13th April 2012
"The 126-year-old company's decision to quit the refining business is the latest sign of the tumult in downstream fuel markets that is accompanying a global shift in oil use. As consumption flags in developed economies and grows in emerging markets, refineries are dying from Japan to Pennsylvania, the Sunoco home state where oil wells drilled in the 1850s begat the petroleum age."
"Keeping a lid on refined fuel prices has been weak consumption. US petrol demand has fallen steadily since 2007 as cars became more fuel-efficient, fuel marketers blended more corn-based ethanol into their product and high unemployment kept highway travel light."
The refiners are at the front line of the changing market for energy. Although much of the online debate centred on the reasons for the problems – many blaming over-regulation – and potential solutions – such as more drilling, greater investment – at its heart refiners may simply be the first victims of the shift in the energy market.
For the time being, this has been seen as a problem in developed markets. Certainly, the pressures are more immediate than for emerging markets. The economic forces are against fossil fuel providers as growth slows. There is a strong drive towards energy efficiency. Plus, the situation may be exacerbated by technical change. Edward Guinness, Energy investment specialist at Guinness Asset managers, predicts that real progress will have been made to full electrification of the vehicle fleet within 20 years, for example.
China has been seen as the solution for many involved in the fossil fuel chain, but may actually be part of the problem. China's energy market is not developing in the same way. Guinness says that China doesn't yet have the energy industry they would like – it is an emission rather than climate change driven policy. As a result, he says, "real progress in alternative investments is being seen in non-OECD countries. China, for example, is he biggest provider of wind farms."
China is spreading its alternative energy expertise across the world. For example, this piece showed the latest overseas boost for wind-turbine maker Sinovel. The piece also points out that Goldwind, China's second-largest turbine-maker, bought two wind farms in Montana this year and will supply projects in Chile. Sinovel signed a pact to work with Greece's Public Power Corp. on wind last year.
So should investors be shifting their portfolio accordingly, rejecting some traditional energy providers? Certainly, Guinness believes that hydro, solar and wind are now established technologies and costs are coming down in most cases. He says that there are substantial investment opportunities in these areas, particularly in some of the major emerging markets.
The wrinkle is the gas market. This is not homogenous and has different prices in different countries. The relatively low price of gas in the US has halted the progress of alternative energy. This piece on Forexpros outlines some of the problems in alternative energy investment: "Right now, the economy continues to improve, and this could help encourage alternative energy development. Yet the federal debt now exceeds $15 trillion and leaves little room for subsidies. The government recently ended subsidies to corn-based ethanol, which had been championed as an alternative to gasoline prior to the credit crisis. The recent failure of solar panel maker Solyndra, which received government funding, also speaks to the risk of letting politicians influence the development of new industries and technologies."
Undoubtedly the industry needs scale to compete with, in particular, natural gas, but also other fossil fuels. As such, the investment opportunity is undoubtedly long-term. However, investors need to be wary of extrapolating too much from the situation in the US. It may be that the best opportunities lie outside and particularly in emerging markets.
Guinness says that the problem needs to be solved for the sake of future economic development: "Most people want to use more. It is critical for global prosperity in the long run. It is therefore important to focus on the provision of cheaper energy." In this, developed markets may be forced to follow the lead of emerging markets.
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