February 02, 2018
At a recent seminar, I was asked why energy prices have remained so stable. After all, with a significant cut in OPEC production, three major hurricanes, and the domestic and several global economies booming, it does seem oil should be around $100 per barrel by historical standards. In the last decade, the landscape of energy has changed, which is impacting prices at the pump as well as other areas of business and the household. Let’s examine a few of these changes.
First, America has made energy independence a priority. The U.S. has combined alternative sources of energy such as solar, wind, ethanol and natural gas from fracking to provide a diversified energy base. Further, these industries are driving to increase economic efficiency, which lowers the cost of doing business. Thus, the population as a whole continues to become less reliant on foreign energy, and overall, there is less volatility in the marketplace.
On the demand side of the energy equation there are many moving parts. For example, the U.S. and global populations are becoming more urbanized, more dependent on public transportation and less tolerant of long commutes. These trends are reducing energy usage. In fact, many members of the younger generations do not view driving as a priority, which is also driving down the demand for vehicles. And when vehicles are purchased, there is a higher demand for more efficient engines, also impacting the demand for energy.
In some areas of the world, such as France and Germany, there is another trend regarding efficient engines, namely electric vehicles (EV). It is possible that these countries may prohibit internal combustion engines by 2040. Similarly, the president of China has mandated that by 2025, one-quarter of all vehicles on the road in China will be electric. When added to the other factors, these social and political movements are definitely impacting the supply and demand parts of the energy equation.
Finally, the dynamics of the energy industry will bode well for agriculture in providing cheaper energy and some expense relief. The mandates for fuel and energy efficiency bolster the strength of alternative fuels, many of which are currently made from agricultural commodities. Recently, China increased reliance on ethanol, but ethanol strategists must plan well to compete with other sources becoming more prominent. Of course, a well-managed ethanol facility is still a solid long-term investment.
In answer to the question, many factors play a role in the stability of energy prices. And like agriculture, the energy sector is increasing efficiency. Yet, the basics of supply and demand, regardless of the causes, still largely govern the price.