The energy sector is as complex as the different forms of energy required to power our modern lives. According to the U.S. Energy Information Administration (EIA), “The May Short-Term Energy Outlook (STEO) remains subject to heightened levels of uncertainty because responses to COVID-19 continue to evolve. Economic activity has increased significantly after reaching multi-year lows in the second quarter of 2020. The increase in economic activity and easing of COVID-19-related restrictions have contributed to rising energy use.”[i]
For energy risk professionals already dealing with the inherent volatility of energy, jobs just got a little harder. The last year has brought on the desire for renewable fuel sources, the challenges of energy transition, the uncertainty of governmental policy concerns, disrupted supply chains, swings in demand, weather and cybersecurity threats.
At its core, energy risk management is centered on managing uncertainty, but the flavors and drivers are even more complex. In the coming weeks, we will explore these areas driving uncertainty for the post-COVID-19 modern energy risk manager. In this blog, we highlight three areas: ESG (Environmental, Social and Governance), supply chains and inflation.
ESG is the acronym of the day. It crosses sectors, geographies and generations. As shareholders increasingly look for products that are ESG compliant, funds want to see more responsible and sustainable operations from companies to justify an investment. There are, however, justifiable concerns that a wide range of stocks are immediately ruled out from ESG investments, while issues in reliably scoring the factors persist.[ii]This uncertainty creates a conundrum for energy companies caught between continuing to report on sustainability and deciding when to pivot to meet policy or shareholder demands while keeping costs in check.
Supply chains and downstream impacts
For the power generators, stay-at-home orders caused a shift in load patterns. Customers’ ability to pay utility bills was directly related to job loss. Social distancing and slow delivery on PPE impacted work crews’ ability to operate equipment.[iii] In the refined fuels sector, the drop in demand due to stay-at-home orders caused a significant impact on fuel prices and the preceding supply chain. Despite the positive year-over-year posting, gasoline demand substantially trails 2019 pre-pandemic levels.[iv]
Things just cost more now. In the spring of 2020, oil prices collapsed amid the COVID-19 pandemic and economic slowdown. The Organization of the Petroleum Exporting Countries (OPEC) and its allies agreed to historic production cuts to stabilize prices, but they dropped to 20-year lows. Oil and inflation are linked because oil is a major input in the economy—it is used in critical activities such as fueling transportation and heating homes—and if input costs rise, so should the cost of end products. For example, if the price of oil rises, then it costs more to make plastic, and a plastics company will pass on some or all of this cost to the consumer, which raises prices and creates inflation.[v]
As companies continue to develop comprehensive risk management strategies, the ability to pivot will become increasingly important. A strategy based on being proactive, not reactive, will allow companies to prepare for the next shift as they continue to manage business operations in 2021 and beyond.
SS&C’s solutions and technologies stand out among service providers for both technology licensing and outsourcing. As energy companies look to pivot and develop new strategies in this new norm, they can take a cue from the fintech space. To learn more about energy risk management, download our on-demand webinar Energy Risk Management- Managing the Uncertainty in Traditional Energy Sources.
Written by Sheshieda Davis
Director, Business Development