WHY INCREASING ROLE OF RENEWABLES AND CLIMATE CHANGE – TWO IMPORTANT FACTORS – ARE NOT INCLUDED INTO OIL AND GAS INDUSTRY OUTLOOK?

Even without going to details, it becomes clear that dramatically improved cost efficiency of renewable energy sources within short period of time and urgent nature of implementation of the required measures  to address issues of climate change can no longer be ignored. Moreover, in my opinion these two factors begin to play important role due to potential impact resulting in negative consequences for the petroleum industry. Therefore the inclusion of renewables and climate change issues in a forecast for the oil and gas industry is essential to ensure completeness of the analysis.

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OilPrice, with reference to Bloomberg, indicates that now solar energy is cheaper than coal, and could become the lowest form of energy within a decade. Economies of scale are causing solar to drop from an average of $1.14 a watt all the way to 0.73 cents per watt by 2025.

Several agencies, from the U.S. Department of Energy’s National Renewable Energy Lab to the International Energy Agency, all confirm this rapid decline in costs. Capacity for solar is doubling, causing the supply chain to be lower for bank loan premiums and manufacturing capacity in the solar energy space. Now with Tesla’s gigafactory opening the cost of batteries is also expected to drop for electric vehicles and home battery systems.

China also plans to invest over $360 billion on renewable energy and fuels to help decrease the smog issues the country is currently experiencing. Unsafe, coal-fired power plants are currently suffocating the country’s air supply.

Although total costs, or levelized costs, still make renewable energy underproductive as a wide-scale fuel for developed, emerging and third world countries, the fact that cost-wise renewable have made a remarkable progress within short period of time cannot ignored. It also strongly indicates that we shall expect impressive progress in this respect.

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Meanwhile, key risks to the global economy include: the Trump presidency, Brexit, advanced economy stagnation, weak global trade and the threat of a Chinese hard landing. Global growth is expected to pick up in 2017 to reach 3.4%, and it will continue to strengthen slightly in the medium-term. However, it will still remain significantly below pre-financial crisis levels. 2017 shows a mixed performance for major advanced economies with the Trump presidency and Brexit weighing on the outlook in the medium-term.

According to Euromonitor, President Trump has significant powers to unilaterally raise trade tariffs without congressional approval. Both the Trading with the Enemy Act of 1917, and the International Emergency Economic Powers Act of 1977 allow the president to impose unlimited tariffs. According to legal experts, the current war against various terror organisations would be sufficient grounds to use the Trading with the Enemy Act, and there is no need for an actual war against a country to impose tariffs on it. The International Emergency Economic Powers Act could also be used, if president Trump declares the ongoing loss of jobs in manufacturing as an emergency. Congress and court challenges may ultimately reverse usage of these acts to raise tariffs, but these challenges could take years to succeed if at all.

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The International Monetary Fund indicates that the baseline forecast for the global economy points to a pickup in growth over the rest of the forecast horizon from its subdued pace this year, in the context of positive financial market sentiment, especially in advanced economies. Nonetheless, the potential for disappointments is high, as underscored by repeated growth markdowns in recent years. Moreover, if we look at the numbers, we could see that projected growth in the advanced economies is less than modest. 

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Forbes in its Article “2017 Energy Outlook: 4 Must-Follow Sectors For Investors” specifies that 2017 could bring significant changes to the finances of alternative energy companies in the U.S. If the Republican President and Republican Congress follow through with promised changes to the tax code consumers may be without federal tax breaks for electric cars and other green technologies. Solar and wind energy companies may also be without some of the generous federal subsidies and tax incentives they currently enjoy.

In my opinion, if Trump’s actions would suspend development of renewables it would mean that the achieved reduction of greenhouse gas emission would be offset by a newly introduced policy and accelerate the climate change. As a result, damage caused by increasing frequency and scale of natural disasters could affect optimism in terms of economic growth resulting in decline of demand.

Whatever the future holds, I assume rapid cost improvement for renewable sources of energy, geopolitical and environmental risks shall not be ignored due to potential impact these factors on overall trend of the oil and gas industry. It makes especially surprising that PwC’s  “2017 Oil and Gas Trends”, Deloitte’s “Oil and Gas Industry Outlook 2017” and the World Economic Forum’s “Digital Transformation Initiative Oil and Gas Industry” did not take them into account.

Besides, I am also not clear why outlook published by the agencies is mostly optimistic. 

According to published by Rabobank “Outlook 2017: The global economy in the Trump era”, it is expected the US to still generate economic growth of 1.7 per cent in 2017. In subsequent years, we expect the negative effects of a more protectionist policy increasingly to overshadow any positive effects of a more expansive budgetary policy, taking the economy to a lower growth trajectory. Over time, a sharp worsening in the US debt position will damage confidence in the US as a safe haven and put downward pressure on the dollar. 

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Chinese growth will be undermined by a problematic demographic structure. Due to its long-maintained one-child policy, China has one of the fastest ageing and contracting populations anywhere in the world. The transition to a market economy is meanwhile far from complete. The upshot is that China will be a source of uncertainty in the coming years and will certainly not be a driver of the global economy.

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The United Kingdom will increasingly be faced with the consequences of the vote to leave the EU, known as Brexit, in the referendum of 23 June this year. A weak pound in combination with what at the moment looks like full British access to the internal market will form a strong buffer in the coming years, and the direct effects of the referendum on economic growth would appear to be not too serious.

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The Eurozone shows continuing but rather weak economic growth of varying degrees between the individual Member States. The average unemployment rate shows a slight downtrend and government finances are modestly recovering. However this situation, which will probably continue to dominate in 2017, is not likely to continue in the somewhat longer term. Not only is there reasonable doubt that the current monetary policy will still be sustainable (see Outlook 2017: Financial Markets), the expected growth rate is too low to resolve the major problems.

I would think that all of the above is not in line with outlooks published by most of the agencies.

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