Oil now costs less than the barrel it comes in. Adjusted for inflation, oil prices are back to the levels of 2003, and United States gas prices have returned to the level of the early 1990s. The costs of new wind and solar power are at historic lows and continue to drop. This is the beginning of an era of energy abundance.
Even if prices have rebounded somewhat from the trough, low prices are both cyclic and structural. The usual commodity cycle is a familiar one. A period of panic over shortages is followed by an episode of “high-cost abundance”, when resources are plentiful but only at high prices. This inevitably leads to a period of low-cost abundance, when over-investment and surplus producing capacity can keep prices down for years, even decades.
At least for oil, today’s cyclical component may not be as deep and long-lasting as the previous mid-1980s crash. Opec spare capacity is much smaller, demand has not fallen sharply, and budget cuts will hit production in the years to come. But gas, particularly liquefied natural gas, seems set for a tougher time. New projects are still continuing to enter the market, Russia may compete aggressively on price in Europe, and gas has to be cheap enough to displace coal.
The structural side is more worrying. New technologies in both hydrocarbons and renewable energy have lowered the cost of production while opening up enormous new resources. Alongside shale production and cheap solar panels is the prospect of widespread adoption of the electric car.
Ageing populations, anaemic economies, the spread of energy-efficient technologies such as LED lighting and highly insulated “passive houses”, the removal of subsidies, and action on climate change promise weak demand growth for a long time. India and African countries may boom in the years to come, but this will only be a faint shadow of China’s historic surge.
An extended period of ample energy upsets a paradigm with which both suppliers and users had become comfortable.
Governments may take much of the windfall from consumers by imposing new energy taxes to fill fiscal holes, and using the breathing space provided by lower prices to ratchet up climate policies. The Obama administration has already moved in this direction.
Environmentalists will need to re-examine their assumptions about resources – clean energy sources cannot rely on handouts, rigged markets or the prospect of the dwindling of hydrocarbons. Cheaper wind and solar are disrupting traditional energy markets before they themselves can provide all the answers.
This will be an austere epoch for energy-exporting countries. The laggards face a grim future of economic decline and political strife. But some of the mantras of diversification now have the chance to become reality. Even if oil and gas prices recover, a nation that in the interim has grown new industries and unlocked entrepreneurial abilities will hardly regret it.
Companies – from Spain’s solar pioneer Abengoa to the US shale giant Chesapeake – are struggling for survival. They have to streamline their operations without ceasing to invest in the future. Indeed, the best people and technology will be more important than ever, in the face of short-sighted shareholders. Oil and gas companies have to decide whether, and how, they can pursue new energy sources or clean up hydrocarbon use.
Rather than passively accepting the market situation, energy companies and states need to seek out and create new demand. Gas producers should promote their relatively clean fuel, both in Europe and Asia, and find new uses for it, as in shipping. Building markets and infrastructure that can deliver modern energy to the hundreds of millions in Africa and South Asia who still lack it.
An age of energy abundance brings opportunities for all: producers, consumers, entrepreneurs and environmentalists. It demands though, not passive harvesting of windfalls and subsidies, but imagination, flexibility and boldness.
Robin Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis.
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