Energy Finance

Defined as a single industrial sector, the global production, distribution and consumption of energy is the world’s largest in terms of annual capital investment (US$1.83 trillion in 2019, the last pre-pandemic year with full data available) and the second largest nonfinancial industry in terms of sales revenue ($4.51 trillion). Over 100 million barrels of oil are produced and consumed each day—with 70% being traded across borders--and each of the world’s 7.5 billion citizens consumes an average of 3,181 kilowatt-hours/year, though per-capita energy consumption varies enormously and is much higher in rich rather than in poor countries. Properly analyzing the financial economics of the global energy industry requires focusing on the both the physical aspects of production and distribution--how, where, and with what type of fuel energy is produced and consumed--and the capital investment required to support each energy segment. The global energy “industry” can be broadly categorized into two main segments: provision of fuels for transportation and production and distribution of electricity for residential and industrial consumption. The fuels sector encompasses the production, processing, and distribution of crude oil and its refined products, mostly gasoline, kerosene (which becomes jet fuel), diesel, gas oil and residual fuel oil. The electric power sector includes four related businesses: generation, transmission, distribution, and supply. The ongoing transformation of the global energy industry is being driven by the twin imperatives of meeting rising demand due to population growth and rising wealth and of addressing climate change through greener energy policies and massive capital investments by corporations and governments. The pathway to de-carbonizing electricity production and distribution by 2050 is fairly straightforward technologically, though doing so will require both scientific innovations (particularly regarding scalable battery storage) and sustained multi-trillion dollar annual investments for the next three decades. Decarbonizing transportation is a far more difficult and expensive proposition, and will require fundamental breakthroughs in multiple technologies, coupled with unusually far-sighted policy action. Extant academic research already provides useful guidance for policy makers in many areas, but far more will be required to help shape the future policy agenda.