firm projected, in data going back to 1990.
Whether this spending shift affects consumers in the next few years is uncertain, but some believe oil companies will eventually have to increase spending to meet global demand in coming decades.
The International Energy Forum, a group advising energy importing and exporting countries, says the oil industry’s capital expenditures need to climb by $225 billion from last year’s levels by 2030 to prevent a fuel-price spike that would be damaging to economic growth. It warned that “peak investment,” in which oil spending stays lower than 2019 levels for good, was a more pressing post-virus issue than peak oil demand.
Meanwhile, the consulting firm Rystad Energy said in a recent analysis that it would take 80 years to find sufficient supplies to meet global demand through 2050 at the past decade’s low level of exploration activity.
For now, though, American drivers aren’t giving oil companies much reason to change course. Household spending on gasoline in the U.S. is projected to edge upward this year but remain well below 2017-19 levels, according to fuel-price tracking site GasBuddy.
Another reason oil companies will keep spending at lower levels is that electric vehicles are expected to skyrocket to about 32% of new vehicle sales globally in 2030, up from less than 4% last year, according to Deloitte, which made the forecast before a recent uptick in auto sales. In China, they will rise to 48%, and in the U.S. to 27%, Deloitte projects.
Mr. Eaton and Ms. Elliott are Wall Street Journal reporters in Houston. Email collin.eaton@wsj.com and rebecca.elliott@wsj.com.