What $1.8 Trillion Doesn't Buy in Energy
Here's something we can all agree on: $1.8 trillion is a lot of money. In energy terms, it would get you:
- 38 billion barrels of oil, or enough to meet just over a year's worth of global demand.
- 45 billion tons of Appalachian coal, or -- given the way demand is going -- probably more than enough to meet America's requirements for good.
- Almost 50 million shiny new Chevrolet Bolts (before any subsidies).
The one thing it doesn't buy, it seems, is peace of mind. The International Energy Agency's round-up of global investment trends, published on Wednesday, tallied the world's spending last year on oil, gas, grids and all the other stuff that keeps us moving at that fantastical sum. Yet:
Although energy markets around the world are generally well supplied at present, investment trends warn against complacency about energy security ... Globally, energy investment is not yet consistent with the transition to a low-carbon energy system envisaged in the Paris Climate Agreement reached at the end of 2015.
That's the IEA's way of saying even $1.8 trillion isn't really enough. Plus, if we actually plan on doing something about climate change, then we're spending on the wrong stuff. Our -- collective -- bad.
For investors in oil majors, miners and utilities, this is a bit demoralizing and confusing. Not because they are all necessarily teetering on the edge of destruction (actually, some miners are). But because the details beneath the IEA's headline numbers point to that overused, but in this case definitely apt, term: disruption.
Coal is the obvious candidate here, where investment hit its lowest in a decade, leaving it far below what was spent on just about every other form of energy, including not using energy:
Coal still provides more than a quarter of the world's primary energy supply, so it's hardly dead. But low investment, the mass bankruptcy of the U.S. mining industry, and falling or flat demand in the U.S. and China are symptoms that even rising Indian consumption can't mask.
One supportive factor, China's recent over-investment in coal-fired power plants, also has a zombie-ish quality to it. China's coal plants ran less than 50 percent of the time in the first half of 2016, according to the IEA, and not merely because of slowing growth in electricity demand. China has also overbuilt its nuclear and wind capacity and largely cornered the market in urban smog. Yes, sunk costs in coal plants mean they will still be used -- but as a source of sustained growth in coal demand, forget it.
This has implications for the oil majors. They also overbuilt during the commodities boom, especially in liquefied natural gas. As I wrote here, Big Oil has become gassier in the past decade or so, partly because access to good oil reserves on reasonable terms was restricted, and to meet demands for lower-carbon fuel.
Investment in LNG, aimed particularly at Asia, peaked in real terms in 2014 at more than double the annual amount spent in the years before 2010. The resulting glut has squeezed out the spreads in regional natural-gas prices those LNG plants were built to exploit:
Working off the glut won't be easy, partly because coal -- clearly the fossil fuel Big Oil would love to drive a stake through -- lingers on in the form of those underutilized Chinese coal plants. It's also because of this:
That's a chart from the IEA report showing cost trends for various energy technologies. Oil and gas have responded well to the collapse in prices since 2014. But their trend pales in comparison to what's been happening with truly manufactured -- rather than discovered -- energy sources and efficiency-related technology. This raises the risk that the long-heralded golden age of gas gets squeezed between coal that's cheap because it's dying and renewables that are getting cheaper as they gain in strength.
That's a nightmare for a gassier Big Oil that is finding its model of focusing on massive, complex projects that take years to develop -- such as LNG plants -- under pressure. Smaller producers don't escape either, obviously.
But those without busted balance sheets and able to move more nimbly are more in favor with investors these days. It says a lot that Anadarko Petroleum announced a $2 billion acquisition of oil and gas assets from Freeport-McMoRan this week, selling new shares to fund it -- and was still the best performing E&P stock the following day, even as oil prices slumped.
Despite the IEA warning about what today's lack of investment in new oil supply could mean for energy security, Big Oil's investors are demanding it give them any spare cash rather than spend it.
There are risks to oil demand, too, in the medium term, as shown by the growing buzz around GM's new electric vehicle, the Bolt. The big thing here is less the car itself and more the fact that, as fellow Gadfly Chris Bryant wrote here, electrification is spreading beyond the rarefied circles of Tesla Model S buyers.
Like LNG, the threat isn't a sudden collapse in global oil demand -- battery-powered vehicles are still a fraction of a fraction of the market. Rather, it's the risk that growth in that demand flattens out quicker than was anticipated when multi-billion dollar investment decisions were taken just a few years ago.
Conversely, the transportation market is a huge opportunity for the power sector, especially in the U.S., where electricity demand has been stagnant for a decade. Even incumbent utilities, though, aren't in the clear. Here's that first chart above, on how global energy investment is divided, but redrawn slightly differently:
Utilities can, as the name suggests, build utility-scale renewables themselves. Between 2010 and 2015, utility-scale renewable energy generation went from 43 percent of the overall investment pie to 58 percent, versus a drop for distributed generation from 17 percent to 11 percent, according to the IEA. Meanwhile, utilities are also trying their hand at monetizing efficiency, even as it cuts into traditional demand.
But unlike traditional fossil and nuclear plants and the grid, renewables and efficiency are both much more open to new entrants. There has been a concerted effort on the part of incumbent electricity providers to entrench their critical advantage: the ability to earn regulated returns.
This can be seen in a number of ways, be it American Electric Power's deal to offload unregulated plants to private equity or FirstEnergy's tragicomic efforts to foist uneconomic merchant plants onto the bill payers of Ohio.
With the power-generation market now more in play than ever, that $262 billion "power networks" bar -- wires and transformers, basically -- represents the utility sector's ultimate redoubt (and even that's being messed with.)
Unlike Big Coal, Big Oil and Big Power are by no means on the mat. You don't comprise the bulk of a $1.8 trillion global industry without wielding considerable power.
Their problem is that this also makes them a huge target, just as growth has slowed and changes in technology and regulation are handing challengers the weapons with which to take them on.
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