For the first time in history, the globe has invested more money in electricity than crude oil, according to the International Energy Agency (IEA); and while that may seem to inspire thoughts of electric cars and cheap shale oil, the truth is it's a problem we will have to deal with at some point in the future. The IEA issued a warning that because of a 20% drop in global energy investment over the past three years, we are laying the groundwork for oil and electricity shortages in the future.
The IEA said that oil and natural gas energy investment and power plant upgrades around the globe was only $1.7 trillion dollars, which were down 12% from last year and 17% lower than 2014. A lot of that investment seemed to go into shale that skyrocketed by 50% as producers hoped to make a quick return on their money with no concern about the long-term viability of the project and with no concern for the looming future supply shortage. While right now we have ample supply, the IEA says that underinvestment “points to a risk of market tightness and under-capacity at some point down the line.”
The IEA also reported that “The largest planned increase in upstream spending in 2017 in percentage terms is in the United States, in shale assets that have benefited from a reduction in breakeven prices because of a combination of improvement in costs and efficiency gains.” Marketwatch reported, “The big rise in U.S. activities is expected to give global upstream — or exploration and production — investments a 6% bump in 2017, following a 44% plunge between 2014 and 2016. Russia and the Middle East are also seen ramping up spending on upstream projects, albeit at a slower pace, as the chart below shows.”
Reuter’s reported that IEA chief economist Laszlo Varro told journalists, “This decline (in energy investment) is attributed to two reasons: The reaction of the oil and gas industry to the prolonged period of low oil prices, which was a period of harsh investment cuts; and technological progress which is reducing investment costs in both renewable power and in oil and gas."
The rapid ramp-up of U.S. shale activities has triggered an increase of U.S. shale costs of 16% in 2017 after having almost halved from 2014-16," the report said. The global electricity sector, however, was the largest recipient of energy investment in 2016 for the first time ever, overtaking oil, gas and coal combined, the report said. "Robust investments in renewable energy and increased spending in electricity networks, made electricity the biggest area of capital investments," Varro said.
Electricity investment worldwide was $718 billion, lifted by higher spending in power grids which offset the fall in power generation investments. Investment in new renewables-based power capacity, at $297 billion, remained the largest area of electricity spending, despite falling back by 3%, according to the report. Although renewables investments were 3% lower than five years ago, capacity additions were 50% higher and expected output from this capacity about 35% higher, thanks to the fall in unit costs and technology improvements in solar PV and wind generation, acording to the IEA.
Crude oil prices at this point do not care. The market is focused on short term thinking with the belief that OPEC cuts won’t matter and the trend of falling U.S. oil supply does not either. The increase in U.S. oil production and the rebound in rig counts is controlling the market mood even if it’s a lot of smoke and mirrors.