Be that as it may, the second chart on Oil and Gas Upstream Investment highlights just how severely the 2014 oil price slide hit sector CapEx, which fell 25% and 26% yr/yr in the following years, and barely recovering in the years that followed, before collapsing again in 2020 due to the pandemic. Eminently one could argue that the elevated levels in the early part of the last decade were in a sense artificially high due to the US shale oil boom, and will be welcomed by those pushing for a faster exit from hydrocarbon energy. But again that misses key points in a number of respects: for example, the shale oil sector has not been as profitable, and hobbled by the volume of debt that was required to get it ‘off the ground’, which in turn has made the banking sector wary of funding further investment, regardless of climate change related pressures, leaving it either unable to service its debt, and allowing oil majors to buy up distressed assets cheaply, or more importantly to feed into the forward supply chain for the sector.
The latter is above all significant, given that many oil majors are rolling back upstream and downstream investment plans under ESG and climate- related pressures from investors, even if the rollback from the perspective of activists is probably too tentative, and deemed to be little more than lip service. But as the woes evident in the electricity supply sector in Europe, China, Brazil and USA over recent months more than amply demonstrate, the transition to renewables is fraught with numerous headwinds and pitfalls due to prior underinvestment in infrastructure, both in existing hydrocarbon supply and a renewables sector that is many light years away from being able to meet extant energy demand. It requires cools heads and painstaking planning, with no place for idealism, and a broad array of risks in terms of inflation pressures for businesses and consumers in the event of missteps.
HERE IS SCANT IF ANY DISCUSSION OF NON- ENERGY RELATED PETROLEUM PRODUCTS, SUCH AS PLASTICS AND PETROCHEMICALS, FOR WHICH THERE ARE SOME ALTERNATIVES, AND THERE WILL BE MORE THANKS TO INNOVATION, BUT BOTH OF WHICH REQUIRE A COLOSSAL AMOUNT OF INVESTMENT.
A further risk that appears to be little appreciated in terms of the political and broader public narrative on the topic is dual aspect. Firstly underinvestment in the hydrocarbon sector by oil majors and secondary companies in the developed world effectively increases dependency on supply of crude from NOCs (national oil companies) in the GCC region, Russia and China. Secondly, if the pace of transitioning from hydrocarbons to renewables is to be dramatically increased, then even taking into account greater efficiencies from technological advance, this will require the deployment of a lot more hydrocarbons and many other raw materials, above all metals and indeed water*, to create the necessary infrastructure, as well as some quantum leaps in renewables technology, leaving aside the consideration of realistic timeframes that will be required to implement this. Last but not least, there is scant if any discussion of non-energy related petroleum products, such as plastics and petrochemicals, for which there are some alternatives, and there will be more thanks to innovation, but both of which require a colossal amount of investment, which will take time to generate “acceptable” levels of returns on investment and capital.
The final point in this far from exhaustive article relates to the labour market, both in terms of availability and skills. The pandemic has underlined just how much the pre-pandemic economy was dependent on the free and unencumbered movement of people, i.e. labour, as well as raw materials, intermediate and finished goods, and how vulnerable it was and is to disruption in the event of movement restrictions, above all ‘lockdown’ measures. The unsurprisingly protracted timeline of the virus has prompted what are likely to be longer-lasting changes in consumer behaviour, with profound consequences for demand in many parts of the services sector, above all retail and anything leisure related. For many of those that were employed in those specific sectors, and indeed many others, it has prompted a rethink about careers and attitudes towards work ‘opportunities’ and employment conditions, which will see the labour market and the structure of the labour force in flux for an extended period. The fact that this comes at what was always going to be a major inflection point for the labour market in terms of demographics as, the ‘baby boomer’ generation exits the workforce, presents a further set of challenges to employers, which will more than likely see an accelerated move to use technology to automate processes to overcome labour shortages.
*For a more detailed discussion on the widening water crisis, please see the ADMISI @Black Sea White Paper here.
Marc Ostwald E:
marc.ostwald@admisi.com T: +44(0) 20 7716 8534
20 | ADMISI - The Ghost In The Machine | Q4 Edition 2021
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