The Econmist - USA (2021-10-09)

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  inflationary  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  four­fifths  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  Trafigura,  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 fish. 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  firms  predict  big  increases  in

capital  expenditure,  energy  investment  is

expected to fall sharply (see box). Oil firms

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 newflare­upofcovid­19casescould

hitdemandagain.AndasOswaldClintof

Bernstein,aninvestmentfirm,putsit,ma­

nyarewondering“Whynotjustridethis

highpricefora while?”Inanycase,evenif

therallywereeventuallytoinspireinvest­

ment,itwouldtakeseveralyearstomean­

ingfullyraiseproduction.

Lowerinvestmentinoilhasa spillover

effectontheoutputofnaturalgas,whichis

often aby­product ofdrillingforcrude.

Addedtothatisa dearthofliquefiednatu­

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 coal­fired power plants, the

mood has swung against the dirtiest fossil

fuel, because of both its carbon emissions

and  its  effect  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