Über die Autorin bzw. den Autor

Eric Spiegel is a Senior Partnerin Booz & Company’s McLean,Virginia, office and leads the firm’swork for global energy, chemical,and utilities clients.
Neil McArthur is an AmsterdambasedSenior Partner, member ofBooz & Company’s Global ExecutiveCommittee, and leader of the firm’sbusiness in Europe.

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ENERGY SHIFT

The McGraw-Hill Companies, Inc.

Contents

Chapter One

ENERGY PRICES are extraordinarily volatile, and have recently hit record highs. Economists worry about the effects on gross domestic product (GDP) growth. Politicians raise alarms about energy dependence and the security of foreign oil and gas supplies. Scientists warn of irreversible damage to the earth from the uncontrolled use of fossil fuels. There is much talk about conservation and alternative energy sources.

Welcome to ... the late 1970s. For anyone who remembers that time, the crisis atmosphere surrounding energy since 2006 evokes more than a little déjà vu. It is tempting to take comfort in the fact that there was no economic apocalypse after the energy crises of the 1970s. Instead, most energy prices fell back to their earlier levels within a few years; governments, businesses, and consumers adapted; and the world economy not only survived but prospered. It's reasonable to wonder: why can't things go back to normal now, just as they did then?

But the similarities between the current energy situation and the 1970's oil crises are limited and somewhat superficial, and the differences are more pronounced. To be sure, many of the most critical factors are uncertain, particularly when the time it takes to change large-scale infrastructure is taken into account. But there's one thing we can say with confidence: the energy situation is not going back to normal, at least if "normal" means the industry structure and stability of the 1990s.

Every chief executive and senior manager today will be forced to confront the reality of uncertain and unstable energy markets over the next two decades or more. For leaders in organizations that are involved in energy production or that use energy as a key input, the impact will be immense. The structure of their industry will undergo significant change—slowly at first, but accelerating over time as early innovations succeed and the rest of the industry falls in step. All other businesses will be affected as well. The goods we produce, the devices we create, the computer systems we rely on, the transportation and logistics networks we use—all will depend on what happens to energy supply, demand, and prices.

This book will help you understand the major forces that are shaping the future of energy and the choices that will face leaders in all walks of life. It will help you distinguish the myths and misconceptions that you read in the newspaper from the actual situation and its implications for any business or organization, from the smallest local enterprise to the largest multinational.

The signs of discontinuity in the energy sector today are unmistakable. The most obvious is the spectacular volatility in energy prices, especially the price of petroleum, in the early twenty-first century. As recently as 2003, a barrel of crude oil sold for less than $30 in 2008 dollars—close to the inflation-adjusted level that it had trended around throughout the late 1980s and 1990s. Since then, however, the price has risen dramatically, to as high as $147 per barrel, far eclipsing its previous record high set during the oil shock that followed the Iranian Revolution in 1980 ($103.76 in 2008 dollars). A price of $100 per barrel, which seemed unthinkable a few years ago, became seen as unremarkable. Price increases for the other major fossil fuels—natural gas and coal—more than doubled over the same time period. The energy price runup was less sharp in Europe and other regions, since oil prices are denominated in dollars and the dollar had depreciated significantly relative to other currencies. Recent European oil prices went as high as 80, however, around the record set in the 1980s, adjusted for inflation. Then, during the financial crisis of autumn 2008, global oil prices suddenly fell to $50 a barrel—still a major net gain—leaving tremendous uncertainty about the future price.

In addition to the direct pain that energy costs inflict upon businesses and consumers, they are also pushing up the prices of many other goods. Rising energy costs, for instance, have contributed to a surge in world food prices. These have risen some 60 percent in the last few years and have produced deprivation (in some cases, provoking riots) in parts of the developing world. Prices of other commodities, including minerals and raw materials, have also risen rapidly. Such "second-order" factors, or other significant economic trends affected by changes in energy costs, are sending shocks through the economy. They present urgent problems for many managers who are struggling to maintain stable costs and revenues while engineering cleaner, greener operations for their companies.

Back in the 1970s, energy prices rose solely because of uncertainties about supply—specifically, about political instability in the Middle East. Today, the stability of the Middle East remains a concern, but more fundamental factors are driving this price rise. The current world energy situation is the result of three colliding long-term trends: the relentless increase in energy demand driven by world economic growth, the slow drop-off in crude oil and natural gas supplies from producers outside the Organization of Petroleum Exporting Countries (OPEC) and the former members of the Soviet Union (FSU), and an intensifying need to reduce greenhouse gas emissions. The result is a widening awareness that the way we have used energy in the past is unsustainable in the future.

The steep, sustained rise in worldwide energy demand slowed during the economic downturn of 2008 but will resume as growth returns. It is driven both by economic growth in the developed world and by the surging growth and rising populations of newly industrializing nations. Oil and natural gas production, meanwhile, has been leveling off since the late 1990s, and over the last five years, it has been consistently too slow to keep pace with demand. This new dynamic is a discontinuous, unprecedented change in the historical trend for energy supply and demand.

The other major difference between the last energy crisis and the current one is the level of concern about global warming. Environmentalists in the 1970s worried mostly about the effects of air pollution on health and the quality of life. Solving those problems seemed to be a matter of incremental change, achievable using existing technologies, and was not a matter of urgent public concern. Today, rising levels of greenhouse gas emissions have created widespread fear that energy use is endangering the earth's climate, and these emissions are a major focus of national and international policy debates. Public and political concerns about the urgency of the climate change problem continue to grow, convincing many former skeptics that comprehensive changes in energy policy and practice will be needed to forestall future damage.

For businesses, the concerns about climate change will have major implications. If the prices of high-carbon fossil fuels like petroleum and coal rise to reflect their environmental impact—which will happen if global climate-change regulation is enacted—then the basic business models of some industries, such as the power-generation industry, will change drastically. But all businesses will be significantly affected as higher prices spread across the...