The high cost of power for homes and businesses looks like it will be one of the features of winter 2021/22 in many parts of the northern hemisphere. The problem is being created by an unfortunate confluence of events that is unlikely to be resolved in the short term, suggests Kay Rieck, an experienced market observer and investor.

The oil and gas sector has occupied a unique position at the centre of the global economy for over a century. It’s a sector with many of the hallmarks of an oligopoly, but the advantages that that position offers are starting to be obscured by the market inefficiencies that it encourages.

It has long been said that the price of auto gas on forecourts rises like a rocket and falls like a feather. In some ways this reflects the market’s ability to use its position to respond to increase prices whenever there appears to be an opportunity and its unwillingness to let prices fall when demand drops.

To be fair, while this might be a comforting gripe to have when you are filling up your automobile, it’s actually a little too simplistic for the reality of the oil and gas sector.

Ultimately, while oil and gas prices have been climbing to eye-watering levels for many people over the last three months, it’s only now, with December looming on the horizon, that it looks like wholesale prices will start to level off. According to the International Energy Agency, the US is starting to ramp production up which is starting to have an impact. West Texas Intermediate is starting to come off the US$84 per barrel peak that it was enjoying in the middle of November, while Brent Crude is similarly softer from its US$86 per barrel peak. How long this will take to translate to falling prices at the pump remains to be seen.

The gripe and the reality

So why are oil prices so unresponsive to increases in supply? There are several reasons.

While ever improving geology and artificial intelligence have combined to give us an increasingly good idea about where deposits of natural resources can be found, getting the oil and gas out of the ground and transporting it to market is rarely a simple task. There is the challenge of staffing up for a project but there is also the question of getting hold of the hardware necessary for extraction and transportation and getting it from where it is to where it needs to be. Both of these factors can take a considerable amount of time, so it is rarely simply a question of flipping a switch and releasing more oil and gas into the market.

The added challenge this time around is that we are in a much-touted transition period, with the relative importance of oil and gas being slowly downgraded in favour of alternatives such as wind and tidal. From most perspectives this is the right thing to do, but it does mean that governments and oil companies have been somewhat slower to invest in oil and gas infrastructure over the last few years. This in turn means that the sector lacks the flexibility to respond to changing demands.

Coupled with this is the fact that as the transition period gathers momentum, more and more people are seeking their careers outside of the industry. This makes the demand cycle more difficult to manage because the staff aren’t in place to respond. Added to this, wage expectations are rising because there is more demand for experts than supply of people, and the rising costs are added to the price of power.

The short-term factor in everything

Of course, the massive challenge that has complicated every aspect of demand and supply over the last eighteen months is Covid-19. It is difficult to understate how much this has complicated the global supply, with demand initially dropping to near zero during the spate of lockdowns around the world, before roaring back over the last few months as economies recovered. The challenge here is that we are still some way from knowing what the new normal actually is.

The final point to make that is both fascinating and very difficult to come to terms with is that the higher that the prices get, the more that consumers and governments will increase the speed with which they embrace alternative energy sources. This has been particularly visible with the re-emergence of conversations about the role that nuclear could play in the energy mix. In some economies the recovery has been accompanied by a notable shift away from cars being powered by gasoline to being powered by electricity, with infrastructure shifting to match.

If the last few years have taught us anything it is that predictions about the future are almost always a fool’s errand. What we can say with increasing certainty is that we are in the midst of a fundamental change in the global energy mix and managing the process is going to take fresh thinking on the part of the oil and gas sector, regulators, governments and the public.

Kay-Rieck

About the Author

Kay Rieck has been an investor in the US oil and gas sector for more than two decades. He was a financial advisor and stockbroker on the New York Stock Exchange (NYSE) for many years.

He quickly developed his interest in the oil and gas sector and related assets, building his expertise in investment banking and asset management at the New York Board of Trade and the Chicago Board of Trade.

Leveraging his exceptional network of global contacts, he founded his first oil and gas development company in the U.S. in 2008, selecting investments in the Haynesville Shale, Permian Basin, Eagle Ford Shale, Dimmit County, and anywhere else that offered and continues to offer exceptional return prospects.