Since I wrote my original Megatrends blog post back in June much has changed (and I have delivered it many times as a session for clients). The biggest changes have been in the Decarbonisation Megatrend.
I wanted to update this with a few really significant points:
1 – The price of oil has continued to fall
2- Tesla and electric cars have continued to prosper inspite of 1
3 – The Paris Climate Summit and the coming Green Tech boom.
The price of oil is currently hovering at around $30 per barrel. Only the most easily accessible oil wells are profitable at this level and most of them are in Saudi Arabia. With sanctions lifted on Iran, their oil is now flowing onto an already over supplied market, Iraq announced record production figures and Russia’s economy has contracted by over 3%.
What typically happens in the long oil cycle is that money gets invested in exploration and then production. As the investments mature production rises, supply levels rise, eventually outstripping demand at which point prices fall. Falling prices push more expensive production out of the market, which stabilises the market before the cycle begins again.
Oil consumption is still rising slightly, but production particularly from the US, but also from West Africa and Brazil have massively boosted production in the current cycle. Historically Saudi Arabia and OPEC have taken the role of market stabiliser by cutting their own production to boost prices. This time, however, they have not.
An ex-oil industry friend of mine uses the following analogy to describe the situation – “if you have a warehouse full of a product that you know will go out of fashion – what is your strategy?” The answer is that you do every thing you can to sell before the fashion changes, including cutting prices.
The Saudi’s and others recognise that demand will dry up before supply does and therefore it is worth suffering the loss of margin to maximise the overall revenue. Right now no one can afford to stop pumping and be the one left with the largest stranded assets – it is a race to the end.
In this race the strongest will last longer and it is easy to see that the small independents will be the first to go, followed by the large internationals – assuming they fail to find another strategy in time (which they show little sign of doing).
There is a lot of speculation at the moment that Saudi Aramco – the national oil company of Saudi Arabia – will float, at least partially, suggesting that the Saudi’s want to sell the warehouse as well as the stock. If Saudi Aramco does float, it is not impossible that they will then also buy other oil companies. Whether they do or not, it is almost inevitable that there will be another turn of the cycle and the current stalling of investment will lead to production failing to meet supply and prices will rise again.
However there is another race between the turning of this oil cycle and the decarbonisation of our economy. If we can decarbonise faster, then oil prices will only rise modestly and oil producers will remain politically weak. If we decarbonise too slowly, oil prices will rise significantly and producers will be politically strong once again.
2 – Conventional logic and even history might have suggested that with falling oil, interest in alternatives would also fall. This has not really happened, renewable energy enjoyed it’s greatest ever year of investment in 2015 and the Tesla Model S outsold all other cars in it’s class in the US and Telsa was narrowly the second largest selling luxury car maker in the US, just behind Mercedes. What has changed?
Three things probably; electricity prices are only loosely connected to the price of oil meaning that the cost of generation has not really dropped. Concerns about pollution, particularly in China have massively increased investment in both solar and wind generation. Unlike oil (a finite commodity) when demand for solar and wind technology increases the prices will go down, with economies of scale and product innovation.
For Tesla the real reasons are not completely clear, but most reviewers regard the Tesla specifically (and well engineered electric cars in general) as just better – a lot better – than the competition, in terms of the overall user experience. Unsurprisingly the competitors – Porsche, Mercedes, BMW and Audi are all racing to build their own long range electric cars. This year is also likely to see the launch of both the Tesla Model 3 and the Chevrolet Bolt, both aimed at the much higher volume mid size car market.
Like renewable energy generation higher volumes will push prices down, further expanding the market. With increased demand will come increased charging infrastructure bringing the exponential growth of the electric market closer. Once you also factor in the urgent need for virtually all cities globally to drastically improve air quality, under current regulations, it is easy to see that what is a tail wind for green tech generally is a headwind for fossil fuels.
3 – Which brings us to Paris and COP21, it is fair to say that our political leaders are seldom “leaders” in the sense of actual taking the lead, but the zeitgeist has clearly moved since the calamitous Copenhagen summit. The biggest differences being in the Chinese and US stance, as well as the clever facilitation of the event itself. Regardless, the outcome is likely to encourage further investment and invention in the green tech space.
The places we are going to see real change will be in electricity generation and energy storage and efficiency, transport, pollution mitigation and agriculture and food production.
We are entering a massive energy transition from a fuel that has dominated not just our energy supplies, but our economies and geopolitics for over 100 years. Side effects of our oil addiction included significantly increased global wealth and serious environmental damage. The transition will be seriously disruptive for most businesses as global markets adjust to the new norm and each of us in our own ways have to change how we operate.
Is your business ready for the changes implied by the three Megatrends of Digitisation, Decarbonisation and Ageing? All of us will be affected by them. If you want to explore the effects on your own business and sector Holos offers a standalone Megatrends session to help you to explore and begin the adaptation process.
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