Future Energy: Between Ideologies and Sanctions

Since the outbreak of the covid pandemic in the early months of 2020, the composition of the global energy mix has undergone one of the largest reconfigurations in decades, with particular emphasis on the intertwining of traditional and emerging forms of energy; the rebuilding of entire supply chains; and the expression of regulatory intervention that accompanies what is commonly referred to as the energy transition. Nevertheless, even taking into account the ambitious agreements reached at the 29th Conference of the Parties (COP 29), held in Baku in November, the plans of which call for mobilizing an estimated $300 billion a year for developing countries until 2025, the inherently fragmented nature of energy needs on a global scale and the scattered plans to achieve sustainable energy trajectories still do not allow for the formulation of a global energy supply agenda that leaves managers and institutions in a dangerous dead-end situation between immediate energy demand, the search for secure, accessible, and affordable sources of supply, and world-scale plans aimed at reducing emissions.

In this context, the oil industry is a prime example of resilience, depth, and liquidity. At the end of 2019, global demand for crude oil and petroleum products was hovering at the highest level for that time at around 101.68 million barrels of oil equivalent (1), fully in line with the availability of supply volumes (around 101.63 million bpd) (2), leading to a prolonged season of price stability of about $60 to $70 BOE (3) and reflects the highly efficient market capable of meeting about 33% of global energy consumption (4). The spread of the covid pandemic in the first quarter of 2020 led to a sudden and profound demand crisis that resulted in reduced consumption to about 85 million barrels per day as early as June, effectively closing the gap with supply at about 8 million barrels per day and creating an unprecedented price crisis that sent Brent and WTI prices below $30 per barrel of oil equivalent, as the April 20 episode clearly illustrates. The 2020, spot futures contract (May) for WTI crude oil fell $55.90 per BOE during one day, ending the trading session at negative $37.62 per BOE.

Despite the crisis, already in the third quarter of 2020 (i.e. before the announcements of vaccine discovery and distribution), demand for crude oil and petroleum products had already exceeded 93.5 million barrels per day, while supplies were further reduced due to simultaneous cuts in production and investment, throwing the entire sector into a chronic supply shortage situation that would last until the third quarter of 2022. Physical crude took another year to reach supply and demand above pre-pandemic levels, while over the last year we have seen a strong balance between supply and demand that has also proved immune to growth on both sides. In this equation, particularly with regard to the global consumption data, which is now firmly above the 103 million barrels per day level, balanced by a supply of just under 102.5 million barrels per day due to targeted cuts made by the OPEC cartel, has begun to encourage the sale of stocks starting April this year.

This stability has resulted in a precise price adjustment mechanism, entirely dictated by the market, which, after a sustained recovery in 2021, was able to cope with a peak of more than $105 per barrel of oil for both Brent and WTI grades, which occurred in 2022 after a sudden burst of volatility caused by events unfolding at the geopolitical level. In particular, even after the sharpest inflation season recorded globally since the 1980s, the path of energy price normalization has been remarkably harmonious, returning the Brent price to an average of $92.36 per BOE for the full year 2023 (WTI price per barrel for the same period averaged $86.36 USD per BOE), a further decline for both major grades of around $10 per barrel of oil equivalent in the third quarter of this year.

Overall, three dynamics can be simultaneously observed in this sector: from the outset, a remarkable level of resilience, liquidity, and depth that has allowed the industrial production-processing-distribution model to recover within a reasonable timeframe and without damaging the lower-level economy and infrastructure also in light of shocks such as the covid pandemic and the recent inflationary season, as well as the important volume realignment of some of the world’s largest producers such as Russia and Iran. In this regard, it is even more remarkable how the sector has quickly absorbed the provisions of the sanctions regime, developing new trade routes and partnerships with emerging powers, particularly in Southeast Asia and the Indian subcontinent, effectively easing the effects of sanctions and contributing with renewed vigor to economic growth in these regions. Similarly, the outbreak of conflicts at various key points on the geopolitical chessboard has reignited the debate on security and access to energy sources on affordable terms. In particular, post-historical transition countries, such as Italy and Germany, are facing significant challenges in restructuring their supply chains, while at the same time having to deal with procurement cost levels that are roughly double those seen in 2021, as well as with the reality that rebuilding energy baskets aimed at including more sources will require years of investment at the industrial level (so far, Germany has no regasification facilities that have fundamental significance for importing liquified natural gas (LNG), the construction of which is estimated to take 3 to 4 years from the moment of obtaining permission), political (leading to the closure of nuclear power plants on the continent simply to see the need to resume operation of coal power plants), and financial consequences that are particularly aggravated by the need to communicate to the people ne necessity to convert short-term subsidies into budget and infrastructure spendings. Finally, the shocks starting in 2020 showed that the energy transition aims to shift the load of the main energy supply from fossil fuels to countries with low CO₂ emissions (low carbon). Finally, however attractive it may be, it cannot proceed without combining with the significant technological advances made in recent years by the conventional energy sector, with particular emphasis, for example, on thermal power plants (closed-cycle gas turbines, CCGT), to power transmission lines enhanced by the use of artificial intelligence, and to the latest generation of transportation vessels, such as the YamalMax.

Industry analysts have described the Energy Addition (5) as a phase of convergence between the continued consumption of traditional energy sources and the rise of a low-carbon world. This phase has already occurred during previous transformations at the structural level of the energy system: for example, when the rapid growth of coal production in the early 20th century made the consumption of biomass (including wood) obsolete, effectively becoming the first source of world energy before it was in turn replaced by oil, which had already become the dominant form of energy in the mid-20th century. Thus, the concept of energy addition refers to a very specific moment of paradigm shift, where the sector – especially on the supply side, but also on the demand side – has already determined which form of energy will be dominating next, and yet it does not stop consuming the previous one, based on considerations of comparative economics, availability of access, and the degree of technological development of intermediate and final uses. Thus, this effect leads to an increase in horizontal energy consumption, which benefits both in volume terms and by diversifying energy sources between generations.

In the current scenario, the drive to replace oil with low-carbon sources, particularly with wind and solar energy, does not take into account an efficient, low-emission, and economically affordable source of supply such as natural gas, which already represents about 23% of global energy demand (6) and whose market has shown radical improvements in terms of liquidity and distribution thanks to the commissioning of various liquefaction plants and important innovations in long-distance transportation that has become possible thanks, for example, to floating storage and regasification units (FSRUs). Over the past decade, natural gas production has grown to account for more than 50% of the hydrocarbon production mix of global energy leaders, such as ENI, Equinor, and TotalEnergies, accounting in many cases for more than half of operating profits due to a highly contracted market in an environment that typically links upstream, production, and transportation costs to final prices. In addition, like the oil products market, the natural gas market has responded with surprising firmness to the peak of volatility recorded in August 2022, when the delivery price fell at the TTF trading point in the Netherlands – the benchmark for pipeline distribution across Europe – to exceed the €346/MWh level; in fact, in just over a year the terms of trade returned to just over €30/MWh before rising again in the face of geopolitical instability that affected the global scenario from late 2023 and throughout 2024, however, moving to a current price just below €50/MWh (7). In other words, the natural gas market seems to have already developed price calibration mechanisms that are fully analogous to the oil market, allowing national, regional, and independent operators to expect transparent access and distribution conditions that are efficient and profitable. Which is not the case for renewable energy sources, such as wind and solar, that are characterized by sporadic distribution, making it impossible to use them to meet the main energy demand (base load), especially if we take into account international electricity markets historically characterized by industrial and political fragmentation.

Errors in baseload supply planning in an attempt to artificially increase the weight of low-carbon energy sources in the global energy basket will expose developed countries and growing economies alike to unnecessary and counterproductive risks. In spatial terms alone, even accounting for the doubling in relative terms of the energy mix of renewables, low-carbon technologies are still largely represented by nuclear and hydropower, which together account for just under 8% of global demand. Significant progress in energy conservation and storage, exemplified by innovations in batteries and storage systems, can only benefit from the goals achieved by conventional energy sources in the field of CO₂ capture (carbon capture; carbon sequestration), the results of which actually prove the significant opportunities offered by energy transition led by natural gas, capable of conserving and accompanying the growing demand for global energy and at the same time harmonizing with the planet’s natural and biological mechanisms of aborbing and recycling emissions. Finally, at the financial level, the development of a global agenda that directly addresses the issue of energy supply will more organically take into account the different speeds of countries’ economic, industrial, and technological development: in this sense, it could be a prototype for the formalization of the energy portfolio concept, through which supply forms are efficiently allocated based on the intensity and degree of demand, emphasizing correlations between countries and therefore taking an objective perspective, guided by facts and a longevity, with regard to limitations of economic efficiency and sustainability.

The emissions budget available to the world is coming to an end. The challenge of the world energy system is one of the greatest of the modern era: to ensure the transition from the phase of energy addition to new energy replacement. The world’s bodies, institutions, and top leaders could benefit tangibly from the evidence and opportunities presented by the covid crisis and the subsequent season of great political instability, which in some cases escalated into military clashes that continue to this day, to assess the sustainability and efficiency of the current energy system and its associated infrastructure as an important basis, on the one hand, for developing countries contributing to their rise to higher levels of prosperity and, on the other hand, for highly industrialized economies, to encourage technology transfer and reward even higher levels of efficiency and diversification. If countries could overcome the pressure to make an energy transition at a baseline consumption level to energy sources that have already demonstrated that they cannot fulfill that commitment, at least for now, it would be possible to return the debate to the lowest level of a realistic view of an energy transition that uses the fruits of energy addition as a drive belt to a future of substitution dominated by supply and demand relationships that may still be unknown today.

Technology, as well as art and engineering, is rarely completely ignored. The first law of thermodynamics prescribes the same for energy.

1 Source: Energy Information Agency (EIA), Short-Term Energy Outlook, December 2020.

2 Ibid.

3 Brent grade, North Sea benchmark; indicative price for WTI grade: $54-$60 per barrel of oil equivalent.

4 BP Statistical Review of World Energy 2020, 69th edition, section 99.

5 Ibid.

6 Energy Institute Statistical Review of World Energy 2024, 73rd edition

7 The Henry Hub Index, the basis for calculating natural gas prices in the United States, only partially reflected the volatility seen in the European market, trading in the first week of December this year was nearly identical to conditions seen in 2021 due to the largely segregated nature of supply.