The characters are fictitious and do not correspond to real people.
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Today we are going to talk about the energy market. In about 10 minutes you will know:
1.- What factors are of interest to producers?
2.- How do they affect prices?
3.- What are we waiting for now?
1.- What factors are of interest to producers?
According to the EIA (US Energy Information Administration), currently the largest source of energy is still natural gas. In developed countries, in general, renewable sources surpass coal, although this is not the case worldwide. Nuclear energy also plays an important role.
The fact of using high-carbon energy sources has a not inconsiderable penalty. In Europe, as in other regions, emission limits have been implemented. If they are exceeded, it is necessary to purchase emission credits at auction. The prices of these credits that give the right to emit more carbon have skyrocketed, as evidenced by the data provided by tradingeconomics.com:
In 3 years they have multiplied by five.
Companies that do not manage to consume the available carbon credits can sell them on the market and make a profit from emitting less CO2. This is an important incentive.
Another way to earn carbon credits are the so-called CCS CO2 Capture and Storage projects. Let’s say that the CO2 that is produced, is stored under the land or the sea and in this way you do not emit it, at least for a few years. Although it raises doubts, these projects are proliferating as well.
The costs of emissions make it uninteresting to invest in obtaining and processing fossil fuels. Companies have been reducing their investments in oil exploration over the past fifteen years. There has even been talk of the possibility that there will not be enough oil in the year 2050 if investments in discovering new wells are not increased:
Not only do companies stop looking for new deposits, banks also stop financing them looking for greener projects and in accordance with their policies of contribution to reducing the carbon footprint:
The fact of the bans on Russia has changed the course. Initially, it was necessary to turn to energy sources such as coal to replace Russian oil and gas, which fueled an increase in prices and emission allowances. Now investment in oil farms is increasing again to replace Russian sources:
https://www.reuters.com/article/turkey-energy-oil-idAFL1N3710DC?dm_i=53XH ,RL27,27RFY9,3BEU3,1
A lot is being invested in natural gas to maintain the necessary energy production and reduce the use of coal again.
All this while renewable sources do not provide enough energy to cover the demand and, although there are investments and an increase in the use of renewable sources, progress continues to be slow.
In addition to the Russian problem, problems also arose in the supply chain. It caused a shortage, a reduction in supply. Oil and gas prices rose sharply in 2022.
This has led to major investments being made to improve the supply chain.
In addition to expanding the supply capacity, also to make it, of course, less polluting.
https://unctad.org/news/maritime-supply-chains-need-urgent-investment-boost-resilience-future-crises
The producers, as a result of all this, want to:
1.- Cost-effective energy sources.
2.- That do not involve high costs in fees or emission allowances.
3.- That they do not generate dependence on other countries such as Russia.
4.- That they can be easily distributed.
2.- How do they affect prices?
We have already seen the high prices of emission allowances. In addition to incentivizing the reduction of emissions, it also represents a great benefit for the intermediaries of the carbon credits market. All these costs will be passed on to the final consumer who will pay more for the same kilowatts of energy he consumes. This is a rise that, although it has a good part, harms the consumer, at least in the short and medium term.
Another totally artificial and political decision, like the one in Russia, has caused a great inflation. The price of gas as a major energy source greatly impacts the final price per Kilowatt per hour.Not to mention the tax part.
The prices we see now are almost cheap after those reached last year, but they are in a high historical line.
3.- What do we expect now?
Natural Gas Price Chart done with Tradingview Platform
Natural gas prices rose last year, with seasonal peaks in the peak demand months. In the following discussion, the fictional characters Luz Blanco and Tron Bright are going to tell us about what they expect now in the energy market:
Luz:
Hey. The emission allowances are going to remain expensive. Energy sources are not going to change drastically, although I expect an improvement in the sense that the most polluting sources are reduced.
Natural gas is going to continue to be the largest source of energy in this decade and I think its prices are going to be increased now. The weather has been favorable this winter and has allowed a lower demand, but we don’t know how the next one will be. A hot summer will increase the demand for gas, as well as a more active Chinese economy, and in summer gas purchases also have to be made to have enough quantity for the winter. They are not going to be price increases like those of 2022, but energy is going to remain expensive.
Tron:
Hey.
I would like to point out that oil has lost its effectiveness. New fields are more expensive to exploit and the oil in general is also of poorer quality. It is not in our interest to delegate all our energy, and our transportation to oil. We have to look for other sources. We are going to see a lot of investments in alternative energies, but it is not going to be an easy path and we are going to see price increases.
The fact that the electric generating capacity of oil decreases over time may pose a risk of shortages in the long term. The supply is reduced and we have to look for it in other ways. It also seeks to reduce energy demand by being more efficient and also contracting the economy. The shortage of energy would be the worst result of the current policies and we must act in every way until there is security.
Luz:
Actually Tron. The good thing is that on the supply side many alternatives appear: hydrogen, nuclear fusion, geothermal, new wind and solar technologies. The biggest problem we are going to find on the transport side, in getting vehicles that do not depend, at least excessively, on a particular raw material such as Lithium.
Tron:
I agree Luz. We are seeing how it is trying to reduce the use of one’s own vehicle, especially in European cities. Access to certain areas is not allowed, lanes and parking areas are removed. These measures seek to prolong the current supply while alternatives are found.
Luz:
The young generations already come with the inculcated idea of not polluting, which is the same as not using current energy sources. There is a background in the green message and it is precisely that, not to spend. This is not a bad thing if a good quality of life is achieved, with more local economies, more efficiency and more variety.
Tron:
Being critical, I think we are still at a time of little development of the global energy landscape. I am convinced that more progress could have been made and that in a short time the current system will seem archaic to us. Energy technological development is the most important point of the economy today. This is going to impact the way we live, the pace of development.
Tod:
We will come to see with these possible innovations an economy with the marginal cost of production close to zero as Jeremy Rifkin has postulated. The entire world economic system has to be adapted, not an easy reset if you don’t want to take a lot of things ahead of you.You have to be well informed.
In the next chapter we will talk about raw materials, something that is not dissociated from today’s episode.
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