Peak Demand, Relentless Supply – Paper 1, The Outside View
Paper 1 – The Outside View
The energy industry is going through a major transition comprising three key events: the peaking of global fossil fuel demand as China and other growth markets plateau, the rise of new energy supply from conventional and commercial-scale renewable sources, and the integration of the energy markets of transport and power via electricity.
The Oil & Gas Industry consensus view is such energy transitions take a very long time, and the current changes in the sector are part of an extended cycle that will take decades to play out before major transformations occur. Oil and gas will remain dominant in primary energy for decades to come.
History is bunk, say external analysts: this transition is different and will be far quicker. The demand for conventional fuels is peaking just as new sources of energy and technology become mature enough to provide major new supplies. Oil and gas are rapidly becoming residuals between peak demand and relentless supply – so don’t look at the totals of energy supply, look at the changes.
Who is closer to the likely outcome, and what does it mean for firms in the market today? A set of three white papers attempts to address those questions.
The first explores the issues of peak demand, supply and energy integration using both the industry consensus and an external analyst framework.
The second the uses this framework to address three fundamental issues that come with peak demand, and are a priority for the industry today: When is Peak Investment? What is the shape of demand post-peak? What is the likely long-term reaction of OPEC?
The final paper looks at how incumbent firms are reacting today, and assesses their strategies in light of external analysis, proposing critical areas that still need to be tackled.
The first paper is now published on the White Paper section of this site. The next two papers will follow soon.
A summary of Paper 1’s framework and main conclusions are shown below:
Table 1 – The Outside View Framework
Main Conclusions
- The external view sees classic risk to industry going ex-growth: market structure, price deflation
- There is too little industry focus on systemic issues eg renewables incremental share capture, China and India policy changes, fossil fuels as residuals
- The industry has a over-reliance on total percentage changes rather than incremental change, and on narratives such as rebalancing and transitions being historically slow
- Peak demand will likely occur sooner than expected, and post-peak decline could be steep
- The internal focus on current business model optimization and continued investment increases risks to all participants due to “relentless supply”
- The industry probably underestimates the deep corporate impact of supply-demand tipping points eg share price valuations, as investors become active in portfolio management
- Incumbents needs to use increasing transparency of risk management with stakeholders to signal change and engage in adapting their business model to the key systemic risks – long-term price deflation, and over-commitment on investments
Papers 2 and 3 will be published soon.