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Energy investors are facing uncertain times in the wake of the global coronavirus pandemic and the recent oil-price sell-off. In light of changing supply and demand fundamentals in energy markets, it remains to be seen what longer-term implications the current environment could have on the future of energy investing. However, in our view, there’s still no question that we are at the beginning of a major transition in the global energy economy, from a world dominated by fossil fuels to one with a rising share of renewable energy sources.
We believe we can draw insights from previous energy transitions to better understand how this longer-term transition from hydrocarbons to electrons may play out. Among the lessons we have learned, three stand out as our key takeaways from over two centuries of energy evolution:
- Transitions in the energy economy take decades, are difficult to forecast, and are best considered in terms of scenarios and probabilities.
- Cyclicality in oil prices should be expected, rather than the structural bear market some fear.
- Though the pandemic and oil-price sell-off are making headlines, longer term, climate change and global carbon policy will be the big wild card.
The folly of forecasting
Forecasting in the energy markets has suffered from what I believe to be three common errors. First, there has been overreliance on extrapolation of the past, assuming things will go on as they have. Second, the impact of technological change has at times been overestimated. And third, there has been a tendency to forecast doom — i.e., we’re going to run out of fossil fuels.
The reality is that relatively little has changed in the energy markets since about 1940. Certainly things have become massively more efficient and larger in scale, but the basic structure of the system is surprisingly unchanged. In fact, the effectiveness and affordability of the current system has given it…
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