The Return to a Calm After the Storm

It’s close to 50 years since the 1973 energycrisis during which oil prices quadrupled and energy rationing took place across much of the world. Europe is facing a similar challenging period now with a return to energy rationing already upon its people.  Across the world we are seeing shortages of all key energy commodities with prices of diesel, coal, naturalgas at or close to multiyear highs and in the case of Europe, retail energy costs at all time highs. One thing that makes this energy crisis very different than past ones is that major participants: suppliers, customers and regulators, have all become complacent following 15 years of declining prices for everything energy related. In addition, the energy world has become incredibly complex because of the vast array of financial derivatives that are used to hedge risks and for investment purposes. The good news is that there is light at the end of the tunnel. 

After the 1973 oil crisis, there was significant demand destruction, technology improvements (especially nuclear), regulatory changes particularly around energy efficiency and increases in oil and gas supply, all of which together created substantial corrections in energy prices. We saw the same extreme rise and collapse in prices in 1990 after the Iranian invasion of Kuwait and again in 2008 in the rush to the $147 per barrel all-time high for crude oil.  Bottom line, high prices lead to low prices. And it will be the same this time. 

What makes this energy crisis potentially more interesting than the other crises is that central banks are scrambling across the world to control inflation and to reduce money supply following the most sustained period of money pumping in history. The result is recessionary tendencies across all major economies across the world and what is likely to happen and we are seeing it already in Europe particularly is massive energy demand destruction. This will lead to lower prices. In the finance world it is called meanreversion (see graph) or more simply the return to a calm after the storm.  

After the storm will come a move away from molecules toward electrons; in other words instead of burning fossilfuels for nearly all of our energy usage, we will use solar, wind and other low cost cleanenergy sources to generate electricity. The advantages of electrification are multifaceted, but the key advantage is energyefficiency. As a rule of thumb an electrical vehicle uses less than a third of the energy used by a conventional vehicle running on diesel or petroleum. 

The way forward is deepelectrification which means electrifying as much as possible of our energy system. We must start with transport, heat and cooling, and heavy industrial processes which are the easiest. If we deeply electrify our energy world, then we will need less energy, noting that 60% of energy is lost enrolee to its final application, which in turn will save the customer a lot of money. In addition, deep electrification will also lead to less burning of fossil fuels which will in turn be good for the environment and nationalsecurity ! Finally, the reimagining and redesigning of our energy world is probably the biggest growth opportunity I have seen in my lifetime.  What an exciting energy world we have in front of us!