A year in energy: what we have learnt in 2017
By Ed Crooks
“These were shadows of the things that have been,” the Ghost of Christmas Past tells Scrooge in A Christmas Carol. “That they are what they are, do not blame me!” In that spirit, I am going to use the penultimate Energy Source of the year to look back at some of the key things that have been in 2017, and the lessons I think they have taught us.
1) Opec still has clout, when it has Friends
The end of Opec’s power has been proclaimed so often that announcing it has become a journalistic genre in its own right, but this year the cartel proved that it can still exert some influence over the oil market, at least for a while. The fact that Brent is hanging on above $60 per barrel, at a time when US shale production is surging and global crude inventories are expected to rise, testifies to Opec’s enduring authority. It has only been able to be this effective in its strategy of production restraint, however, because it has allies, above all Russia.
The “bromance” between Khalid al Falih and Alexander Novak, energy ministers of Saudi Arabia and Russia respectively, has been one of the more unlikely alliances of the year; their countries have long been strategic rivals. But in the face of the common threat from low oil prices, they have been remarkably effective in maintaining a more-or-less united front in assessing the problem in the market and agreeing the action needed to fix it. The relationship can be expected to come under more strain next year. Russian oil producers are eager to increase output, and if the International Energy Agency is right about world oil production exceeding consumption in the first half of next year, as US output booms, there will be renewed questions about Opec’s strategy. For now, though, the cartel can look back on 2017 as one of its more effective years.
2) Saudi Arabia’s crown prince is serious about changing his country
Crown Prince Mohammed bin Salman, widely known as MBS, was elevated to that title only in June and is just 32 years old, but already he has made a huge impact on the kingdom. The most dramatic sign of that was the swoop he ordered last month that detained dozens of leading Saudi figures, including princes, government officials and business leaders on corruption charges. There is no doubt that Saudi Arabia has a history of corruption, and some applauded the news that the authorities appeared to be prepared to act decisively against it. But as the FT editorial put it, “ this purge looks to be primarily about the crown prince consolidating his power.” One reason for him to want to strengthen his position is that he has started making some tentative but still controversial social reforms, including allowing women to drive and re-opening cinemas after a 35-year ban.
On the economic front, meanwhile, the crown prince hosted a conference for international investors dubbed “Davos in the desert”, launched a plan for a futuristic new city intended to attract $500bn of investment, and pressed ahead with plans for an IPO of Saudi Aramco, scheduled for next year. In between all that, he also found time to buy the world’s most expensive house, and possibly the world’s most expensive painting, too. (Although the story of who actually bought ‘Salvator Mundi’, and why, is somewhat mysterious.) The end point of all this change is uncertain. Saudi Arabia has remained stable by balancing competing interests, and Prince Mohammed has disturbed that equilibrium. History shows that authoritarian regimes can be at their most vulnerable when they try to make changes. But given the demographics of Saudi Arabia’s youthful population, and the long-term threat to its oil revenues from alternative energy, trying just to maintain the status quo forever does not look like a viable option. Prince Mohammed has set off on a risky course, but the dangers in his other possible routes may have been even worse.
3) Bringing back coal in the US is easier said than done...
On the campaign trail, the promise to “bring back coal” was one of President Donald Trump’s favourite themes. It was a slogan that served several purposes: as an attack to hurl at Barack Obama and Hillary Clinton, as a symbol of the kind of economy that Mr Trump wanted to revive, and as a direct vote-winner in the coal-producing states of Pennsylvania and Ohio. Mrs Clinton’s remarkably maladroit presentation of her policies for coal regions, appearing at one point to be eager to put miners out of work, was also a gift to Mr Trump’s campaign. He told a simple story about how Mr Obama was waging a “war on coal” with his policies to address the threat of climate change, and once the deathly grip of Washington was broken, the mines would come roaring back to life. As the past year has proved, that story was mostly a fairytale. As a study for Mr Trump’s own energy department concluded in the summer, the real war on coal was being fought — and won — by natural gas, which is a cheaper and cleaner fuel for power generation. The Clean Power Plan, the main set of regulations that Mr Obama proposed for addressing climate change, had not yet come into effect, having been stalled by the Supreme Court. Scrapping those regulations, as the Trump administration intends, may slow the decline of coal-fired power in the US, but cannot bring back the jobs that have been lost.
The US coal industry has picked up this year, but that has been the result of the rebound in China’s consumption and a rise in US gas prices making coal-fired power somewhat more competitive again. And the recovery has been modest: US coal production this year will be about 9 per cent higher than last year, but is set to drop back again in 2018, according to the Energy Information Administration. Just 1,200 new coal mining jobs have been created since last year’s election, an increase of 2 per cent. The administration has now moved on from its belief that simply removing anti-coal regulations would bring the industry back, and has realised that it will have to impose pro-coal regulations in electricity markets to make a significant difference. The debate about those plans now going on at the Federal Energy Regulatory Commission will be one of the big issues to watch in US energy next year.
4) ...But getting off coal in China is tricky, too
As China’s coal consumption rebounded earlier this year, after three consecutive years of decline, cynics were quick to argue that it showed the government’s professed commitment to curbing local air pollution and greenhouse gas emissions was mostly a sham. In the past few months China’s government has given the lie to that criticism, making a determined attempt to shift homes in some of its most polluted regions away from coal and towards gas for heating. The difficulties that have been thrown up by this initiative, however, have been a reminder of just how dependent China is on coal, and how great an effort is required to break that dependence.
There have been shortages of gas for industry and reports of people freezing in their homes. Some of the restrictions on coal use had to be relaxed, and gas companies have been using desperate measures to increase supply to the regions that need it. China’s imports of LNG have soared, creating a bonanza for suppliers to Asian markets. The message for the world hoping to see China curb its emissions is mixed: the government’s determination to address its problems is real, but so is the scale of the challenge. Meanwhile, another trend to watch is surging coal demand in southeast Asia.
5) It is the private sector that is leading the way in decarbonising energy
The past month has brought a flurry of eye-catching announcements from governments about their plans to tackle climate change, from the initiative led by Britain and Canada for developed countries to stop using coal for power generation by 2030, to New York state’s plan to stop its pension fund making new investments in fossil fuel companies. The announcements all generally share a common intent: to send a signal that international action to curb emissions is still making progress, in spite of Mr Trump’s announcement that he plans to withdraw the US from the Paris climate agreement. For all of that governmental activity, though, some of the most consequential moves in terms of changing the world of energy are being made by the private sector. Investors are combining to put pressure on companies to curb emissions.
The plunging cost of renewable energy is making it a competitive option for power generation without subsidies in much of the world. Companies from outside the energy industry, from Apple to Walmart have been investing in renewables, storage and efficiency. Fossil fuel producers including ExxonMobil and BHP Billiton have been discussing the need to address the threat of climate change, and although you could easily argue that there is a gap between their talk and their actions, the shift in communications in itself is significant. And Elon Musk’s Tesla has offered some ambitious ideas for how electric vehicles and batteries can shake up our energy system. However that company’s story ends up, it has taught some important lessons about the possibilities of the technology and the market.
Finally, you might be interested to see some of the most-clicked stories in Energy Source this year. Our most popular link was to the presentation by Michael Liebreich of Bloomberg New Energy Finance, which he gave at the firm’s summit in London in September. Other sweeping views of the landscape also attracted a lot of interest, including Royal Dutch Shell’s scenarios for modelling future energy trends, and the International Energy Agency’s presentation from June on trends in energy investment. The most-read report was the paper from Sustainable Energy for All on flows of finance for access to electricity and clean cooking in low-income countries. The Calgary Herald’s excellent history of Alberta’s oil sands was one of the best-read stories from a non-FT news source, along with a Utility Dive story about compressed liquid air energy storage.
Among FT articles, Nick Butler’s blog reliably attracts the most attention, with Charles Clover on electric cars in China and Martin Wolf on climate change also well read. Some of the weirder items have also been very popular, including the monster fatberg blocking a London sewer, which could be a source of biodiesel. And the tenth most-clicked story from the email this year: the “connected cow”.
There will be one more Energy Source before the end of the year, when I will be looking ahead to 2018. Happy holidays!
Another view
Quote of the year
"We are planning to be leaving totally the dependency [on oil] that we have been living for the last 40, 50 years. Hopefully by even 2030, I wouldn't care if the oil price is zero." – Talking to CNN, Mohammed Al-Jadaan, finance minister of Saudi Arabia, set an ambitious goal for the country’s economic reform programme.
Chart of the year
From this year’s World Energy Outlook from the IEA, this shows shifts in energy use, comparing the past 25 years or so to expectations for the next 25. All sources are still expected to grow, but oil by much less than over the past two decades, and coal barely at all. The IEA has repeatedly underestimated the growth of renewable energy in the past, though. Will that prove true again?
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