Energy: Background

Industry Composition:

Energy is the backbone of any economic system. The energy industry includes the discovery, production, distribution, and sale of energy for multiple power needs including heat, light, propulsion, and whatever else energy may be needed for. There are two primary sources of energy: renewable alternative fuels and fossil fuels. Alternative fuels include energy sources such as wind, water, solar, geothermal, bio-diesel, or nuclear power. Fossil fuels account for nearly 80% of the world’s energy consumption and include oil, gas, and coal.

The petroleum and natural gas industry is divided into three processes: upstream, midstream, and downstream. Upstream is the exploration of resources, and includes production and extraction companies. Midstream is transporting the product to factories and the refining process. Downstream mainly involves distribution and sales. Gas distribution utilities, service stations, and other oil product wholesalers are all involved in the downstream process.

For globalEDGE’s purposes, the upstream segment is listed under the Mining/Minerals/Metals industry, as discovering and extracting resources for energy would be defined as mining.

History:

The energy industry was first comprised of burning wood and certain oils for heat in ancient times. It has since been under constant change and evolution due to changes in demand.

The first major change in the energy industry came with to the invention of the steam engine by James Watt in 1769. The steam engine was run on primarily coal, which increased demand and led to commercial mining and distribution for coal. By the 1800s, coal was the primary source of energy in Europe and the United States. Not surprisingly, this shift in the energy industry correlates with major shift in the economy as a whole known as the Industrial Revolution.

During this time, whale oil was the energy source for lighting and residential use. Oil was also extracted from coal, foreshadowing the next change in the industry. In 1901, the Spindletop Oil Field was discovered in Texas. This helped to drive the shift from coal towards oil because oil (i.e. petroleum) was available in massive quantities, the realization that previous fuel products could be derived from it, and the easily transportable nature of the resource. Oil continued to be the primary source of energy for transportation, light, and electricity while natural gas was also used for private applications due to its lower price compared to oil. The peak of oil usage occurred in the 1970s.

Today, with the world’s supply of petroleum is decreasing rapidly and can’t be replenished; there is a movement towards alternative fuel sources. Some of these fuel sources are fairly old, including hydropower which was discovered in the late 19th century and pushed by the government during the great Depression with the construction of such generators like the Hoover Dam. Wind power has also been around for ages, with the Netherlands using it in their famous windmills to pump water and grind grain. Biofuel, or fuel that comes from food products such as ethanol, has been around nearly as long as petroleum products have been. There were political reasons for both their initial decline in the early 1900s and for the increased use of them today.

However, most of the alternative fuel sources are fairly recent. Nuclear power was discovered in 1934 by Enrico Fermi who had irradiated uranium and, unbeknownst to him, split the atoms inside uranium creating the world’s first example of nuclear fission. Solar power is a very new source of energy that is being used. The first modern solar panel was made in 1973.

Leaders:

Because of the diversity of sources of energy today, there are many different leaders in the industry. Each specializes in its own section of the industry. However, all of these sections are very profitable with the energy industry as a whole creating $1 trillion of the total $17 trillion revenues in the United State’s economy. Much of the industry is vertically integrated; meaning companies are major players in more then one section. Chevron is a major player in petroleum, biofuels, and natural gas production. Conoco-Phillips is known for petroleum and natural gas while BP is involved in nearly every sector. NRG is a major company in the nuclear division of the industry.

Trends:

The industry, despite being very profitable for a sustained period of time, has many problems. One of the major issues facing the industry is its environmental impact. Nearly all energy sources impact the environment in a negative way. The most common effects discussed are global warming and the disappearance of the ozone layer. In order to combat this global problem, leaders from 120 countries met in February 2010 to discuss possible solutions. Nothing was established then, but the framework for future regulations was laid. Carbon cap trading is a very realistic possibility, where producers can a set amount of carbon they can produce and are able to sell or buy excess amounts of these carbon caps.

The other big issue with petroleum as the principal source of energy that it is today is the fact that it is a nonrenewable resource. All resources are finite, petroleum is no exception. Petroleum takes millions of years to be created and is being used at a much faster rate then that. These factors are leading a push towards the alternative fuel division of the industry.

Future Outlook:

Due to energy’s place in the modern economy and how it contributed to the rise of the modern economy, the industry is very secure going into the future. In the short run, revenues for the petroleum division of the industry looks to be high like always while the alternative fuels division looks to increase.

In the long run, governmental policy and the environmental initiatives will likely either significantly reduce or completely eliminate the petroleum fuel division in favor of alternative fuels. There was a large increase in government funding for alternative fuels last year, with President Obama of the United States earmarking $43 billion towards the development and implementation of alternative energies.

Sources:

Deloitte Industry Outlooks

KPMG Industries

PwC Industry Sectors

EY Industries

Glossary