TheEconomistOctober9th 2021 Finance&economics 71
Capitalideas
Companies’enthusiasmforinvestmentfadedaftertheglobalfinancialcrisis,andtook
a hugehitwhencovid-19struck.Buteventhosethathavebeenstingyinthepast
decade,suchasminersandshippingfirms,areexpectedtoloosenthepursestrings
thisyearandnext.Oneexceptionisoil-and-gascompanies,manyofwhich,giventhe
globalpushtodecarbonise,mayseelittlepointinexpandingcapacity.
Theurgetosplurge
EuropeandUnited States, capital expenditure, annual average % change
Sources:Bloomberg;TheEconomist *Excludesfinancial firms †Compared with 2019, where forecasts are available
Total,largest 500 companiesby
marketcapitalisation*
10
5
0
-5
-10
2001-10 2010-19 2020 2021-22†
Metals and mining
Semiconductors
Freight
Energy
-10-20-30 3020100
By industry 2001-10 2010-19 2020 2021-22†
slump in investment in oil wells, natural
gas hubs and coal mines. This is partly a
hangover from the period of abundance,
with years of overinvestment giving rise to
more capital discipline. It is also the result
of growing pressures to decarbonise. This
year the investment shortfall is one of the
main reasons prices of all three energy
commodities have soared. European gas
prices, though volatile, were near record
highs as The Economist went to press. Oil
crossed $81 a barrel after the Organisation
of the Petroleum Exporting Countries
(opec), and producers such as Russia who
are part of the opec+ alliance, resisted calls
to raise output at a meeting on October 4th.
The potentially inflationary upheaval
will not be good for a world that still gets
most of its energy from fossil fuels. But it
may at least accelerate the shift to green
er—and cheaper—sources of energy.
Start with oil, an industry that needs
constant reinvestment just to stand still. A
rule of thumb is that oil companies are
supposed to allocate about fourfifths of
their capital expenditure each year just to
stopping their level of reserves from being
depleted. Yet annual investment by the in
dustry has fallen from $750bn in 2014
(when oil prices were above $100 a barrel)
to an estimated $350bn this year, reckons
Saad Rahim of Trafigura, a commodity
trader. Analysts at Goldman Sachs, a bank,
say that over the same period, the number
of years’ worth of current production held
in reserves in some of the world’s biggest
projects has fallen from 50 to about 25. A
supply crunch was averted last year be
cause the covid19 pandemic clobbered oil
demand. But once the world economy
started to recover, it was only a matter of
time before a squeeze started to emerge.
The industry would usually respond to
robust demand and higher prices by in
vesting to drill more oil. But that is harder
in an era of decarbonisation. For a start, big
privatesector oil companies, such as
ExxonMobil and Royal Dutch Shell, are be
ing pressed by investors to treat oil and gas
investments like weekold fish. That is ei
ther because their shareholders reckon
that demand for oil will eventually peak,
making longterm projects uneconomic,
or because they prefer to hold stakes in
companies that support the transition to
clean energy. Even though prices are ris
ing, investment in oil shows no sign of
picking up. The Economisthas looked at
capitalspending forecasts for American
and European commodity producers in
2021 and 2022 compared with 2019. Where
as mining firms predict big increases in
capital expenditure, energy investment is
expected to fall sharply (see box). Oil firms
are instead giving excess cash back to
shareholders.
Another factor inhibiting oil invest
ment is the behaviour of opec+ countries.
The halfdecade of relatively low prices
during the “age of abundance”, which
reached its nadir with a price collapse at
the start of the pandemic, gutted state cof
fers. That cut funding for investment. As
prices recover, governments’ priority is not
toexpandoilproductioncapacitybutto
shore up national budgets. Moreover,
staterunproducersarecautious,worried
thata newflareupofcovid19casescould
hitdemandagain.AndasOswaldClintof
Bernstein,aninvestmentfirm,putsit,ma
nyarewondering“Whynotjustridethis
highpricefora while?”Inanycase,evenif
therallywereeventuallytoinspireinvest
ment,itwouldtakeseveralyearstomean
ingfullyraiseproduction.
Lowerinvestmentinoilhasa spillover
effectontheoutputofnaturalgas,whichis
often abyproduct ofdrillingforcrude.
Addedtothatisa dearthofliquefiednatu
ralgas(lng) terminals forshippinggas
fromplaceswhereit remainsrelativelyea
sytoaccess(America)tothosewhereitis
scarcer (Asia and Europe). Given the long
time it takes to build facilities, the lack of
spare terminal capacity in America is ex
pected to last at least until 2025.
Investment in thermal coal is weakest
of all. Even in China and India, which are
planning new coalfired power plants, the
mood has swung against the dirtiest fossil
fuel, because of both its carbon emissions
and its effect on air quality. Yet with de
mand likely to be pushed up as China po
tentially heads into a cold winter, and with
India struggling with supplies, coal may be
in the throes of its last hurrah.
All this places fossilfuel producers in
something of a bind. A slump in invest
ment could enable some oil, gas and coal
investors to make out like bandits. But the
longer prices stay high, the more likely it
becomes that the transition to clean energy
ultimately buries the fossilfuel industry.
Consumers,in the meantime, must brace
for moreshortages. The age of abundance
is dead.n
Power surge
Sources:ICIS;RefinitivDatastream
120
90
60
30
0
2120191817162015
Dutchfront-monthnatural-gasfutures
€/MWh
100
80
60
40
20
0
2120191817162015
Brent crude oil price
$ per barrel