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Leonard Hyman & William Tilles

Leonard Hyman & William Tilles

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…

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5 Important Energy Questions For 2023


With 2022 ending, we have to do what all pundits do, look back on the past year and pontificate about next year—which most pundits do by simply projecting whatever just happened into next year. An old-fashioned wood ruler works as well as any econometric model. As we have done in the past, we have asked our anonymous expert, the so-called Question Man, to provide the wisdom.

Q. Where is the price of oil going?

A. Where it always goes, up and down. Look at the graph below.

Figure 1. Real price of oil in world markets. 

A half-century since OPEC oil producers began aggressively manipulating crude supply has barely budged the trend in real oil prices, up about 1% per year. And only then because of the big boost during the 1970s during the Yom Kippur War and Oil Embargo. After that, the real price of oil stayed flat. As for 2023, the Russians have been building a fleet of aging tankers, to keep that discounted oil flowing. As often happens some OPEC member will cheat and an economic slowdown might dampen demand. So, the direction of prices? Flat to down unless the Ukraine war ends, China opens up or Iran explodes in a revolution and their oil is unaccessible. Does that help?

Q. Won’t shortages of key minerals prevent the planned electrification and /or decarbonization of the economy?

A. You remember the famous bet between population expert Paul Ehrlich and economist Julian Simon back in 1980? You don’t remember? You weren’t born in 1980?  Well, Ehrlich thought the world would come to an end due to a shortage of materials and a surplus of people. He said England wouldn’t exist by 2000, and raw material prices would rise into the stratosphere. Simon bet him that a package of commodities picked by Ehrlich would decline in real price ten years later.  Ehrlich picked a lot of scarce stuff. Simon won the bet. Sure, all sorts of parts shortages will gum up the works until production gets rolling, but focus on the end point, not the method. The end point here is decarbonization. Electrification is simply a means to the end. Hydrogen or green ammonia might be the way to go for many industrial processes, thereby taking the pressure off electricity. A true shortage of lithium won’t lead to no batteries, but rather to non-lithium batteries. Or maybe to small modular or fusion reactors. Doesn’t anyone believe in progress, ingenuity, and market incentives anymore? 

Q. So much depends on getting the electric companies on board. Haven’t they spent the past three decades delaying action. 

A. Sure, they embraced all the lessons of the Tobacco Institute strategy in addressing the connection between cigarette smoking and lung cancer. Probably even had the same K Street advisors. But, you guys wrote a paper a few years ago that showed that the electric industry could manageably finance decarbonization, and you argued that the industry would change its tune as soon as the government stopped beating it over the head and started bribing it. Well, Biden’s Inflation Reduction Act did just that. The industry is now on board. They see opportunity. By the end of next year, the top industry executives will sound like lifetime members of the Sierra Club. Industry executives that continue to sound like climate change deniers will be sidelined and ultimately replaced. The directors will say, “It’s not personal. It’s strictly business.”  Authenticity counts. You do understand the difference between principal and principle, don’t you?

Q. What’s the outlook for the oil industry?

A. Remember that the oil market has barely grown for decades, generally 1% a year or less, nowhere as fast as the economy. (See figure below.) Interestingly in this aspect, it resembles flattening demand for electricity.

Figure 2.  Real GDP vs Oil Consumption in USA (semi-log)

The chart is in semi-log scale, meaning that the slope of the line shows the rate of growth. In 1965-2000, real GDP grew 3.3% a year and oil consumption 1.6% per year. In 2000-2022, GDP grew 1.9% per year while oil consumption grew 0.2% per year. Roughly 60% of oil is consumed in the transportation sector. The manufacturers of transportation vehicles have decided to stop making vehicles that burn petroleum fuels within the coming 10-15 years, which means that the biggest market for oil will then begin to decline by about 5% per year (the automobile scrap rate) at that point. If 60% of your market declines 5% per year and 40% grows at 1% a year, that means that sales will fall, right? The only way the oil companies can avoid that fate is to buy all the automobile manufacturers and prevent them from making electric vehicles. Meanwhile, what is the right business strategy?  Well, you can either pump out as much oil as you can at whatever price or sell the commodity as high as you can before demand falls. Given that demand for oil is relatively inelastic, doesn’t it make more sense to charge as much as possible, and stall public policy relating to climate as long as possible?  

Q. Anything else to watch for in 2023?


A. You mean something like peace in Ukraine or a discovery of oil under Mar a Lago? I’d watch for two items, hydrogen and environmental engineering. Hydrogen because too many large, established, technologically smart firms are investing in it, for transportation or more likely near term for industrial processes. And don’t only think of hydrogen as a gas. It comes as part of chemical compounds with far wider uses such as ammonia, which unlike hydrogen already has worldwide distribution and storage thanks to the need for fertilizer. Environmental engineering really means removing components from air, such as carbon dioxide or nitrogen, and using or storing those gases. In other words, why not remove carbon dioxide from the air if it is politically impossible to prevent carbon fuel users from putting it into the air?  Does it make sense to fight city hall?

Q. Thank you, Mr. Question Man.  We hope to speak to you again next year. 

A. You really mean that? 

By Leonard Hyman and William Tilles

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