Recessions are a normal and healthy part of the economic cycle. They usually come about because there is too much supply in the market which in turn causes prices and then profitability to fall which then leads to restructuring and a sort of “cleansing out” before eventually growth comes again. A severe recession, one that lasts more than two years is known as a depression and usually involves weak demand, oversupply, collapsing prices, falling incomes, lots of financial pain and job losses. The energy industry has been in depression since 2008.
Coal has been the hardest hit. In 2008 coal was trading at $140 a tonne but since then it has steadily fallen in price given cheaper and cleaner alternatives as well as oversupply, and very weak global demand. Coal is currently trading at $40 and unsurprisingly we are seeing a whole pile of bankruptcies such as Alpha Natural Resources, one of the US’s largest producer of coal.
We have also seen it in the power markets. In Europe, for instance, thanks to a huge increase in renewables and low demand because of energy efficiency there is an excess of power across the continent. Unsurprisingly, wholesale power prices have collapsed and are now around $35/MWh which is one third what they were in 2008. This in turn has had a huge impact on the profitability of Europe’s leading utilities, the two biggest of whom, Engie (formerly known as GDF Suez) and E.ON have seen their market valuations collapse. Engie’s share price has fallen by over 75% over the last seven years while E.ON’s market capitalisation has fallen from $140bn in 2008 to $17bn today.
And then we have nuclear. Following the Fukushima accident in 2011 we have seen the industry implode. Germany and Switzerland made decisions to exit nuclear and there are now questions marks over the whole future of the industry, and the impact of leading nuclear technology providers such as Areva has been immense. It’s market capitalisation has fallen by 90% over the last four years.
The one bright spot in energy has been renewables which has seen steadily increasing installations over the last years but we have had extreme boom and bust in lots of markets (such as Spain and Italy) and we have a clear depression in European solar which has seen annual installation fall over each of the last four years. And despite increasing global renewable installations the share prices of the leading solar and wind companies such as First Solar and Vestas are still not at the levels they were at in 2008. Plus we have had a whole pile of high profile bankruptcies across the industry such as Q-Cells and more recently Abengoa.
Finally, we have oil and gas. We have seen a revolution in the US in terms of new drilling technologies which have enabled the US to become the biggest producer of oil and gas in the world, something which was unimaginable a decade ago. But the speed and amount of that boom has been so great that it has resulted in a surplus of oil and gas across the world, the result of which is that we have incredibly low prices. Oil is currently trading at 12 years lows (below $30) a barrel oil and natural gas in most parts of the world is below levels from 2008.
At these low prices oil companies will go bankrupt or restructure. We are seeing the reaction in the stock market where the share prices of oil and gas E&P companies have collapsed. Even investor darlings such as Tullow Oil have been badly hit. Their market value has fallen from $22bn in 2012 to $1.5bn today. What this all means is that the value of the global energy market is lower today than it was in 2008. Energy has become almost “uninvestable”, too high risk with too little upside. And we will see further bankruptcies this year but somehow I feel good about the future. I feel we are reaching the end of the depression.
There is lot to make me positive. First and foremost, I think we will see a bottom in terms of oil prices this year which should lead to the stabilisation of oil and gas prices which will in turn lead to power prices. When that happens companies will start to look increasingly at energy efficiency and renewables to reduce energy costs. And as prices rise and the energy market expands in size investors will begin to re-employ capital. They will invest in new ideas and business models and we will see new innovations. A lot of that is going to be in the renewable area and in fact that is going to be the real growth opportunity in the next years. I am also very excited about the opportunities in energy storage particularly around batteries. I am also seeing new business models which can be alternatives to the traditional utility model. Then we have the coming of the electric car. Again very exciting and it should lead to an increase in demand for power. But on the other hand hybrids cars and EVs will impact the demand for oil. All in all, a very exciting time in front of us.