The energy industry is in a state of flux — with new technologies, an increased focus on sustainability from consumers and from the government actions that affect it.
Alfred Marcus, a professor of strategic management and entrepreneurship in the Carlson School of Management, explains the uncertainties companies are facing and what it means for the future of energy.
Q: Why are energy companies facing an uncertain future?
Prof. Marcus: The pressures energy companies face are multi-dimensional, ranging from global security and economic futures to changing technologies, the threat of climate change, and changes in national and international policies and priorities.
With changes of this significance, it is very difficult to make long-term decisions.
Many sectors are involved and affected by the uncertainties ahead, yet the most important are automobile companies that are major consumers of petroleum; fossil fuel companies that explore for oil and natural gas, transport, produce and refine it; and electric utilities that generate power, transmit and distribute it to homes and businesses.
Q: How are energy companies identifying and managing this uncertainty?
Prof. Marcus: We need to talk about the most visible way these uncertainties manifest themselves, that is in price volatility. In the past decade, we have seen oil prices rise to record highs and crash back down. This has a ripple effect, affecting everything from renewable energy advancements to global economic growth — especially in petro-dominated nations — and international security.
Virtually no forecaster expected prices to be so volatile. In response, managers must choose hedging strategies. They hedge by preparing for a variety of different futures so that they can shield themselves from the negative consequences of volatile prices and take advantage of these opportunities.
Q: What strategies are automakers taking hedge their future bets?
Prof. Marcus: When talking about the automakers, they must make long- and short-term choices about vehicle models (e.g., how large), what to do in various global markets and what types of engines (e.g., diesel, gas, electric) to use to propel these vehicles.
The automakers respond to their perceptions of what consumer markets want to buy. Their perceptions are based on the past buying decisions of consumers, of which the automakers have substantial past data.
However, past behavior doesn’t help automakers understand what consumers will want five to 10 years from now, when the ultimate results of their decisions will play out. They are speculating on the shape of future consumer demand, making their decisions today about unknown conditions in the future. What they know today is their profits lie in the SUV and small truck market in the U.S. and that their growth has come — and has been likely to continue to come — from China.
The automotive market is very mature and competitive. Automakers would like the future to be one of electrification and autonomous vehicles where it might be possible, by dint of innovation, to break the competitive logjam among them and for them to see new sources of growth and profits. While today they offer more SUV and small truck models and are trying to expand the Chinese market, in the future they will likely offer more electric options and try to move into managing shared transportation systems like Uber.
Q: What issues are facing public electric utilities and how is the industry responding?
Prof. Marcus: One of the biggest changes in recent decades — one that we are still seeing being implemented around the world — is a greater focus on reducing greenhouse gases.
From the Kyoto Protocol to the Paris Agreement, governments have agreed to efforts to reduce greenhouse gas emissions. This has included the retirement of older, coal fired power plants and a growing focus on hydro, wind, solar and nuclear.
With all of these options, managers must weigh the possible cost, safety and environmental opposition when companies choose among energy options, such as how are they likely to hedge their future bets among different sources of power generation, what mix of generation options will they commit to and how fast they will convert to options that reduce greenhouse gas emissions.
Government action is important. Governments provide a necessary nudge for energy companies to move forward in new directions. They allow societies to address the challenge of global climate change and provide the oil and natural gas and motor vehicle companies to see new avenues to be profitable and grow.
Q: What further research are you conducting aimed at providing insight into the energy industry?
Prof. Marcus: Currently, I am examining the role of regulatory uncertainty and voluntary regulation pressures on companies environmental strategies and performance. While we know how managers react to mandatory environmental regulations in different ways, we need to look at how mandatory and voluntary pressures work together given imperfect enforcement and the political influence companies exert.
Alfred Marcus is a professor and the Edson Spencer Endowed Chair in Strategy and Technological Leadership at the Carlson School of Management. The author of 21 books, including “Strategies for Booms and Busts: Managing Uncertainty in the Energy Industry,” Marcus has expertise in the automotive; oil and gas; electric utility; and food industries. He also studies corporate social responsibility, sustainability and government regulations.
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