Tell Me Why, Encore Edition - Markets React as the Energy Transition Slams Into Energy Reality

Supply chains are screwed up. Inflation has returned with a vengeance. And the politics of energy in the U.S. are all over the place, with demands for energy companies to do more today even as plans are being made to phase them out of existence tomorrow. This is today’s world — traditional energy markets learning to live with the impact of renewables, decarbonization and sustainability initiatives, while at the same time dealing with the aftermath of a pandemic and the consequences of a war with a totally uncertain trajectory — and it’s likely to be with us for a long time to come. That was the focus of our Spring 2022 School of Energy and it’s the subject of today’s RBN blog. Warning: Today’s blog includes a couple of blatant plugs for a newly available replay of our recent conference in Houston.

As we’ve talked about often in the blogosphere and as we covered over two days at our latest School of Energy, the reality of the energy transition is that there is simply no way that renewables and electric power can replace hydrocarbons at the speed that many people would like to see happen. That’s not a judgment about the efforts to decarbonize. Instead, it’s an understanding that to avert major economic dislocation, the shift to a lower-carbon economy will need to occur at a measured, responsible pace. There is plainly too much infrastructure that will have to be replaced, too many challenges regarding the supply of needed metals, minerals and other materials, and too many up-front costs for decarbonization to happen overnight. And that means the traditional hydrocarbon energy will continue flowing side-by-side with renewables and lower-carbon energy for years to come.

U.S. oil production, which had risen to a peak of just under 10 MMb/d in 1970, was steadily declining until the Shale Revolution, which led to a welcome surge in unconventional production. Natural gas followed a similar trajectory, as did NGLs. It was a paradigm shift that changed the U.S. energy market from one of shortage and energy dependence to one of energy security and even surplus. In a surplus market, like we had for the better part of a decade, buyers tend to have more pricing power and they push suppliers to produce more efficiently. But the COVID pandemic crushed demand and tanked prices — especially for crude oil — leading to dramatically lower production and a shortage of supplies once the global economy reawakened.

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