Crystal Ball Science: In the energy sector, follow the money in 2015

by Michael E. Webber
Friday, October 31, 2014

Editor’s Note: We asked our staff and some frequent contributors to write a short commentary on something that they had been thinking about in 2014. We gave everyone carte blanche. What follows is a collection of extremely varied, often very personal insights into how the planet impacted each individual.

Five years ago this month, in these pages, I and a number of other contributors looked deep into our crystal balls to predict what the following year might bring. This year, I thought I’d try it again. As I did then, I’ll add this caveat now: Due to the intertwined relationship of energy with every sector in the economy and the complicated behavior of commodity prices and financial markets, only a fool would be bold enough to put pen to paper to add his or her predictions about energy to the permanent written record. I am one such fool.

Three main energy trends will unfold in 2015 in the United States: First, the shale oil and gas boom will slow. Second, midstream issues will move front and center. Third, solar power will continue its rapid ascent.

The shale oil and gas boom has been the world’s most important energy story since about 2008, revitalizing domestic energy production here in the U.S. and shifting the geopolitical landscape of energy. In fact, it’s been so successful that there was talk this fall about the U.S. overtaking Saudi Arabia as the world’s largest producer of liquid petroleum. Instability in the Middle East no longer causes us to panic about price spikes, and policy­makers are even contemplating the possibility that U.S. production could liberate Europe from its dependence on Russian gas.

Although this exciting boom has been transformative for the United States, 2015 will be the year it starts to fizzle, for several reasons. First, the boom will be a victim of its own success. A surge in oil and gas production is keeping prices low, making it harder for producers to generate the profits they need to invest in new wells. Additionally, other parts of the world see what we’re doing and will start following suit with untapped reserves of their own (albeit with a significant lag time).

Second, investments in and policy decisions related to the midstream sector — where energy gets moved from the point of extraction to the point of use — have lagged behind production, creating local gluts because producers can’t easily ship their oil and gas overseas or move it quickly to refineries and chemical plants. (See below for more on this point).

Third, the boom was fueled by an abundance of cash from Wall Street, but that cash is currently looking for other places to go. Meanwhile, interest rates have been at record lows. Without hundreds of billions of dollars of cheap capital available from investors looking to put their money somewhere, it could be argued the boom never would have happened. As interest rates rise and as Wall Street gets frustrated with the low returns from depressed oil and gas prices, their investments will pull back, causing the boom to slow down. When this oil and gas production boom ends, where will the money go? Among the lucky beneficiaries will be the midstream and solar sectors.

The unfolding narrative of the oil and gas boom depends on sorting out our midstream situation — and there are so many issues to work on. Small pipelines that point the wrong direction need to be expanded and reversed to take oil from shale in far-flung places like North Dakota toward new refineries. Flared natural gas at shale sites in locations such as Texas and North Dakota remains a national environmental and economic travesty that needs to be fixed, either with new pipelines or onsite technologies that put the gas to work rather than wasting it.

Meanwhile, terminals built to receive natural gas imports now need to send it out instead. Pipelines like the Keystone XL that are stalled in policy debates are being replaced by oil transport aboard trains, which are more nimble but possibly more explosive. And the question of whether to export crude oil remains the next big national policy decision awaiting attention on Capitol Hill. Perhaps most importantly, investors looking to make money are recognizing that the profit margins for moving energy might be better than for producing energy. Look for the construction of tens of thousands of kilometers of rails, pipes and trucking networks in 2015.

While the U.S. oil and gas boom has remade the global energy landscape, it’s not the only energy boom afoot. Solar power remains a small part of the energy mix overall, but it is growing faster than any other energy option and is starting to attract some of that Wall Street capital looking for a new home. Look for solar power to continue this phenomenal growth in 2015, adding tens of gigawatts of new capacity globally, with a significant fraction of that in the U.S. The U.S. will create tens of thousands of new jobs in the solar industry this year. And investors will start to favor solar in droves because of its predictable fuel costs (free), dropping capital prices, convenient alignment with peak demand in the South and West when electricity prices and profits are higher, and compatibility with policy priorities for domestic, renewable, low-carbon energy.

The energy industry will remain a dynamic sector in 2015, with major developments and important shifts looming as the investor-class hunts for the next big deal. At least that’s this fool’s prediction.