Some notes about Energy

The collapse of oil prices which started at the end of 2014, and played out through 2015 and into 2016, took many by surprise. The IEA got it very wrong – as indeed they have repeatedly done in the past. The companies were no better, nor were the politicians who were so convinced that prices would go on upwards forever.  They thought that even the more expensive renewables would all be in the money before 2020.

As the prices have come tumbling down, they have all struggled to keep up. Both the companies and the markets took the price falls to be temporary, and in the first half of 2015 they all expected a bounce back to between $60-$80 a barrel. The futures markets agreed. They then all revised down the estimates as 2015 ran onwards, but remained confident that there would be a return to high prices. Bankruptcy in the US and reducing on capital expenditure reinforced this confidence. It was all only a matter of time.

Yet it might not turn out this way. Oil is abundant and it is cheap to produce in exactly the places where output is expanding – like Iran and Iraq and even Russia. With higher output from all the main producers except the US, freezing production now would not make much difference. The world may be heading for 5 countries all producing over 10 mbd eventually – the US, Saudi Arabia and Russia, joined by Iran and Iraq.

The supply side looks robust, whereas demand is anything but.  The slow down in China is real, and no amount of official Chinese statistics can disguise the scale of the contraction. The weak global demand for commodities may turn out to be much more normal than what went on at the end of 2014. Further out the demand side looks vulnerable too. Oil is used primarily in transport and petrochemicals. In both cases gas is snapping at oil’s heels, and gradually electric cars and lorries, and new materials will make a further dent in oil demand. Add in the digitalisation of manufacturing and services (robots, 3D printing, and AI) and the growth of electricity is likely to surprise on the upside. Oil plays little part in electricity generation. The digital revolution might continue the decline in world trade too, and production is re-shored, reducing the global transport demand further.

The new normal will take a while to sink in. But when it does, the profound structural break with the past in oil markets will reveal itself.

 

Latest Publication

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Burn Out - The endgame for fossil fuels

August 1, 2017

Energy Publication

A summary of my new book published in March 2017 by Yale University Press.

Publications

  • Publication Energy The CMA Energy Market Investigation: Companies 5-0 CMA?
    March 15, 2016

    The Big 6 energy companies have scored a great victory at the CMA, and against considerable odds. Faced with an adverse finding that they have made excess returns of around £1.7 billion per annum for the period 2012- 2015, rising to £2.5 billion in the la
  • Video Energy Fossil Fuels: Is it the end?
    March 5, 2016

    Video Presentation for Warwick Climate Forum
  • Presentation Energy The Price of Oil - in the short and long run
    February 9, 2016

    Presentation slides for International Petroleum Week conference - 9th February 2016.
  • Publication Energy The new normal: oil prices after the crash
    February 9, 2016

    They did not see it coming and ever since the oil price started its precipitous crash from the $100 level, they have been reeling. The “they” includes investors, company directors and the resource-cursed governments. At first, they expected it to be a tem
  • Video Energy The new normal- oil prices after the crash
    February 9, 2016

    They did not see it coming and ever since the oil price started its precipitous crash from the $100 level, they have been reeling. The “they” includes investors, company directors and the resource-cursed governments. At first, they expected it to be a tem
  • Publication Energy Stranded Assets - a deceptively simple and flawed idea
    October 22, 2015

    The stranded assets argument has an elegant simplicity. Start with a maximum of 2 degrees warming. Work backwards to the total amount of additional carbon dioxide that can be emitted, consistent with this constraint. Compare this with the booked reserves
  • Publication Energy Reforming the FiTs and capacity mechanisms: the 2-stage capacity auction
    September 3, 2015

    Back in 2010, as Energy Market Reform (EMR) was getting going, I proposed a 2-stage auction as a way of combining mechanisms for meeting the carbon targets with the maintenance of a sufficient security margin. The first stage would be open to all, and the
  • Publication Energy The first 100 days of Conservative energy policy
    August 24, 2015

    Amber Rudd, the Secretary of State for Energy and Climate Change, has had a very busy start. She has ended new subsidies for onshore wind, reined back the Green Deal, removed the exemption from tax for renewables, ended the zero-carbon homes plan, removed
  • Publication Energy Penalty tariffs, open-ended regulation and embedding overcharging
    July 20, 2015

    When, in the face of the sustained attacks from Labour’s Ed Miliband and Caroline Flint, OFGEM referred the electricity industry to the Competition and Markets Authority (CMA), many hoped the result would settle the controversies once and for all, restori
  • Video Energy Evaluating the Impact of new Technologies - The end of the traditional utility model
    June 25, 2015

    Presentation for NEM Future Forum 2015

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