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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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Chronic Underinvestment Could Send Energy Prices Higher For Longer

  • Just two years ago, many forecasters predicted that oil and gas prices were likely to remain lower for longer.
  • Thanks to a perfect mix of underinvestment and rebounding demand, energy prices are soaring.
  • The next crunch could be caused by actual shortages of fossil fuels, just like this year’s record coal prices were caused as much by the sudden spike in demand.

Less than two years ago, the energy industry was being advised to get used to the fact that oil and gas prices would be lower for longer because there was so much supply. Coal was on its way out, and the future looked green and bright.

Fast forward to October 2021. We have record-high gas prices, oil over $80 per barrel, and a boom in coal demand that has led to a surge in prices that even a year ago was probably unthinkable for many. What’s next? Apparently, nobody knows.

Oil demand was supposed to be nearing its peak, but now, forecasters are revising their forecasts because oil demand appears to be quite resilient to all attempts to stifle it artificially.

Gas demand is through the roof and so are prices. And, like on oil, analysts are split in their opinions of whether this is only a temporary, short-lived problem or whether it could extend over a longer period.

“This will be a crisis that is reoccurring over the next three or four years, simply because we don’t have a lot of new natural gas supply coming into the market in that period,” Richard Gorry from JBC Energy Asia told CNBC this week. “By 2025, the situation may change, but I think we definitely have a couple of years where we’re going to be looking at high energy prices,” he added.

Energy Aspects Amrita Sen goes further: in a recent opinion piece for the Financial Times, Sen argued that high fossil fuel prices are here to stay, but instead of trying to bring them down, stakeholders should embrace the fact. The reason: higher fossil fuel prices will help us move away from them and replace them with lower-carbon energy sources.

Others, however, believe the current price spike is a temporary occurrence. Citi Research’s head of energy strategy, Anthony Yuen, told CNBC that the current prices were the result of “a confluence of factors”. This, he said, could cause a decline in demand growth and push the market into a potential oversupply.

“Never say never,” he told CNBC. “It partly depends on [the] weather. But then, once you factor in a number of supply and demand factors, the situation probably will be much better.”

On the supply side, U.S. companies are planning billions of investments in another wave of LNG export facilities. Russia is pumping at a record pace and planning further production boosts. Qatar is expanding its gas production capacity substantially over the next few years, and Australia has set its sights on becoming the world’s largest LNG exporter.

Yet, according to Energy Aspects’ Sen, higher gas prices, at least in LNG, are here to stay because of the slowdown in new final investment decisions amid the recent glut. There’s underinvestment in both oil and gas, Sen wrote for the FT, and this may not change the way it changed during previous commodity cycles because of the ESG pressure investors are putting on the energy industry together with banks and other lenders.

“Today, investment in fossil fuel is vilified and financing has become sparse as big western banks withdraw,” Sen wrote, adding that we have not yet seen the full effect of that slowdown in oil and gas investments prompted by the rise of the ESG trend. This means that oil, gas, and coal prices still have higher to go. Because demand is sticking around.

Fossil fuels currently account for some 84 percent of global energy demand, according to Sen. This is the same figure as it was in 1980. This means that demand for oil and gas—and to a lesser extent, coal—is a stubborn one, and it can only be reduced with radical measures or natural trends such as underinvestment that leads to prohibitively high prices.

Yet planned investments in oil and gas are high enough to prompt the UN Environmental Program to warn they are too high for Paris Agreement comfort. In a recent report, the program warned that oil and gas production plans by the 15 biggest producers are at great odds with the Paris Agreement emission targets. In other words, these 15 biggest producers continue to bet on oil and gas, despite emission ambitions, including their own stated net-zero targets. 


So, it will be a while before supply catches up with demand, but the price spike appears to be susceptible to the mitigating effect of news reports such as the one about Gazprom beginning to pump gas into European storage hubs after filling up the ones at home. This effect, by the way, has prompted suggestions that the energy crunch in Europe was not in fact caused by a shortage of gas but was more of a speculative nature and the result of trader jitters.

Yet if Energy Aspect’s Sen is right about the seriousness of underinvestment, the next crunch could be caused by actual shortages of fossil fuels, just like this year’s record coal prices were caused as much by the sudden spike in demand as the years of underinvestment as the developed world cheered the demise of the dirtiest fossil fuel.

By Irina Slav for Oilprice.com

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