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Since the financial crisis in 2008, we have seen massive growth in global energy supply, not to mention falling demand across the OECD and weaker than expected demand for energy from countries like China and India, the combined result of which is that we have seen falling and low oil, gas, coal and power prices. The big question why has this happened? My own view is that it is due to a lack of understanding of the technology changes going on across energy which are impacting not only the supply of energy but also and more importantly the demand for energy.

The conventional view has always been that GDP growth and population growth are closely related to energy growth. And the corollary of this is that one should invest in new capacities in down cycles for the forthcoming economic upturn. This is exactly what the United States did with its shale boom. They brought on massive new capacities of gas but demand increases were not able to keep up with supply and the US gas price collapsed. It was the same with oil. The increase in US supply was so great that it has caused not only oversupply in the United States but an ongoing price war with Saudi Arabia and some of its OPEC allies. As to coal, there is lots of it out there with China being the biggest producer and consumer but China has probably seen peak coal demand in 2014 which has left us with a global glut and falling prices.  It is the same with power prices. European, Japanese and US power prices are all lower than in 2008.

Over the last eight years, there have also been massive amounts of money lost by investors across the global energy world. Think of the impact that the low oil prices has had on the budgets of countries like Nigeria, Venezuala or Russia. Or the some $200bn of power generator writedowns we have seen in Europe, not to mention the LNG terminals across the world which are barely covering their variable costs.  Coal has been the hardest hit. The prolonged low coal prices has led to a wide range of bankruptcies such as Alpha Natural Resources, the US’s largest producer of coal. The big question now is what will happen going forward.

First and foremost, the energy market will grow again and in fact we are seeing this happen this year with all energy commodity prices up as well as power prices. However, things are different.  Energy efficiency technologies such as LEDs or improving fuel consumption in cars are having and will continue to have a big impact on energy demand. The former is one of the major reasons why electricity consumption in the United States, noting that lighting represents 10% of electricity demand, has stayed stagnant in recent years. And fuel consumption improvements from on average 7 litres per 100km in 2008 to 5.5 in 2014 is the main reason why UK oil demand has fallen by 15% over this period. Going forward the move to electrify transport and in particularly automobiles will continue to gather pace. Electrification is all about improving energy efficiency be it in combination with an internal combustion engine or on a stand alone base and will increasing impact the demand for oil.

Then we have renewables and in particular solar which is not only cheap but the fastest power generation technology to install and the most flexible power generation technology we have ever developed. It can be used to power a calculator, or power a home or even a town and we will install more GWs of it this year than any other power generation technology. In those countries that have lots of solar such as Germany or Italy the impact has already been immense. Not only are power prices lower during the day but there has been a decrease in demand for fossil fuel power stations particularly gas, noting that both German and Italian gas demand is much lower than in 2008.

Going forward, batteries be they in the car, in our home or connected to the power grid will significantly alter the energy world. Batteries together with solar or wind will bring more low costs renewables to the masses which will impact demand for coal, gas and oil (noting that a sunny country like Saudi Arabia generates the majority of its power using oil). And those same batteries, which are decreasing in cost every year, will also power the next generation of automobiles.

My advise to investors in energy is simple. Think about demand!

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  • coal ,
  • energy ,
  • energy efficiency ,
  • internal combustion engine ,
  • LEDs ,
  • LNG terminals ,
  • natural gas ,
  • oecd ,
  • OPEC ,
  • renewables ,
  • solar ,
  • UK oil demand ,
  • United States ,

Comments

  1. Gerard,
    ‘Demand’ needs a further distinction between what is actually used by an entity (household, business, factory) and what is drawn from the grid.
    As more and more entities start satisfying their own demand by ‘on-premise’ generation, as well as internal storage, the demand drawn from the grid will decrease.
    I realise that this process will differ according to regions of the world.
    The cost of self-generation and storage is already, or will soon be, cheaper than drawing from the grid. The economics will naturally accelerate the development of self-generation. Taken to the limit, this means that everybody will self-generate and there would then be no need for the grid.
    Ultimately this means the demise of the grid and *that’s* what investors need to be cognisant of. Anything attached to, and reliant on, the grid will become a stranded asset, just as the new coal-fired power stations in The Netherlands. That applies to remote solar and wind-farms too.
    The transition away from the grid will be ‘gradual’, in the same sense as the introduction of smart phones across the world was ‘gradual’.
    Besides technological advances and transport transition to electric power, leading to rapid cost reductions and growing advantages of self-generation, there’s also the wider economic environment. I suspect that we’re rapidly heading into a world-wide recession, maybe a depression. Going by the experience of 2008, that will lead to a further drastic decrease in demand (from the grid).
    Ergo: Centralized power generation is set for an extremely rude awakening to a new reality of a disappearing grid and assets tied to it being stranded.
    Investors should only invest in projects which are close to the users or even right next to or on top of them.

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