The Energy Landscape in 2014
The drop in oil prices was the defining event of 2014. To help understand the causes and consequences, Helle Kristoffersen, Total’s Senior Vice President, Strategy & Business Intelligence, reviews the global energy landscape.
Brent oil price
How do you explain the slide in oil prices?
After holding stable at a high $110 a barrel or so for three years, Brent prices plummeted by around 50% between mid-June 2014 and early 2015.
"Oil prices dropped due to two factors. The first was a downward revision of forecast demand for 2014 and the second, abundant supply. Lagging demand is directly related to economic growth, which was less dynamic in 2014 than had been forecast, especially in Europe and China. On the supply side, we saw a spectacular increase in U.S. production, led by the tight oil revolution. Simply speaking, with output of 11.6 million barrels per day, the United States became the world’s leading producer of oil last year, moving ahead of Saudi Arabia. Supply began clearly outstripping demand last summer. That’s why OPEC’s decision last November to maintain its production quotas pulled prices down even more. Faced with this new competition, OPEC’s members decided to protect their market share.
Our industry is experiencing the end of an oil price cycle, which is nothing new. High oil prices between 2011 and 2014 attracted a lot of new investment and in the end upset the balance between supply and demand. Given the current low prices, oil producers will postpone or abandon new project starts and surplus supply will dry up little by little, which will gradually push prices back up. On the face of it, longer-term balances point toward oil prices that are higher than today’s. The natural decline in production from fields means that nearly 50 million barrels per day of new capacity needs to be developed by 2030 to meet demand. We will have to invest to produce that oil, which is only possible with stronger prices. According to our estimates, the marginal projects need to match supply to demand over the long term will only be profitable if prices are significantly higher than today's roughly $60 a barrel."
Brent oil prices since 2007 (in U.S Dollars per barrel)
A few key figures illustrating the change between 2007 and 2015:
- July 11, 2008: $143.77 per barrel.
- December 24, 2008: $33.58 per barrel.
- March 8, 2012: $128.22 per barrel.
- January 13, 2015: $45.25 per barrel.
How is demand for natural gas changing?
In Europe, demand for natural gas is lower than ever, although it is rising in other parts of the world.
"Several factors explain why demand for natural gas has been weak in Europe over the last three years. Manufacturing activity has been less vigorous and the past two winters were relatively mild. In addition, less natural gas has been used to generate power. The situation in Europe is paradoxical right now. Despite assertive efforts at the E.U. level to reduce carbon emissions, the use of natural gas has declined by nearly 5% a year since 2010, replaced in part by renewable energies as well as by coal, which emits twice as much carbon. It seems unlikely, however, that coal use will continue to increase over the medium term due to new E.U. directives restricting the use of the most polluting power plants. But we are optimistic about the role of natural gas elsewhere in the world. In North America, the shale revolution has led to market share gains for natural gas. The market in Asia is very vibrant, as are those in the Middle East and Latin America. This is especially true for liquefied natural gas (LNG), with Asia taking LNG freed up by the decline in European consumption. The start-up of several LNG projects — first in Australia and then in the United States — is expected to increase market supply and thereby support the growth in demand for natural gas.
The slide in oil prices will begin to impact the price of oil-indexed LNG contracts, two or three quarters after the fact. This will make these contracts more competitive and encourage the use of natural gas instead of coal or fuel oil, but could slow investment to develop new LNG capacity. This brings us back to the cyclical effects we discussed earlier."
Have lower oil prices made renewables more attractive?
Investment in photovoltaic solar power picked up again in 2014.
"Worldwide investment in photovoltaic solar capacity rebounded strongly last year, by just over 25%, making up nearly all of the ground lost in 2012 and 2013, when spending declined by 7% and 18% respectively. The reduction in manufacturing costs over the period 2011-2013, followed by stabilization in 2014, has had a positive impact on photovoltaic solar expenditure. Overall, solar energy is becoming more and more competitive, especially in regions where demand for electricity is highest at times when photovoltaic panels are most productive. Since electricity cannot currently be stored, solar energy is only suitable for uses such as air-conditioning, where demand is concentrated during the summer and in the middle of the day. This is the case in California, the Middle East and certain parts of South America and Asia, but less so in Europe. That’s why solar energy’s growth potential is today shifting to regions outside Europe."
How are oil prices impacting biofuels?
"Lower automotive fuel prices could hinder the development of biofuels wherever ethanol is in direct competition with gasoline. This is true, for example, in Brazil, where gasoline, which is only lightly taxed, has benefited strongly from the decline in oil prices. In other regions, such as Europe, demand in any case continues to be sustained by the obligation to blend renewables in fuels. As a result, falling oil prices will have little impact."
The swing to greater energy efficiency is expected to keep gaining momentum despite lower oil prices.
"Enhancing energy efficiency has become an integral part of our business. These efficiency gains are vital if we want to respond to growing energy demand worldwide and mitigate climate change. The automotive industry perfectly illustrates the major strides that have been made in this area, around the world. Wider use of hybrid engines and advances in internal combustion engines will make it possible to attain the E.U. objective of 95 grams of carbon emissions per kilometer in 2020-2021, a target that seemed unreachable five years ago. China is also pursuing this path, introducing emissions restrictions that are tougher than those in the United States. So there’s a real global movement under way that will expand individual transportation while also limiting its impact in terms of energy use."