DOE vs Oil & Gas Alternatve Energy Investment Summary

Below is the conclusion from my research paper where I examined the investment strategies for the DOE and private industry in regard to alternative energy technologies. Enjoy.

As we watch energy prices climb to record levels and forecasts of supply and demand predict an oil shortage in the coming decades, the energy industry is approaching an inflection point where currently unviable solutions will soon begin to substitute traditional energy sources in a meaningful way. In order to adapt to this evolving marketplace, both the United States government and large oil and gas companies are well served to begin to develop a knowledge base and infrastructure around these alternative technologies which have the potential to significantly disrupt the existing market. Because many of these technologies are relatively immature and new concepts emerge frequently, companies would be wise to develop a portfolio of alternative energy solutions. Economics will drive any potential energy solution regardless of the excitement and hype that may surround an alternative technology. However, if energy prices continue to rise at their recent pace it will not be long before substitutes will be viable.

To date the government seems to be focusing its attention on the issues whose risk matches the risk tolerance and time horizon for government projects. The best examples are research into very long time-horizon technologies such as fusion and fission, and national-scale infrastructure technologies such as transmission and efficiency. As technologies mature out of the lab and towards commercialization, I believe that the DOE has done a good job of reducing spending and allowing private industry to take the reins and brings these technologies to market. I expect future research spending to correlate to energy prices, as they did in the past 30 years. As the public bears the burden of higher energy prices there has begun to be an outcry for the government to do something to reduce energy related costs. In the face of this political pressure, I expect non-weapons DOE research spending to increase so that elected officials can at least appear to be addressing an important issue to the constituency.

Going forward I predict that the level and breadth of alternative energy technology investments will increase among major oil and gas companies. As previously stated, I believe these companies will do so primarily in anticipation of near-term greenhouse gas regulation by the U.S. government and to attempt to create goodwill with the government and consumer base. Additionally, large oil and gas companies are exploring ways to use these technologies to more cost-effectively run their existing core businesses. Finally, these companies are well served to at least begin to consider how they fit into the macroeconomic landscape in a world that might reduce its dependence on oil and gas. To accomplish these goals I predict a similar pattern of investment to what has been witnessed recently: companies will form strategic alliances and joint ventures to develop and test new technologies, followed by companies going through a wave of acquisitions to bring technologies in-house once they mature and approach viability. This has already been witnessed in the wind and solar areas, and I expect this to one day happen to other technologies as they improve. The culture of each company plays a huge role in their decision to invest in these technologies to date. Companies that view themselves as oil companies, ExxonMobil for example, have refused to invest thus far. On the other end of the spectrum, companies like BP and Shell have made it clear that they view themselves as diversified energy companies and are actively investing over a wide base of technologies and with a large number of partners. Our group predicts that it is only a matter of time until the “oil companies” are forced to diversify in order to remain competitive in the marketplace.

Another reason I predict increased interest and investment into alternative energy technology is due to the fact that the demographics of the engineering and management base in the major oil and gas companies in the U.S. is set to shift dramatically in the near future. Analysts predict that roughly 50% of the engineers and managers at major oil and gas companies will retire within the next decade[1]. Due to the cyclicality of the energy industry in the 1970’s and 1980’s, companies had been hesitant to hire significant numbers of new employees for fear of future lay-offs. Because of the current staffing situation energy companies are hiring furiously. However, because all of the energy companies are in similar situations, the hiring has become more competitive than normal. Companies understand that young engineers are more interested in cutting edge technologies. The result of this is that companies with a presence in the alternative energy space have found they potentially have a competitive advantage in the recruiting process if they can offer young engineers the opportunity to work on these new and exciting projects.

The energy industry is entering period of rapid change due to pricing pressure on traditional fuel sources, the coming viability of substitute fuels, and a major shift in the demographics of the engineering and management ranks. In order to deal with these issues major oil and gas companies are using a variety of corporate structures and vehicles to assist in the development of alternative energy technologies. From successful partnership projects companies are beginning and will continue to institutionalize this knowledge and bring the technology refinement in-house once the technologies mature. Energy companies are beginning to signal through these actions that a major shift in their business will occur at some point, the only remaining question is when.
[1] Crisis in the Oil and Gas Industry by Peter Parry, Varya Davidson, and Andrew Clark. http://www.strategy-business.com/li/leadingideas/li00003#authors