may have investment implications. While some of these will be long-dated, some vague, and others controversial, my intention is to point to trends which are underway, from a global perspective. On the premise that many of the best investments anticipate change, the series seeks to focus on issues and events whose emergence/change will create investment opportunities (or avoidance). Unless otherwise advised (readers will control the agenda – I will try to deliver information of value), I’ll structure the note in two sections. I’ll start with some highlights since the last note, of interest and either supporting or challenging my outlook. I’ll also try to provide some analysis of a particular trend where my perspective may be of value. In general, the objective will be to help place various energy dynamics in perspective.
Energy Macro – The View from the Troposphere
No carbon problem up here!!!
Beneath the trend of a recovering, but modestly priced hydrocarbon resource, and a sharp deceleration in the value added and shelf space of renewables, several longer term changes are afoot. First, a hole in the global, non-OPEC, crude-related project pipeline, between 2007-9, will lead to a nearly unavoidable slowdown in non-OPEC production growth, from 2010-2013. Assuming any reasonable recovery in demand, moderate current prices seem bound to rise sharply over much of that period. The primary headwind would be reduced economic growth and/or continued substitution or efficiency gains at the consumer level. It is too early for renewables to contribute meaningfully to demand destruction over this period. Global natural gas is in excess, thanks to completion of numerous pipeline and LNG projects, mostly in the Middle East, over the last couple years, and combined with weaker demand due to the global recession. As David has noted, substantial domestic shale resources offer ample supply to meet nearterm demand trends. For renewables, while the stocks traded along with the oil price until late 2008, actual economics are largely tied to local gas/electricity prices. Reduced power demand has probably driven the decoupling over the last couple years, with an added kick from developers’ leveraged business models and subsidy backlash. While both wind and solar momentum appears to have stalled just as booming supply expansion hit the market, I expect several signposts to point the way to much better performance during the 2011-3 period. These include (a) higher oil prices, which increase the economic attractiveness of up front investments in zero variable cost resource, (b) gradual recovery of electricity markets, (c) continued lower capital costs for renewable options, heading toward much reduced need for subsidies, (d) more visible and consistent financing markets, and (e) grinding progress on fronts, including compliance with Renewable Portfolio Standards and regulatory/cost pressures, which which will lead to closure of older, dirtier, power options. News events of the past couple weeks which are interesting, in the context of these comments: