Embracing the Energy Unknown, pt. I

November 7, 2017 Richard Badham

Embracing the Energy Unknown

In the modern marketplace, the exponential rate of innovation is changing business fundamentals. The world is more connected, responsive and dynamic than at any point in history. Sure, that can be exciting, but for some it can be equally intimidating.

Embracing the Energy Unknown 1Further complicating matters, few sectors are more exposed to the daily reality of innovation than energy — see the U.S. energy space, for instance. Only a decade ago, domestic oil and gas production was in long-term decline, and baseload coal had a long history (and presumably a long future) as the core component of power generation. Renewable energy might have been intriguing as a boon to corporate social responsibility, but at the expense of the bottom line.

Fast forward to today.

No country in the world has seen greater growth of oil and gas production than the States. Coal is being phased out of the overall energy mix amid competition from cheap shale gas and renewables, such as low-cost wind and solar electricity. In short, today’s energy market is radically different from what existed only 10 years ago.

As is always the case with rapid change, there are winners and losers. In 2007, five of the world’s 10 most valuable publicly traded companies were oil and gas producers. ExxonMobil is now the lone fossil-fuel company on the list, occupying the last slot. Meanwhile, digital innovators and leaders in renewable energy procurement — Apple, Alphabet, Microsoft and Amazon — rank 1-4 respectively.

The question then is: How do companies get ahead of the curve and reap the benefits of the new energy economy without a clear view of the curve’s trajectory?

OPEC vs. the Shale Boom

Slow Response to New Technology

To answer that question, it’s useful to first dive a bit deeper into some recent case studies. The first example under the microscope in this three-part series is OPEC’s evolving role in the modern marketplace and how it can reveal more than just next month’s prices at the pump.

Until oil prices crashed in 2014, OPEC consistently dismissed U.S. unconventional shale oil production as a threat. Even several years into a trend of sharply increasing stateside production, OPEC did little to change course as prices traded near modern highs — above $100 per barrel (/bbl). For many OPEC countries, these prices meant a return of $80 to $90 on every barrel they pulled out of the ground. The cartel’s strategy was simply to produce as much as possible to maximize revenue.

Drilling Rig- Aerial ViewAnd then 2014 came along. Prices crashed, falling by half by the end of the year. By January 2016, benchmark oil prices traded near a mere $25/bbl. OPEC’s efforts to first overproduce followed by drastic production cuts failed to squeeze U.S. producers out of the market.

All the while, the sovereign budgets of Saudi Arabia, Qatar, the United Arab Emirates and others countries confronted steep deficits and dwindling foreign reserves. Now, compare that to the U.S. where producers spent the same time period maximizing efficiencies and getting leaner for a lower-priced market.

The lesson is clear: Change creates an opportunity for those who anticipate it.

Embracing the idea of change rather than ignoring the threat it can pose is only the first step. That still leaves the much larger question of how to effectively address that change. For that, stay tuned for part two to find out what coal lobbyists, gas guzzlers and the early stages of a personal vehicle revolution have to say about the right way to move forward.

In the meantime, watch this video for additional background and perspectives.

 

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