Oil prices are becoming more volatile as the macroeconomic climate deteriorates.
Meanwhile, investments are faltering because the price of oil does not justify the increased budgets.
1. The geopolitical upheavals and convultions in the energy industry
Geopolitical uncertainty is having a major impact on crude oil prices, but also on natural gas prices. As we gradually move towards the second half of the 2020s, we face an enormous amount of geopolitical uncertainty. In history, there is about a 100-year cycle. About 100 years ago, we experienced a period of great upheaval, but also innovation. This may not turn out exactly the same, but there are probably similarities.
2. The battle between natural gas and oil has begun
We are likely to see more competition between natural gas and oil producers. Natural gas is increasingly seen as a viable option to achieve energy security over oil. There is growing recognition that more needs to be done to meet the challenges of dwindling oil reserves. Peak oil is rightly seen by many in the energy industry as a key challenge. Natural gas has a bright future ahead of it and can make a sustainable contribution to energy security. Natural gas can be of great benefit in oil-importing countries and become an ideal partner for renewable energy generation.
3. The lack of investment in legacy infrastructure
We also see a lack of investment in legacy projects in the oil industry. The situation is acute for oil operations in the North Sea. New investments are needed to meet production quotas and facilitate energy trading in Europe. Incentive structures matter, and renewables are ahead in Europe. There are generous subsidies for renewables, such as hydrogen production. Oil production in Europe is treated rather stepmotherly.
4. The completion of projects is delayed
Old energy projects need to be brought to completion. When oil prices fell, there was less incentive to invest in projects that were started but never completed. In part, this has to do with political uncertainties that undermine successful completion of these projects. Oil and natural gas projects must pay off over the long term. They are multi-year undertakings and require full commitment.
5. The pricing model of oil and natural gas contracts is subject to change
Pricing is also important. Natural gas prices were historically and contractually tied to oil prices. When that price linkage began to break down, natural gas markets separated from oil markets. There are other inputs involved. But the fact that the link between the two markets is less tight than it was historically is worth noting. The expansion of network infrastructure across the Eurasian landmass means that natural gas markets are becoming further disconnected from oil markets. There is a much larger market for natural gas with many delivery options, both LNG and pipeline gas.
6. The rise of China as the central hub of our global economy
China is establishing itself as a central hub in the global energy system. This is also because China is a single entity and consumes an enormous amount of energy. This is also because China is able to establish infrastructural nodes and networks across the Eurasian level. These networks channel energy into the node, which is China. Products are distributed outward and move from the center to different regions. This, in effect, creates a whole new market for energy commodities.
7. Romulus vs. Remus: The battle between renewables and fossil fuels
As if guided by an invisible hand, renewable energies continue their rise in the energy industry. They have now become a fixture around the world. Every nation is looking for energy solutions that meet national requirements, and grid parity has been achieved for solar power. This is closely followed by wind power, which is an important part of the renewable energy transition in many countries. Germany, in particular, jumped on the renewable energy bandwagon early and is well advanced. On some days, Germany is able to generate more than half of its electricity from renewable energy sources, of which wind power accounts for the majority. The main problem for many oil-importing countries is how to store wind energy effectively. So far, we have not found a way that does not involve large energy losses.
Nevertheless, renewable energies alone cannot meet the requirements of the renewable energy transition and must be supported by other fuels. There is currently much debate about which fuels are best suited to support renewables and enable a greater share of renewables in the energy mix. But in general, the choice has been natural gas. That means natural gas will replace coal and oil as part of the electricity mix. In recent years, oil has accounted for only a small share of the electricity mix in most European countries. This share is expected to decline further.
As long as the oil price is below 70 euros per barrel of oil, innovations in biofuels will lag behind and will not be as attractive to many investors. Investments in biofuels pick up when oil prices rise again. This is important because biofuels are a major competitor to kerosene in air travel. At present, electromobility cannot replace fuels in the aviation industry.
8. The Artificial Intelligence Revolution and Bitcoin: Energy at its Heart
Artificial intelligence and algorithms are invading every corner of our lives, and the energy industry is no exception. Bitcoin and blockchain are finding new applications in the economic superstructure, and it’s only a matter of time before they find a particular use in the energy sector. Bitcoin’s relationship to energy is twofold. First, Bitcoin requires enormous amounts of energy to mine. Right now, Bitcoin uses cheap energy from countries that have a surplus of energy. These countries often supply surplus energy in the form of coal and other fossil fuels.
Since oil is abundant and energy-rich, it is not without reason to assume that sooner or later, with continued energy consumption to meet the demands of a growing bitcoin economy, bitcoin will make use of oil resources. The second reason is that energy underpins bitcoin and gives bitcoin validity. Similar to gold, oil is a real asset, but unlike gold, oil is of much greater use in the economy and underpins almost every economic activity. From producing window frames, to building roads, driving cars, making medicines and toothpaste, oil is always involved. Bitcoin therefore requires a meaningful relationship with energy, particularly natural gas and oil, as these hydrocarbon resources are particularly abundant on Earth.
As natural gas and oil compete to be the energy source of the first half of the 21st century, there will also be a battle over which energy source will underpin Bitcoin transactions.
9. New business models based on existing income-generating activities
Oil sands will not be an attractive business model, but is attractive when the price of oil is above $100 per barrel. Nonetheless, oil sands operations have more in common with mining operators, which is obvious because the earth produced must be processed.
The new business model could be renewables. But new entrants have already established themselves in renewables and it will be hard for many oil companies to make renewables their new home. Hydrogen could be an option, using CO2 as an energy carrier, but just like (other) renewables, hydrogen offers a low EROI (Energy-Return-on-Energy-Invested) that does not put it on par with hydrocarbon fuels.
Many oil companies have started investing in and collaborating with startups. These startups have the agility and mindset to drive change in the energy industry. Many of these initiatives and startups are focused on sustainable energy management and resource recovery. Biofuels have long been a focus of research because they would require minimal changes to the existing energy infrastructure that has been built over the last 100+ years. The production of biofuels and the manufacture of fuels from waste can be expanded alongside the existing refinery business. Biofuels have lost some of their spark in recent years due to slow commercialization, loss of innovation momentum, and market shifts due to the fall in oil prices.
10. Training and development: Attracting talent to the oil industry
The renewable energy industry has an easy time attracting a lot of good talent to new business models that otherwise would have gone into the oil industry. Although the oil industry offers high salaries, this alone is not enough to encourage innovation, research and development in the oil industry. The oil industry must find a way to attract this talent back to the oil industry and develop new training models to prepare employees for the challenges of the 21st century. New talent must learn to develop the business models of the future to transform the oil industry.
Many thanks for the shared interest in the energy world!