Ten years of Energy Perspectives: The biggest surprises
“The shale revolution took us by surprise. Coal fell sooner than expected. We underestimated the growth in renewable energy. We hit the oil demand target, but unfortunately for the wrong reasons.”
On 17 November we will launch the 2020 edition of Equinor’s long-term macro and energy market outlook, Energy Perspectives.
This is the tenth edition of the publication and chief economist Eirik Wærness has been responsible for all of them.
In this interview he shares his reflections on the years that have passed – on surprising trends and an uncertainty that is stronger than ever in view of the Covid-19 pandemic.
The background for Equinor’s willingness to share externally what was earlier kept internally was a desire to contribute more actively to the public dialogue on economic, energy and climate issues.
“Energy Perspectives sums up the work we do in market analysis, adding to the basis of the company’s long-term strategic planning. It was regarded as part of our corporate social responsibility to provide facts and background data publicly as well, make statements on the trends we see, dare to put our head out and give our opinion on energy market developments. The aim was also to involve a wider audience and young people and not just our usual discussion partners,” says the chief economist.
“The reports have been well received, both in Norway and internationally. It has been a true pleasure to present our perspectives and discuss energy issues with enthusiastic target groups. We are being challenged, we meet people of the same opinion as well as critics, we have put our head on the block and that has enriched the work and improved the analyses,” he says.
From forecasts to scenarios
The first reports were pure forecasts, based on the market analysts’ best estimates. Gradually it became a problem that the forecasts did not describe a development scenario where the world reached the climate targets.
“Gradually we saw a strong need for describing what it would take for the world to reach the climate targets, and that is what we have been doing since 2015 – in one of three different scenarios. It is still a challenging issue that we include scenarios that do not produce an outcome in line with the goals of the Paris Agreement. Equinor obviously wants the world to reach the climate targets, however, we must be prepared for various outcomes. We are not doing our job if we disregard other outcomes than those we wish for,” says Wærness.
He remembers especially when the scenario called “Rivalry” was introduced in 2016, the year after the Paris Agreement was signed. One of the premises of this scenario was a development involving escalating trade conflicts and a weaker EU. Three weeks after it was launched, we saw the Brexit referendum.
“The increasing polarisation between superpowers and the escalating trade conflicts were trends that we did not predict. We have had a scenario describing that, but it was not a scenario we regarded as the most probable and of course not something we want,” he says.
Formidable growth in solar and wind power
On the energy side, the US shale revolution has been one of the biggest surprises.
“The energy balance in the USA turned out to be totally different from what we predicted ten years ago. Seeing the USA moving from being a big importer of gas to becoming an exporter, and shale oil becoming such a vital source of supply, was not a development we predicted,” he says.
Another surprise was the cost development in new renewable energy, such as solar and wind power.
“The costs have dropped faster and the growth in solar and wind power has been much stronger than anticipated, which is of course positive. They still represent a small part of the energy mix; however, the growth is formidable. Onshore wind and solar power are now competitive sources of new electricity without subsidies, as long as they do not need to cover all system costs,” he says.
“One of the uncertain factors is how future market regulations will be in a world where renewable energy sources become a considerable part of the electricity mix. Land conflicts may also impact the tempo. There is enough land in the world, however, there are densely populated countries that do not have enough land to cover their own needs. That is in fact one of the aspects that favour offshore wind,” he says.
Overestimating coal and gas, underestimating oil
With regards to fossil energy, the first report overestimated the future coal and gas demand.
“The coal demand reached a peak in 2013 and then it dropped. There are several reasons for believing that this trend will continue. Coal power is being outcompeted by gas and renewable energy. The gas development has not been as strong as estimated at the time either – we missed by around eight percent,” he says.
Oil demand, on the other hand, has increased more than Eirik Wærness and the Energy Perspectives team predicted. The first report estimated an oil demand in 2019 of 90 million barrels per day, however it turned out to be 10 percent higher: 100 million barrels per day.
“For 2020 we will be spot on – but for the wrong reason. The Covid-19 pandemic and the impacts of the lockdown have led to a serious global recession, and the hard stop in parts of the transport sector hit especially the oil market, resulting in the biggest shock ever in the oil market. The 1973 oil crisis quadrupled the oil prices, however the global oil market at the time was only half of the current market. On the volume side we have never seen such a sudden change,” he says.
“It is also the biggest global economic shock since 1929. A positive effect of this is a reduction in CO2 emissions. Most people will however agree that we must find other ways of handling the greenhouse gas emissions in the years to come than an annual repetition of what we have experienced this year,” says Wærness.
Accelerating the energy transition?
Have we gained experience in 2020 that will boost our efforts to develop a more sustainable energy system? Can the shock be a catalyst for the energy transition?
Eirik Wærness sees several factors that may affect this effort:
“When federal authorities spend so much money on meeting the challenges, they are also able to direct capital to the areas where they want growth. That may form a basis for realising variations of a “green new deal” in several places. At the same time, it is desirable to get people back to work as soon as possible, and the question is whether there are enough shovel-ready projects in renewable energy to deliver on the various considerations. Furthermore, the public treasury in many countries has been strongly affected, possibly limiting their scope of action in relation to funding the energy transition,” he points out.
The pandemic and its dramatic impacts on the world economy are the reasons why this year’s edition of Energy Perspectives has been postponed. Originally it was to be launched in June.
“When the world is hit by a pandemic like this, with its dramatic impacts on the energy markets and economic policy, we need time to think,” he says.
On 17 November we will know what has come out of this pause for thought.