WHY ENERGY PRICES WON'T DROP: THE ECONOMICS OF OIL COMPANIES

In recent years, we've witnessed a seismic shift in the energy industry, with traditional oil companies pouring investment into renewable energy sources, particularly offshore wind. Among these, Energy majors BP and TotalEnergies recently made headlines by winning a 7 gigawatt (GW) offshore wind site auction in Germany.
The deal, worth a record-breaking 12.6 billion (Mrd.) euros, marks their entry into the central European market without a partnership. Despite the optimism surrounding this investment, I believe it's essential to critically analyse the implications.

Big Oil's Green Transformation

Oil companies' interests in renewables are driven by a variety of factors. The most evident is the global push towards environmental sustainability. With growing public concern about climate change and stricter government regulations, these companies are under increasing pressure to reduce their carbon footprint.

Moreover, transitioning to renewables is a strategic move for these companies. Oil is a finite resource, and the shift to renewables is an investment in their long-term future. Offshore wind, in particular, offers a high energy return on investment (EROI), which could promise significant returns.

The High Bid Phenomenon

Interestingly, many oil companies are bidding higher for offshore wind regions than established power generating and transmission companies. This is likely due to their robust financial resources and a strategic desire to secure a significant stake in this burgeoning market. They can afford to pay a premium now for potential future gains, a luxury that smaller, less diversified companies might not have.

The German Press and Energy Prices

The German press, in response to these developments, has been optimistic about the potential for lower energy prices. Although I can empathize with the initial perception, considering the substantial investments and potential for heightened competition, I must respectfully express my view that such a perspective appears somewhat lacking in depth.

Given my limited proficiency in English, I struggle to find a more suitable alternative term to convey the idea of naivety in this context. Contrary to the press belief, it seems to me that oil companies haven't quite earned a reputation as generous benefactors of society, despite their best attempts.

Energy prices are influenced by a myriad of factors, including infrastructure, energy demand, merit order and geopolitical issues. The funds gained from the auction have been planned to be used for extending the required infrastructure, which is in private hands. However, we should question whether these funds will be invested usefully.
Alternative ideas like temporary subsidize the industrial energy cost are also under consideration. In that case, the funds would only be sufficient to smoothen the next elections without benefit for the private sector.

In addition, infrastructure development and maintenance are costly, and the expenses incurred can often be passed onto consumers. If the infrastructure costs are high, it may not necessarily lead to a drop in energy prices, despite the increased supply of renewable energy.

Conclusion

As we navigate this era of energy transition, it's crucial to maintain a balanced perspective. While the shift of oil companies like BP and TotalEnergies into renewable energy is a logical development, it's important not to overlook the complexities involved. The current situation in Germany presents a transferable model that is or will be applied to numerous other countries.

I encourage all readers to engage in this discussion. What's your view on this transition? Do you think the big oil investments in offshore wind will lead to lower energy prices?
I welcome all thoughts and comments on this topic.

About the author

Lao Ren is the Chinese name of Reinhard Günther.
He is Product Director and Consultant with more than 35 years experience in energy metering.
In his spare time, he writes articles for CLOU GLOBAL.

The views and opinions expressed are those of the author and do not necessarily reflect the official policy or position of CLOU GLOBAL.