Impact of the global recession on future energy prices

The current global slowdown in energy demand growth, and lower oil and energy prices could pave the way for sharply higher prices when economies begin to recover.

(1) While we will very likely see a global recession, which decreases demand of oil and eases prices, the relative reduction in the size of oil exploration and production now will mean much higher oil prices in the future, I believe.

New exploration and production, along with necessary infrastructure investments, could take 10 years or so before oil could start flowing. (Similar outcome, but in shorter time frames, will probably play out in other energy commodities.) Even though many large oil majors have not announced any significant cutbacks in oil investments, the national oil companies (NOCs), controlled by various governments and all in the top 10 in terms of production, may think differently. Higher oil prices to a certain level benefit them more (such as Venezuela). Hence, as the pressure to produce more is off with the sharp drop in oil prices, they could reduce their investment both to conserve cash and, consequently, raise longer term prices. NOCs also tend not to have good reservoir management, where, loosely speaking, the full production of the field may not be reached. Mismanagement could in fact reduce the amount of oil recoverable as well. Hence, on this thesis, a slower growth in supply over the medium and long term is likely.

(2) Alternative energy development is hampered by both the lack of fund due to the recessions and lower energy prices. Without a certain amount of promising alternatives in the pipeline, there would be few substitutes if the supply and demand of traditional energy sources become tight again.

The weak credit environment is already impacting start-ups on solar, bio-fuels or other alternative energy sources, with stories from the venture capital industries about cutbacks. Large scale investments such as nuclear, where a plant costs billions to construct, are likely to be substantially slowed. Wind farms could still be built given government tax breaks, but the bottle necks come from transmission lines. Again, billions of investments are needed for the build-out, assuming all else being equal, including legal issues about access rights, compared with several months ago. Of course there could be "disruptive technologies" that come about and could change the world in short order, but should we count on that? If Paul Romer's Endogenous Growth Theory is any guide, the amount of resources put in would, broadly speaking, affect the R&D outcome.

As such, as the world economy recovers down the road, sharply rising energy prices could very well slow the rate of growth.