By Benedict De Meulemeester on 16/02/2010
I am not in the forecasting business, so futurology is even less my cup of tea. Still, last week, in the margin of the E-World fair in Essen, I had a very interesting conversation with a client. Over dinner, we discussed the current outlook for the energy markets and some interesting ideas popped up. We are today facing some evolutions which will very probably have an important influence on worldwide prices for oil, coal, gas and electricity. Asking these questions is interesting in itself. Anyone with a good sense of reality will acknowledge that making a forecast about the outcome of any single one of them is impossible. The energy prices of the future will be determined by the combination of outcomes of all of these questions, which makes it even more difficult to forecast them. So, according to me, these are the issues:
1. Will we all drive an electrical car in ten years? Car companies, and even governments, are betting heavily on this. Today, oil is mainly consumed for transportation. If we all (or most of us) drive an electrical car, the consumption of oil will fall in favor of electricity. Where will that electricity come from (see questions 4 and 5)? Will this cause prices of oil to fall and prices of coal and natural gas to rise?
2. Will the peak oil theory materialize? According to some we are already witnessing the peak. According to some dissidents from the International Energy Agency, oil producers are not able to produce more than 90 million barrels per day. They claim that they were forced by their organization not to tell the world about this fact.
3. Will there be a post-Kyoto climate change policy? And how stringent will that be? Will Europe continue to try to be the best of the class? Or will it be joined by the other countries? And if Europe is that lonely front-runner, how enthusiastic will it continue to be? Or will it rather scale down its efforts? Or is the drive towards greenery unstoppable, even without a world agreement on climate change efforts? This will obviously have impact on the outcome of other questions such as 1 or 4 or even 6.
4. Will renewable energy technologies such as wind or (large-scale) solar become competitive with traditional methods of power production? Or will these technologies continue to need state aid to become widespread? The outcome of this question obviously depends on what the outcome of all the other questions is on the energy price. The higher the energy prices, the more competitive the renewable energy technologies will become. But then, because of their low variable cost, renewable power production pulls down the electricity prices.
5. Will shale gas cause a glut of natural gas in the United States, Europe or China? Shale gas is now being produced and all big energy companies (even Exxonmobil) are investing in it. If it is really recoverable in the quantities such as announced, even with a huge increase in gas consumption, we are not facing a gas supply shortage in the next decades. With abundant gas around the corner (Germany and Poland are said to have big prospects in shale gas), the fundamentals of energy shortages change completely.
6. Are we really at the brink of a nuclear renaissance? In Asia, many new nuclear power plants are being started up. In the US, Mr. Obama is betting on nuclear also. In Europe, governments are more hesitant. As with renewables, the low variable cost of nuclear tends to pull down electricity prices (which again, makes investment in nuclear less interesting).
7. Will Europe continue to be a liberalized energy market? It's hard to see a way of turning it back. Is it possible in democratic, open market countries to create new monopolies without a cavalcade of court cases from the heavily disadvantaged competitors? But on the other hand, consumers (voters) and their governments are growing increasingly frustrated with the results and - logical - consequences of energy market liberalization. But maybe, the market will take some hybrid shape, something in the line of what France is currently trying to create.
None of these questions is hypothetical. I am not speculating about some undeveloped question, such as the possibility of nuclear fission. Electric car technology is being developed, peak oil theory discussed as a real possibility, Copenhagen was a failure to reach a post-Kyoto agreement, prices per kWh of renewable electricity are falling, the gas market is massively investing in shale gas, nuclear power stations are being built in Asia and the discussion on liberalization was opened even in ultra-liberal Britain last week. These are all factors that will determine the price we will pay for energy in the next decade. And moreover, new questions and issues will pop up.