Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Long Ideas

The Future of Energy

Making predictions about the future of energy is not for the faint of heart. Just four or five years ago the fashionable belief was peak oil—the idea that the exhaustion of oil reserves would lead to a permanent energy shortage. Today the world is dealing with a massive oil glut that’s wreaking economic havoc.

That means investors that were betting on the old thinking that energy would get scarcer and energy producers would make more money were wrong. Revenues at some of the major energy producers are falling dramatically. In December 2012 Exxon Mobil (NYSE: XOM) reported TTM revenues of $481.26 billion; by December 2013 those revenues had fallen to $438.25 billion, and by December 2014 they had reached $413.19 billion. The world’s largest oil company saw its revenue fall by $68.07 billion in the last two years.

Nor was it just Exxon Mobil; Chevron (NYSE: CVX) saw its revenues fall by $29.94 billion during the same period. Chevron reported a TTM revenue of $241.91 billion in December 2012, which fell to $228.85 billion December 2013 and $211.97 billion in December 2014.

Big oil is taking a beating because the oil price has collapsed. On January 31, 2012, the spot price of a barrel of Brent Crude (the average price of oil in the USA) was $108.38; on January 30, 2013, that price had risen to $115.42 a barrel, and on January 30, 2014, the spot price was $109.36 a barrel. By January 30, 2015, the spot price of a barrel of oil had fallen to $47.56. Oil as a commodity lost more than half of its value in just a year.


The causes of the oil price collapse can be described in one simple word: progress. In the last two decades we’ve gotten far better at producing oil; at the same time we are increasing energy efficiency.

In 2008 U.S. field production of crude oil was 5,000 barrels a day; in 2013 it was 7,448 barrels a day thanks to the fracking boom, the U.S. Energy Information Agency, or EIA, reported. That’s an increase of 2,448 barrels a day in just eight years.

We’re using less oil because vehicles and other machines are more efficient than ever. The average passenger car sold in the United States in 2014 got 33.5 miles to the gallon; the average passenger car sold in the U.S. in 1980 got 20 miles to the gallon, according to the U.S. Bureau of Transportation Statistics.

This situation is likely to be repeated across the board in the energy industry in the years to come. The reason for that is that we’ve gotten far better at producing or extracting energy, so we’re producing more energy even as we’re getting better at making machines energy efficient. In other words, the supply of energy is increasing as the demand is falling.

It has already happened in natural gas; the average price of 1,000 cubic feet of natural gas at a U.S. wellhead was $10.79 in July 2008, according to the EIA. In December 2012 it was $3.35 for the same amount. That means the price of natural gas in the United States fell by 70% in less than three years.

The average commercial price of 1,000 cubic feet of natural gas in the United States in December 1988 was $89.70; the average commercial price for the same amount was $69.80 in December 2013, according to the EIA. If you adjusted it for inflation, the average price for a thousand cubic feet of natural gas in the U.S. in 1989 was $168.52 in 2013 dollars.

How Elon Musk Plans to Profit from the Energy Glut

What’s happened in oil and natural gas is likely to be repeated in other areas of energy, such as electricity. Electricity costs in the U.S. are rising because large utilities are in a position to monopolize electricity production and distribution in the country. This is likely to change because of technological progress.

For example the recent crisis in the Texas electricity market. Texas suffered an electricity crisis in February 2021 because demand exceeded supply, Utility Dive reports.

Elon Musk’s Gigafactory is designed to produce enough lithium ion batteries a year to store one gigawatt, or one billion watts, of electricity a year by 2017. By 2020 it could be churning out enough batteries a year to store 50 gigawatts, or 50 billion watts of electricity. It could also reduce the cost of batteries by as much as 30%. If that wasn’t enough, the Gigafactory could produce enough cells to store 35 gigawatts of electricity a year.

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If successful, the Gigafactory could make electricity as easy and as cheap to store as gasoline. One of the uses of the cells produced by the factory could be grid energy storage. That means it could become practical for homes and businesses to generate their own electricity. Musk is already promoting this through his Solar City (NASDAQ: SCTY), which sells home solar electric systems.


Other forms of generation are also becoming viable. Toyota (NYSE: TM) and Honda (NYSE: HMC) are selling a fuel cell powered car that generates enough excess electricity to power a home. In other words, people might soon be able to produce the electricity that they need at a lower cost than the grid can. Other companies are trying to develop even more effective fuel cells.

We’re likely to see energy become like food; prices will fall, and the market will be flooded with it. Cheap energy, like cheap food, will create numerous problems; it was falling crop prices that helped cause the Great Depression. We’re already seeing economic chaos in some energy-producing nations such as Venezuela and Russia because of the collapse in oil prices.

This also means that the business model in the energy business in coming years is likely to be discounting like it is in food. Money will be made by raising production and lowering prices to increase demand and revenue. Saudi Arabia already seems to have recognized this, as has Elon Musk. His Tesla Motors (NASDAQ: TSLA) might have more of a future as an energy company than as a car company.

If that wasn’t enough, Musk is promoting another project that could make the energy glut even worse: his hyperloop. If it ever gets built, the hyperloop would be a set of giant tubes crisscrossing the country and carrying high speed trains. The system would be powered by electricity generated by solar panels on the tubes; when they were not powering the trains, the tubes would simply feed the electricity back into the grid.


The hyperloop could greatly lower the cost of energy by decreasing demand for it. Its vehicles would carry passengers at 800 miles an hour, which would effectively drive domestic airlines out of business and put an end to the air freight business. That would eliminate hundreds of jets and much of the market for jet fuel. It would also get large numbers of cars and trucks off the road and replace traditional diesel powered rail, also greatly lowering the demand for oil.

If that wasn’t enough, the hyperloop itself will generate large amounts of cheap electricity that could be fed back into the grid or stored in batteries and sold to the public. In other words, the hyperloop could be the ultimate energy discounter, which could completely transform our economy.

Those companies that can make and deliver energy at the lowest price will make the most money. To survive, companies like Exxon-Mobil will have to transform themselves into the Walmarts (NYSE: WMT) of energy and learn how to discount.