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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August 1, 2017

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

Publications

  • Presentation Energy Geopolitics, the end of the commodity super cycle and climate change
    April 15, 2015

    Presentation for Flame Conference in Amsterdam, April 2015
  • Video Energy Will Coal remain an investible asset over the next 20 years?
    March 27, 2015

  • Presentation Energy What will the energy market look like after the CMA inquiry?
    March 26, 2015

    Presentation for the Future of Utilities conference on the 26th March 2015. What will the energy market look like after the CMA inquiry?
  • Publication Energy The Coalition Effect - Energy Policy and the Coalition
    March 20, 2015

    The Coalition came to power with a ready-made energy policy developed under Labour. The Secretary of State was Ed Miliband, and his policy as it played out under the Coalition was to prove the basis of a return to a level of state intervention not seen si
  • Publication Energy What should oil companies do about climate change?
    February 26, 2015

    Imagine you are chief executive of a major oil company. Your economic forecasts tell you that the world remains stubbornly on a fossil fuel path for decades to come. The world is going to need you. But your forecasts also tell you that the result will be
  • Publication Energy The road to re-regulation
    January 12, 2015

    The Labour Party has followed up its manifesto promise to freeze prices for 20 months if they win the General Election in May with a proposal for legislation now. Ed Miliband says: "We're going to bring before the House of Commons a vote in Parliament to
  • Publication Energy The price of oil
    December 3, 2014

    The recent falls in oil prices have come as a shock to many. Only a few months ago, the IEA and many other mainstream forecasters predicted the price would gradually go up. This fitted with the political assumptions that lay behind the dash for wind and c
  • Publication Energy What future for vertically integrated energy companies?
    September 4, 2014

    The Big 6 British energy companies are under sustained attack from politicians and the media, and the Competition and Markets Authority (CMA) inquiry is being urged to consider whether they should be broken up. Unsurprisingly the companies have been putti
  • Publication Energy The Return of the CEGB? - Britain's central buyer model
    June 26, 2014

    Though no part of any grand plan, and certainly not by intention, the British energy market has morphed from a liberalized quasi-competitive market into one that is driven by the state. It has happened largely by accident rather than design, but it also h
  • Publication Energy Electricity and Energy Prices
    February 11, 2014

    Why are electricity prices so politically toxic?

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