Big Energy Confronts An Unfamiliar Power: Competition
You may not have noticed, but you’re spending a lot less on energy these days.
Less than four cents of every dollar of U.S. consumer spending went to gasoline, electricity and natural gas last year, according to Bloomberg New Energy Finance’s recently published “Sustainable Energy In America Factbook.”
The oil crash is an obvious cause, but that’s just one part of a bigger story.
Here’s something Spencer Dale, chief economist at BP Plc, said this week as he launched the oil major’s annual long-term outlook:
Energy demand is growing less quickly as we get better at using energy more efficiently. But on the other side, improving technology means we get better and better at producing that energy; so there’s an abundance of energy. Moreover, the strong growth in renewable energy means there are more and more energies competing for that demand.
Growth in the economy and energy demand, once tied at the hip, are drifting apart. As I wrote here, the first decade of the 21st century was also the first decade in U.S. history where primary energy consumption actually fell — even as the economy expanded by 18 percent.
Hugh Wynne, an analyst at investment-research firm SSR, noted in a recent report that power generation has lagged economic growth over the past five years in regions representing more than 90 percent of the world’s electricity output. Energy efficiency is a big reason why we are generally doing more with less:
Meanwhile, technological advances have led to more abundant energy supply. The oil and gas industry, for example, is embracing things like digitalization and standardization to cut costs in order to open up more reserves and be profitable come what may. This structurally lowers the cost curve.
Meanwhile, cheaper natural gas has helped to reduce electricity costs. And steep drops in the cost of solar and wind power have made renewable energy competitive in a growing proportion of the world. Their free fuel costs tend to do to the power cost-curve what shale has done to oil and gas curves.
This emergence of competitive energy markets is a novelty. Big Oil and Big Power largely grew up on the back of regulated or cartel-like models. Cracks began to appear toward the end of the 20th century, as the oil-futures market gave buyers and sellers an alternative to OPEC’s price-setters and deregulation started chipping away at utility monopolies.
These forces have accelerated, opening up more competition between energy providers — and, importantly, between energies themselves. For example, oil’s vice-like grip on transportation is now being eroded by electrification. This breaking down of barriers, even if nascent, is a profound change.
Incumbents are reacting in different ways. Saudi Arabia, whose current economic model isn’t compatible with competitive energy markets, is doubling down on trying to manage prices. Riyadh has cozied up to Russia to the point where energy journalists are speculating on how to re-brand OPEC (R-OPEC gets a lot of votes but personally I favor ОПЕК; either way, we’re clearly a fun crowd). Yet such efforts also buoy those oil futures that got going 35 years ago, spurring competing supply from non-OPEC producers, and encourage conservation.