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Oil, Energy & Crypto: The Long-Term View

The COVID-19 pandemic put the breaks on the demand for oil. People aren’t driving that often, flying as much, and many industries are working at lower capacities. Oil traders and producers have not been able to respond effectively to the sudden drop.

For the first time in history, in late April 2020 the price of US oil dropped below zero, moving into negative territory. It was a quirk in the system that no-one saw coming. Traders caused the price to reach negative levels, and while prices have returned to positive levels producers inadvertently keep the prices low by sustaining a surplus in the world’s oil supply.

The inferno we now find ourselves in is telling for the future of the oil industry, especially from an investment point of view.

The machine can’t be stopped, even when it should

Most of the trades that take place in the global oil markets pertain to futures. Traders speculate what the price of oil will be by the end of the month and take positions accordingly to take profits. Oil traders have no interest in actually owning the oil they trade. All they want is to benefit from price movements.

As global demand for oil dropped drastically in April, a lot of these traders operating in the oil futures markets were not able to offload their holdings to the next buyers like they normally could. It meant they themselves would end up with barrels of oil for which they have no storage capacity at all. And so, the prices dropped dramatically to the extent that they reached negative prices. Traders were paying to get rid of the oil.

However, that hasn’t stopped the oil producing machine that is the global oil industry. Even today, the world is producing millions of barrels per day even though there is no market for it. That’s because it simply isn’t easy to halt the operations of oil production sites. Once an oil source is actively being utilized, stopping operations without permanently damaging the source is a very difficult undertaking.

That takes us to where we are now. Companies are now renting container ships, not for transportation purposes but simply to store oil offshore as more and more black gold comes out of the ground. Oil prices are recovering slowly, but getting back to the recent $60 territory is going to take a long time and will move in tandem with the economic recovery following the resolution of the pandemic crisis.

But getting back to the highs in the $120 range seems unattainable. That’s not because of the way things are right now, but because of the way they will be in the future.

Oil remains slow, as green becomes leaner

Innovation can serve many purposes, and within the context of oil prices it can serve to make production more cost-effective. That’s what happened when a new method called fracking opened up many more oil sources that large oil producers had long given up on as there was no cost-effective way to extract the oil before fracking.

But that’s really been the only major innovation that has happened in the last few decades. The oil industry today will look a lot like the oil industry of tomorrow. A stark contrast when compared to the clean energy sector.

Clean energy, or green energy, has seen huge developments in the last few years. Relentless innovation has made equipment more efficient in harnessing power from natural forces, and by doing so the cost of energy production has been on a steady decline and will continue to do so. As such, governments, corporations and, by extension, consumers, will slowly be more reliant on clean energy rather than oil. The powerful lobbying forces of the oil industry will resist, but if we’re talking long-term, the world wants clean energy and it will get it.

Today, with much of the polluting economy on standby, the air is much cleaner and many people would like it to stay that way. This moment we’re in right now, is the perfect time for everyone to take a breather and re-assess what is important in life. We’ve learnt that we are not outside of nature, but indeed a part of it. We’ve seen how quickly the planet improves once we stop polluting the way usually do. And we see that health is a priority for both ourselves, and the planet we call home.

These are not new dynamics, but they have become stronger during the last few months. Going into the future, one particular type of investor will have a huge impact on how we move towards a healthier planet: the Millennials and Gen Z.

Millennials will increasingly start voting with their money

Millennials aren’t known for their interest in investing, retirement planning, or any other long-term preparations. But as they become older, that will start to change. We’ll see more Millennials planning for the future and looking for ways to invest their funds for a variety of reasons. As Gen Z follows, they too will at some point amass wealth and start thinking about investing a portion of their funds.

Where will that money go to? Clean energy.

Investing is a way to vote for the things you want to see in the world. The same way you might avoid certain brands or products because they don’t value the things you do, investing money in something is a vote that says you want that thing to succeed, and you want to see more of it. With that in mind, when Millennials start allocating significant resources into investing, they will more than likely pool much of that in the clean energy sector. Not just that, as we discussed in another post, Millennials are particularly receptive to the concept of crypto and as digital natives we can expect to see some of that portion of generational wealth being allocated to this space. Especially as we begin to see crypto integrate more, and work in conjunction with, efforts to create a better living environment.

Crypto and clean energy

We’ve already seen projects using blockchain and crypto to power distributed solar energy networks, where households buy and sell clean energy from each other according to their needs. There will be more P2P solar energy trading going into the future, and the distributed economy it creates the perfect use case for cryptocurrencies. It holds promise both for developed nations that need to clean up their industries, and as the infrastructure become more accessible, developing nations will find it easier to adapt their energy policies and open up alternative sources of income.

This sector has the potential to become a massive distributed economy of energy trades, funded by the new generation. Crypto has an essential role to play first as a means to funnel capital towards the most promising projects, and secondly as the currency that can power the distributed energy trading economy.

Plus, as Bitcoin and crypto increasingly run on clean energy, we can certainly expect an interest spike as borderless money built for a purely digital world finds its way to more sustainability-minded investors.

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