No Good News For Energy Demand - Barış Sanlı

The good news is rare these days. The global economy is slowing down for sure. OECD’s leading indicator CLI shows that India, China, Germany, and OECD as a whole are heading for tough autumn. CLI may signal the downturn for another three months. What can be the implications for energy markets?

If everyone is pretty sure that a downturn is inevitable and we are entering into a recession, then there is less to worry. But as the geopolitical uncertainties combined with climate emergency and increasing unemployment in the developing countries is like a perfect storm waiting for food prices to rise.

The question now is the timing of the global recession and the duration of it. Already the energy investments are not in their best shape. A prolonged slowdown or lower than average growth may impact producer countries, especially in the MENA region.

What is more worrying is, the economic order of the day for the developed countries is set to change. Whether it is Brexit, tariffs, or industrial growth, the world is in the transition to a much more complex environment.

On the crude oil side, OPEC cuts may not be enough, and OPEC countries may not have deep pockets to survive in a prolonged downturn. Like China, increasing employment may be hard to sustain. OPEC discipline may suffer from domestic pressures. The timing of all these events will be necessary. A recession or a crisis in autumn and winter is different than a crisis in spring or summer.

On the gas side, lots of FIDs have been closed for LNG. That translates to new investments for the next 2-4 years as Sohbet Karbuz claims in our podcast. Asian economies may be the primary destination for LNG demand growth. But having all these future economic troubles may hit the LNG sector hard. History hints us that the diminishing returns will increase efficiency. That may result in lower costs in the capital and operational expenditures in the midterm. But not now.

One troubling question is the inter fuel competition and coupling. Instead of curtailing renewables, can we convert the electrons into gas with power to gas projects? Can hydrogen be a new energy carrier, for real this time? This coupling may tie the fate of renewables and natural gas together and even their prices. Can there be any TTF based renewable contracts in the future? It may be an exciting thought exercise...

But one troubling question remains. What will happen if another recession strikes economies? One thing for sure. The priorities will change. Investments will be hard hit again. The producer countries will try to balance their budgets. Unemployment will be a significant concern. The stability of the current energy system will be questioned not because of climate emergencies but because of fundamental shifts.

This whole story is not new or unprecedented in world energy history. The question is, who will be the winners and losers this time? How there winners and losers will affect consumers globally? My understanding is that we are heading for a downturn and then with plenty of upward volatility to follow. If I may be mistaken, a brief recession or stability with the regrowing world economy is carrying just one significant risk. That is the undersupply resulting from underinvestments in the last 3-5 years.

There is one big possibility that energy demand may have slowed down forever with increasing electrification and renewable investments. Can energy demand peak, or are we again falling under the influence of “end of growth” narratives?

There is a lot to speculate on. For now, we should keep our eyes on economic growth.

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