New Currents in Global Energy

Share of renewable power generation by region

With the advent of the US shale boom, the rise of alternative energy sources, and widespread climate activism, global energy markets have been thrust into upheaval, best exemplified by swings in the price of oil: West Texas Intermediate (WTI) hit a high in 2008 at $145 per barrel, a low in 2016 at $26 per barrel, and as of mid-June 2019 was hovering around $55 per barrel. RANE spoke with Chris Tucker of FTI Consulting to make sense of the changes.

  • Production and exports from the United States have disrupted established global energy supply chains, keeping prices relatively stable even in the face of global events that historically would have sent the price of oil skyrocketing. Political strife in Venezuela, civil war in Libya, and sanctions on Iran should all be raising prices, says Tucker, but US supply has largely inoculated the market to such disturbances. Recent attacks against oil shipments in the Gulf of Oman have contributed to price volatility, but though prices increased shortly after the attack, they receded back to their pre-attack levels after a few days. 
  • Despite moves in Europe and US states to promote green energy and technology, Tucker says that India and China are the real determinants of whether or not green energy can become a dominant energy component.

According to the newly released BP Statistical Review of World Energy, global energy consumption grew rapidly in 2018, led by natural gas and renewables, but carbon emissions rose at their highest rate in seven years.

  • Energy consumption grew at a rate of 2.9 percent last year, almost double its 10-year average of 1.5 percent per year, and it's largest annual growth rate since 2010.
  • Natural gas accounted for more than 40 percent of the increase, while renewables contributed the second largest increment to energy growth.
  • Coal consumption grew by a 1.4 percent, double its 10-year average growth, led by India and China.

Global oil giants have begun investing more in renewable energy, especially after the 2015 Paris Climate Accords.

  • Oil companies are beginning to transition themselves into “energy” companies, driven both by climate activists and investors. While they once were focused on “producing molecules,” says Tucker, they are increasingly focused on “producing electrons.”
  • In addition to direct research and development of green energy, oil companies are investing in green startup companies. Tucker believes that oil companies are hoping to learn from these smaller energy firms and adopt their technologies and techniques.
  • Tucker notes, however, that oil companies are still primarily oil companies. While they are increasing their spending on green energy, total green energy spending in 2018 by the top 24 oil companies was still only 1.3 percent of their combined budgets.

After staying stable at between 1995 and 2012 between 5 and 6.5 million barrels per day (b/d), American oil production shot up to over 12 million b/d by May 2019, according to the Energy Information Association. The production, says Tucker, has led to an oversupplied domestic market, which led the US to ramp up oil exports from 42,000 b/d in 2010 to over 1.1 million b/d in 2017.

  • The US is selling largely without competition in South America, where Brazil’s inability to launch its own oil producers has left a void, and Mexico’s PEMEX is rife with financial problems and corruption, says Tucker.
  • Elsewhere, though, US producers face more challenges. In Europe, US producers are facing Russia’s entrenched energy dominance, while in Africa they lack the trade infrastructure that Russian and Saudi competitors have.
  • US exports to India are increasing as India seeks to diversify its sources of energy.

As the US has ramped up production, OPEC has had to adapt to new circumstances. The cartel has primarily done this by looking outside of its organization, mainly to Russia, to help maintain market and price stability, says Tucker.

  • Russia’s interest in aligning with OPEC is purely political, says Tucker. Russia has found itself in direct competition with the US over energy exports, an arena it did not anticipate competing in a few years ago.
  • US sanctions on Russian state-owned oil companies have led Moscow to look to OPEC to help act as a balance against the US.
  • Within the cartel, Russia acts as a useful ally to Saudi Arabia. Though certainly the most powerful member of the group, Saudi Arabia still has difficulty getting the other members to stick to agreed-upon quotas. By using its political and economic weight to support Saudi Arabia within the group, Russia has helped create a more cohesive OPEC.

The biggest impact on global energy markets will continue to come from China and India. Neither the US, nor Europe, nor Russia, nor OPEC have the economic clout anymore to fundamentally shift the market, argues Tucker.

  • Tucker believes the key metric here is population. With a Chinese population of 1.4 billion and an Indian population of 1.3 billion, which is expected to grow to 1.8 billion by 2050, the two most populous nations will have the greatest demand for energy.
  • Currently, both get the vast majority of their energy from coal. As such, the two countries present the greatest opportunity to transition away from heavily-polluting fuels to more carbon-friendly energies.

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