Market Watchers: The Narrative Shifts; The Industry Responds

[Editor's note: A version of this story appears in the July 2022 issue of Oil and Gas Investor magazine.]

The terrible events unfolding in Ukraine quickly shifted the narrative on global energy from “energy transition” to “energy security,” although we view the current period more as one of “energy scarcity.” A confluence of factors had the market headed toward energy scarcity in the developed world before the invasion of Ukraine (energy poverty exists in the developing world); plummeting costs for renewable energy sources and energy storage, government-led clean energy policy mandates and conscious consumers driving corporations to commit to net-zero policies had sent the world into a green frenzy with unrealistic near-and-medium term ambitions.

These themes, coupled with a misunderstanding by most of the population and many government leaders about the incredibly important and integrated role fossil fuels play in almost all aspects of the modern economy, from energy production to agriculture to pharmaceuticals, led to underinvestment unfolding at a dramatic level. At the same time, oil and gas companies were disincentivized to invest in fossil fuel production, especially oil and natural gas production. This underinvestment is manifesting in dramatically higher oil and gas prices. The recent period of relatively low fossil fuel prices is over, and a period of high energy costs will persist at least for the medium term.

We see an era of heavy investment in “all of the above,” from fossil fuels to renewables to carbon mitigation technologies unfolding. The world is short on hydrocarbons and electrons, and the energy and power companies are responding. This includes both oil and gas, new energy technologies and major growth in electrification, especially of mobility. The traditional energy industry is increasingly investing in clean energy technologies, which we see as natural. The clean energy companies tend to be small, while the oil and gas industry has scale, technology prowess and can innovate at scale. Embracing each other’s skill sets should lead to a flurry of joint ventures, technology partnerships and potentially M&A.