Dwindling investment in oil, gas and coal means high prices are here to stay
FOR MUCH of the past half-decade, the operative word in the energy sector was “abundance”. An industry that had long sought to ration the production of fossil fuels to keep prices high suddenly found itself swamped with oversupply, as America’s shale boom lowered the price of oil around the world and clean-energy sources, such as wind and solar, competed with other fuels used for power generation, such as coal and natural gas.
Yet an underlying factor is expected to make scarcity even worse in the next few years: a slump in investment in oil wells, natural-gas hubs and coal mines. This is partly a hangover from the period of abundance, with years of overinvestment giving rise to more capital discipline. It is also the result of growing pressures to decarbonise. This year the investment shortfall is one of the main reasons prices of all three energy commodities have soared.
Start with oil, an industry that needs constant re-investment just to stand still. A rule of thumb is that oil companies are supposed to allocate about four-fifths of their capital expenditure each year just to stopping their level of reserves from being depleted. Yet annual industry capex has fallen from $750bn in 2014 to an estimated $350bn this year, reckons Saad Rahim of Trafigura, a large commodity trader.
Another factor inhibiting oil investment is the behaviour of OPEC+ countries. The half-decade of relatively low prices during the “age of abundance”, which reached its nadir with a price collapse at the start of the pandemic, gutted state coffers. That cut funding for investment. As prices recover, governments’ priority is not to expand oil-production capacity but to shore up national budgets.
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