What does the future of the energy industry look like, and how will it affect your business?
No other industry impacts society the way energy does, as the ebbs and flows of the energy industry have cascading effects on transportation, food production, home construction and other vital sectors of business.
The impact of energy is so complete that, if you run a business — any type of business — the energy market will impact you in some way. As a result, it is imperative that you stay current with what’s happening in the energy industry, and where it might be headed in the coming months and years.
The energy industry is volatile for a variety of reasons. There are frequent headlines about the geopolitical strife that causes gas prices to spike, or the domestic instability that leads to higher home heating prices during the winter. But the industry itself is inherently volatile, with numerous energy resources battling for market share, and it is one such internal struggle that is changing the face of energy on a large scale.
Hydraulic fracturing, commonly known as fracking, has changed the face of the energy industry. Although the concept of fracking has been around for decades, technological advancements have made it a financially viable method for accessing the natural gas contained in the vast shale fields located throughout North America.
The result is a windfall of natural gas, which is replacing older energy sources such as coal.
“It has really been a game changer,” says Gary Voth, a CPA and energy industry specialist at the Houston office of accounting firm Pannell Kerr Forster of Texas, P.C., a member of the Leading Edge Alliance. “Natural gas is replacing coal as a main energy source, and that will likely impact our economy for at least the next several generations.”
Specifically, the high availability of natural gas is having a profound impact on how electricity is produced.
“First off, it’s a cleaner product than coal,” Voth says. “But its availability has also caused the cost of electricity generation to be cut in half over the past five years, and that’s having a ripple effect down to everything that’s made with electricity, which, in turn, will have a huge impact on our economy. The consumer is and will continue to see the benefits of that.”
Natural gas isn’t just competing with coal. Its availability, and subsequent low cost point, is turning it into an alternative to oil. It hasn’t yet reached a point where natural-gas vehicles are commonplace, but Brian Baumler, also a CPA and energy specialist at PKF Texas, foresees a day when that could be the case.
“The question is going to become, how do we best utilize natural gas when it is in direct competition with oil?” he says. “The biggest issue that has to be overcome regarding natural gas as an oil alternative is the fact that it is just that — a gas. You have to compress it and store it in order to use it, which means there are a lot of questions to be answered as far as finding a convenient and workable refueling process for vehicles. At this point, natural gas refueling has to be supervised by a professional because it is a compressed gas.”
Although natural gas has been pumped to the surface and used in applications such as home heating for many years, its full potential as an energy source is only now being explored, and it is still years away from full realization. However, its abundance will have an increasing impact on our nation’s economy, and the business climate, in the years and decades to come.
One of America’s greatest strengths as a country has always been our access to natural resources. The U.S. has some of the most abundant supplies of natural resources on Earth, and it has supplied the fuel — both figuratively and literally — to turn our economy into the world’s largest.
But with those resources comes the responsibility to manage them properly, which includes ethical usage and access. Mining the ground for energy resources, whether it be natural gas, coal or oil, comes with its fair share of controversy as environmental agencies and activists both inside and outside of the government play the role of watchdog, attempting to ensure that other natural resources, such as trees, livestock and water, aren’t harmed by the pursuit of new energy sources.
The result is an ongoing dance between the need for energy resources, and regulations aimed at ensuring that the drilling, mining and fracking needed to extract those resources is done in an ethical manner, with a minimal environmental footprint.
“It’s always the white elephant in the room,” says Scott Soles, a CPA and energy specialist at PKF Texas. “Whether it’s fracking, offshore drilling or domestic drilling for oil and gas, the one big thing any drilling company will have to overcome is the changing regulatory climate as it pertains to environmental standards.”
Fracking in particular has become a hot-button issue that has garnered a large amount of media coverage in recent years. The volatility surrounding environmental regulations can often add extra layers of oversight and regulatory hoops for drilling companies, which affects the industry as a whole and, by extension, society in general.
“Many companies in this space have their hands full dealing with governmental regulations and oversight,” Soles says. “A lot of it has its roots in media coverage, which drives regulators to get involved due to public outcry. The fact is simply that this industry has a very high profile, and every time someone raises the flag for something, it’s an issue. It could be something environmental, something economy-related, or something else. But it does make this industry a lot more interesting to follow than some others.”
Disasters such as the 2010 Deepwater Horizon oil spill in the Gulf of Mexico and 1989 Exxon Valdez oil spill in the Gulf of Alaska have become defining events in the energy industry in the public eye. But the amount of attention paid to the most negative events to impact the industry overshadows the unified efforts that both the government and the industry have made to harvest energy sources in an environmentally responsible way.
“Everything is converging now,” Baumler says. “We’re seeing an effort to find an energy policy and environmental policy that work together. We’re seeing energy companies responding and developing strategies to address EPA concerns.”
Education is also part of the effort. In particular, the industry is attempting to educate lawmakers, and the public in general, about how fracking is conducted, and paint an accurate picture of the risk level to other resources, such as groundwater, that fracking actually poses.
“The reality is, fracking takes place 8,000 to 10,000 feet below any aquifer that is suitable for consumption,” Baumler says.
The impact of the energy industry touches virtually every aspect of our society, and that includes every corner of the business sector. If you run a business, it’s important for you to understand how the energy industry affects you and what you can expect to see in the coming years.
That starts with understanding your company’s unique relationship with energy — how you use it, where you get it and in what ways that could potentially make your business vulnerable.
“Peel back the onion layers and figure out where your business is dependent on energy,” Voth says. “Figure out where your risks are, and on top of that, what factors could cause those risk factors to move up or down.”
Those factors could include transportation and logistics, building utilities such as electricity and gas, and capital expenses. Even employee costs and health care costs could be impacted by the peaks and valleys in the energy industry.
“If you run a business that is highly dependent on electricity, start to look at your electricity suppliers and figure out ways to get the best price,” Voth says. “Or if you run a manufacturing company and buy tons of equipment overseas, pay attention to what is going on in the countries where your suppliers are based. Political and economic upheaval can affect the supply chain, which has significant ripple effects as far as pricing.”
A good rule of thumb is to always look ahead. Gather data and formulate strategic plans that take into account the most likely scenarios for where your business and your industry could be headed and how emerging trends in energy could affect your industry.
“The global economy is complex, and business owners can certainly benefit from being more futuristic with their thinking,” Soles says. “If you’re not planning for what’s ahead and where the market could go, if you keep your head down and assume you can keep doing what you’ve always done, you run the risk of having some unpleasant surprises. Don’t assume your energy needs and how you purchase and use energy will stay the same.”
Voth says the energy industry itself could stand to improve on its efforts to educate the business community, and the public in general, on the daily impact of energy. Although there have been increasing efforts to educate the public on hot-button issues such as fracking, the everyday side of the energy industry has received less attention.
“I think the energy industry has honestly done a really poor job of PR the past few years to let people know the impact of the industry in their daily lives,” Voth says. “The negative stuff, like increasing prices and brownouts, get the media’s attention, but we don’t see enough about the things that impact the industry. When the current administration in Washington wants to cut back on tax incentives to energy companies, that is going to impact consumers. It’s going to impact 401(k)s, because where do those get invested? In energy stocks.”
In Houston, which has a larger energy industry presence than any other city in the country, the PR tide has started to shift as energy companies are beginning to purchase air time for public service announcements and undertake other forms of grass-roots marketing to educate residents and businesses about the impact the energy industry has, and will continue to have.
“I can’t speak for what they’re doing in other parts of the country, but at least here in Houston, they’re starting to take steps to debunk some of the Hollywood myths about the industry,” Voth says.
Education is essential to America’s future relationship with the energy industry. From the politically charged topics of fracking and oil drilling, to the basic need to understand how energy is used in everyday life, an informed population is necessary to arrive at the best decisions that will impact our ability to harvest energy sources, our ability to make sound environmental decisions as it pertains to energy and our dependence on foreign energy.
“The energy industry will be the same in five years as it is now, which is to say, we’ll still be having the same conversations,” Soles says. “The one constant in the energy industry is that it’s always changing, it’s always politically charged, and everyone feels the ripple effects. It’s just a matter of what issues we’ll have. It’s always going to be a worldwide powerhouse industry that will be important for a long time to come.”