The Energy World is Flat. Lacalle Daniel

course, the media. People dust off Hubbert's peak oil theories (even if they have been debunked many times over) and subsidies and incentives are provided to guarantee the security of supply. To respond to the situation, the investment machine takes over. In Europe, between 2007 and 2010 around 3 % of the Eurozone GDP was devoted to large infrastructure and energy projects based on “security of supply”. In parallel, oil-producing countries devoted another 2 % of their GDP to new sources of generation.18 Combined, the expansion results in overcapacity and excess power generation to meet expected growth and needs until well over 2020.

      How much capacity will be built this time? Where? How fast? The answers will shape the future of energy prices, not only from a cyclical point of view, but also on a more structural and permanent basis. Just like the 1970s resulted in the displacement of crude oil from power generation forever.

Timing: there is no such thing as a crystal ball

      In the early stages of the subprime crisis in North America, as Alan Greenspan and others were dismissing the potential impact of the crisis, I came across a very interesting poll that asked mutual and hedge fund managers “Which inning are we in?”, a baseball analogy in reference to “are we closer to the beginning, middle, or end, of the crisis?” The answers were very polarized. Some believed we were at the eighth inning (closer to the end), while many others thought we were at the second inning (closer to the beginning).

      Yet, the crisis went on to unfold into one of the global recessions in modern history, much further than many had anticipated, showing how market participants and industry experts can disagree on basic issues as “which inning are we in?” With the benefit of 20/20 hindsight, everyone today is familiar with the magnitude and main reasons for the crisis. But back then it was not so obvious.

      1

      National Geophysical Data Center.

      2

      Conversion factor from 1 million British thermal units (MMBtu) to crude oil barrel (bbl) is 5.8 MMBtu/bbl.

      3

      Bloomberg and NARECO Advisors.

      4

      US Energy Information Administration.

      5

      Thomas L. Friedman (2005). The World is Flat. New York: Farrar, Straus & Giroux.

      6

      US Energy Information Administration.

1

National Geophysical Data Center.

2

Conversion factor from 1 million British thermal units (MMBtu) to crude oil barrel (bbl) is 5.8 MMBtu/bbl.

3

Bloomberg and NARECO Advisors.

4

US Energy Information Administration.

5

Thomas L. Friedman (2005). The World is Flat. New York: Farrar, Straus & Giroux.

6

US Energy Information Administration. http://www.eia.gov/cfapps/ipdbproject/IEDIndex3.cfm?tid=5&pid=53&aid=1

7

Bloomberg and NARECO Advisors.

8

Barclays Equity Research (9 December 2013). Global 2014 E&P Spending Outlook. http://www.pennenergy.com/content/dam/Pennenergy/online-articles/2013/December/Global%202014%20EP%20Spending%20Outlook.pdf

9

Enerdata (2013). Global Energy Statistical Yearbook 2013. http://knoema.com/GESY2013/global-energy-statistical-yearbook-2013

10

IEA World Energy Outlook. http://www.iea.org/newsroomandevents/pressreleases/2012/november/name,33015,en.html

11

Paul Klemperer (2002). How (not) to run auctions: the European 3G telecom auctions. European Economic Review. http://www.nuff.ox.ac.uk/users/klemperer/hownot.pdf

12

Wall Street Journal (3 March 2009). Market Data Center – Auto Sales. http://online.wsj.com/mdc/public/page/2_3022-autosales.html

13

European Commission. Taxation and Customs Union. 25 July 2012.

14

Ronald Stoeferle (12 March 2012). Economic Consequences of the High Oil Price. http://oilprice.com/Energy/Oil-Prices/Economic-Consequences-of-the-High-Oil-Price.html

15

Javier Blas (2010). A market ee-emerges. Financial Times, 14 April.

16

Bruno Waterfield and Robert Winnett (2010). Euro under siege after Portugal hits panic button. The Telegraph, 15 November. http://www.telegraph.co.uk/news/worldnews/europe/portugal/8135686/Euro-under-siege-after-Portugal-hits-panic-button.html

17

Bloomberg, Portuguese Government Bonds – 10 Year.

18

US Energy Information Administration. http://www.eia.gov/cfapps/ipdbproject/IEDIndex3.cfm?tid=5&pid=53&aid=1

18

US Energy Information Administration. http://www.eia.gov/cfapps/ipdbproject/IEDIndex3.cfm?tid=5&pid=53&aid=1