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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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Energy Majors Hit Hard By Climate Regulations

Power

They say that bad news come in threes. The headlines one day this past week certainly gave credence to that notion—at least for the fossil fuel business.

The first news came out of Siemens, a Munich-based industrial conglomerate somewhat akin to the troubled General Electric. After last week’s disastrous news from GE—a 50 percent dividend cut and plans for a complete corporate makeover—we shouldn’t have been surprised. GE’s difficulties weren’t just due to poor business conditions. There has also been too much financial engineering and a history of overpaying for acquisitions.

But Siemens made a purely business announcement: It was laying off 6,900 workers due to weak demand for gas turbine electric generators. The industry has the capacity to produce 400 big units per year worldwide, but is producing only 100, and Siemens doesn’t expect demand to bounce back.

You can find Leonard Hyman's lastest book ‘Electricity Acts’ on Amazon

Understand that the gas turbine is the most efficient and economic fossil fuel generator. And replacement of old coal-fired generation by gas turbines made a major contribution to carbon emission reductions.

So, what’s the problem?

First, growth in electric sales volume—particularly in the U.S. and Europe—has been tailing off. As a result, the industry needs fewer units to keep up with declining demand growth. Second, citing environmental objections, many equipment buyers don’t want a fossil-fueled unit no matter how efficient. Siemens, recognizing the latter preference, has made substantial investments in renewable energy.

Related: OPEC Chairman: Output Cuts Are The ‘’Only Viable Option’’

Second, the Norwegian state sovereign wealth fund, the biggest in the world, has decided to exit its oil investments. There is, of course, no small irony in this development because Norway built up the fund with revenue from the country’s oil fields. Nor in Norway closing its oil fields to help mitigate global warming.

Their central bank, which supervises the fund, says that it’s not prudent for Norway (which already relies heavily on oil revenues) to, in effect, double up on the risk by investing oil revenues in various oil stocks. They are just advocating for more portfolio diversification. The bank claims that this decision has nothing to do with its thoughts about the future or sustainability of the oil business; it’s just a matter of portfolio management. Yet, the central bank could have made the same portfolio judgment years ago, and it should have, based on the expressed line of reasoning. So, the question we’re now left with is, do the Norwegians now have our doubts about the oil business?

The third item was unveiled at the UN climate conference in Bonn, Germany. The UK and Canada announced a pledge to end coal-fired power generation by 2030. France, Italy, Mexico, the Netherlands, Portugal, New Zealand, Washington State, Ontario and Alberta have pledged support.

This withdrawal from coal raises a technology and manufacturing question. There are only a few worldwide electrical equipment manufacturers, like GE and Siemens discussed above. They build products for worldwide markets, not niche or isolated markets.

Related: Can Oil Majors Continue To Beat Estimates?

Isolated markets with idiosyncratic demands are often left to self-manufacture equipment that has no market elsewhere. Those markets also lose the benefits of economies of scale and standardization (a reason that Britain’s technical love affair with equipment suitable to its own peculiar market needs left the British electricity industry so far behind for so long).

You can find Leonard Hyman's lastest book ‘Electricity Acts’ on Amazon

These news items serve as a stark warning. Internationally, the market has turned against the most economical of fossil-fueled electric generating equipment. Also, large institutional investors who have benefitted greatly from fossil fuel investments in the past are having second thoughts. And finally, we might be looking at a date certain to end coal-fired electric generation in much of the world.

Despite the U.S.'s best efforts, it was a bad week for carbon.

By Leonard Hyman and Bill Tilles for Oilprice.com

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