Could China's EVs Lead to Peak Oil Demand?

• China's decision on whether and when to ban cars burning gasoline and diesel could alter our view of how far we are from a peak in global oil demand.
• Even though the likely date of such a peak is highly uncertain, the idea of an impending peak could significantly affect investments and other decisions.

A few months ago the British government made headlines when it announced it would ban new gasoline and diesel cars, starting in 2040. That move, which apparently excludes hybrid cars, is further fallout from the 2015 Dieselgate emissions-cheating scandal.

Now it appears that China is preparing to issue a similar ban. With around 30% of global new-vehicle sales, China could upend the plans and economics of the world's fuel and automobile industries. However, it is less obvious that this would lead directly to the arrival of "peak demand" for oil, an idea that has largely displaced earlier thoughts of Peak Oil related to supply.

Some background is in order, because the two concepts are easy to confuse. Peak Oil, which gained considerable traction with investors and the public in the 2000s, was based on the undoubted fact that the quantity of oil in the earth's crust is finite, at least on a human time-scale. Its proponents argued that we were nearing a geological limit on oil production, and that quite soon oil companies and OPEC nations wouldn't be able to sustain their current production, let alone continue adding to it every year.

The presumption that such a peak was imminent has been pretty clearly refuted by the shale revolution, the first stages of which had already begun when Peak Oil was still fashionable. In fact, humanity has only extracted a small percentage of the world's oil resources. We continue to find both additional resources and new ways to extract more from previously identified resources. Global proved oil reserves--a measure of how much can be produced economically with current technology--have more than doubled since 1980, while production (and consumption) grew by 34%.

For that matter, many of the shale plays that today produce a total of more than 4 million barrels per day had been known for decades. Petroleum engineers just didn't see how to produce oil from them in commercial volumes and at a cost that could compete with other sources like oil fields in deep water.

The first mention I heard of "peak demand" was at an IHS investment conference in 2009, when supply-focused Peak Oil was still king. At the time, it was a novel idea, since only a year earlier, oil prices crested just short of $150 per barrel on the back of surging demand and, to some extent the expectation of Peak Oil, and were only tamed by the unfolding global financial crisis.

Peak demand proposes that consumption of petroleum and its products will reach its maximum extent within a few decades, and thereafter plateau or fall. Crucially, it doesn't depend on a single theory, but on a combination of factors that are easily observable, though still uncertain in their future progression: meaningful improvements in fuel economy, even for large vehicles; policies and regulations to decarbonize the global energy system in response to climate change; an apparent decoupling of GDP and energy consumption; and the rise of partially and fully electrified vehicles.

That brings us back to the implications of a ban on internal combustion engine (ICE) cars in China. Considering that China has accounted for roughly a third of the increase in global oil consumption since 2014, this has to be reckoned as one of the larger uncertainties about future oil demand. Even if we're only talking about the equivalent of a couple of million barrels per day of lost demand growth by 2030, OPEC's ongoing struggle to balance a market that has been oversupplied by less than that amount puts the potential impact for oil investment and economics into sharp relief.

China has every incentive to take this step. Its urban air pollution is on a scale that cities like London and L.A. haven't experienced since the 1950s or 1960s. The country's 2015 pledge to limit greenhouse gas emissions was a centerpiece, and arguably the sine qua non, of the Paris climate agreement. If that weren't enough, the country's dependence on oil imports is exploding in much the same way as the US's did in the early-to-mid 2000s.

Perhaps I'm cynical to think that the last point weighs most heavily on China's policy-makers, just as US energy debates hinged on energy security concerns until quite recently. China's oil demand continues to grow, with over 20 million new cars and trucks reaching its roads each year, and the vast majority of them still needing gasoline or diesel fuel. Meanwhile, its oil production is going sideways, at best, as its mature oil fields decline.

Moreover, despite the country's large unconventional oil resource potential there does not seem to be a shale light at the end of their tunnel, because most of the conditions that supported the shale revolution here don't apply within China's state-dominated system. What it does have is plenty of electricity, and multiple ways to generate a lot more.

Let's concede that China's grid electricity, on which most of those EVs would be running, is among the highest in the world in emissions of both CO2 and local air pollutants. Switching China's new cars from gasoline and diesel to electricity won't constitute a big environmental win, initially or perhaps ever. Even under the relatively generous assumptions used in a recent analysis on Bloomberg, it will take the average EV in China 7 years to repay its extra lifecycle carbon debt, unless the country's electricity mix becomes much greener.

That seems realistic but almost beside the point, if China's main aim is to shore up its worsening energy security. Nor should we ignore the industrial-policy angle in such a move. China set out to dominate the global solar equipment market and can claim success, at least based on sales. If EVs catch on as many expect, the ultimate global market for them would be a sizable multiple of last year's $116 billion figure for global solar investment, only part of which relates to solar cell and module manufacturing, where China leads.

So let's assume 100% EVs is a given in China from some point in the next two decades. Does that spell the end of global oil demand growth in roughly the same timeframe? A number of recent forecasts, including those from Shell and Statoil, reached that conclusion even before the news about China's future car market.

It's not hard to envision this point of view solidifying into conventional wisdom, with interesting implications. Among other things, it could result in further cuts to investment in oil exploration and production that various experts including the International Energy Agency already worry could lead to another big oil price spike--well before EVs take off in a big way. It could also reduce R&D and investment in improvements to the conventional cars that will account for the large majority of car fleets and new car sales for some time to come, with adverse consequences for emissions.

When I consider these forecasts I'm struck by how early we are in this particular transition. Global EV sales are still only around 1% of global car sales, and petroleum products account for all but a small sliver of the global transportation energy market. As fellow energy blogger Robert Rapier recently noted on Forbes, "China is a long way from reining in its oil consumption growth."

Meanwhile, the nascent competition between petroleum liquids and electricity in transportation will occur against the backdrop of a much more complex reshuffling of the entire global energy mix. The current stage of that larger transition involves the rejection of coal and its replacement by natural gas and intermittent renewable energy: wind and solar electricity.

An excellent article by John Kemp in Reuters last week placed the shift away from coal in the context of a long sequence of historical energy transitions. As he noted, "Each step in the grand energy transition has seen the dominant fuel replaced by one that is more convenient and useful." Although there are other, compelling rationales for a move in the direction of electric vehicles backed by wind and solar power, it is extremely difficult to see that combination today in the terms Mr. Kemp used.

Pairing EVs with vehicle autonomy might create a product that is indeed more convenient and useful than current ICE cars with their effectively unlimited range and short refueling times. Perhaps it will require packaging self-driving EVs into mobility-on-demand services to beat that standard. It remains to be seen whether such a package would be technically or commercially viable, since even Tesla's "Autopilot" feature is still a far cry from such level 4 or 5 autonomy.

And even if EVs win the battle for car consumers with sustained help from governments, electricity is still an energy carrier, not an energy source. Renewables may go a long way toward replacing coal in the next two decades, but dispensing with both coal's 28% contribution to global primary energy consumption and oil's 33% in such a short interval looks like a massive stretch. Before the transition to EVs is complete, we may see at least some of them running on electricity generated by gas turbines burning petroleum distillates such as kerosene. (The environmental impacts of such a linkage would be significantly lower than running a fleet of EVs on coal.)

So while China's likely ban on internal combustion engine cars certainly looks like a key step on the path to peak oil demand, it could just as easily force oil producers to find new markets. That happened over a century ago, when a much smaller oil industry saw kerosene lose out to electric lighting and was farsighted or lucky enough to shift its focus to fueling Mr. Ford's new automobiles.

Peak demand for oil definitely lies somewhere in our future, regardless of China's future vehicle choices.  However, as a long-time practitioner of scenario planning, my faith in precise forecasts extrapolated from current facts and trends is limited. Whether we are close to peak demand or, as with a global peak in oil supply, continue to push it farther off, will remain subject to uncertainties that won't be resolved for some time. Our best indication of either peak--demand or supply--will come when we have passed it. However, the idea of an impending peak has shown great potential to affect markets and decisions in the meantime.

Are Renewables Set to Displace Natural Gas?

• Bloomberg's renewable energy affiliate forecasts that wind and solar power will make major inroads into the market share of natural gas within a decade. 
• This might be a useful scenario to consider, but it is still likelier that coal, not gas, faces the biggest risk from the growth of renewables. 

A recent story on Bloomberg News, "What If Big Oil's Bet on Gas Is Wrong?", challenges the conventional wisdom that demand for natural gas will grow as it displaces coal and facilitates the growth of renewable energy sources like wind and solar power. Instead, the forecast highlighted in the article envisions gas's global share of electricity dropping from 23% to 16% by 2040 as renewables shoot past it. So much for gas as the "bridge to the future" if that proves accurate.

Several points in the story leave room for doubt. For starters, this projection from Bloomberg New Energy Finance (BNEF), the renewables-focused analytical arm of Bloomberg, would leave coal with a larger share of power generation than gas in 2040, when it has renewables reaching 50%. That might make sense in the European context on which their forecast seems to be based, but it flies against the US experience of coal losing 18 points of electricity market share since 2007 (from 48.5% to 30.4%), with two-thirds of that drop picked up by gas and one-third by expanding renewables. (See chart below.)

It's also worth noting that the US Energy Information Administration projected in February that natural gas would continue to gain market share, even in the absence of the EPA's Clean Power Plan, which is being withdrawn.

Natural gas prices have had a lot to do with the diverging outcomes experienced in Europe and the US, so far. As the shale boom ramped up, average US natural gas spot prices fell from nearly $9 per million BTUs (MMBTU) in 2008 to $3 or less since 2014.  Meanwhile, Europe remains tied to long-term pipeline supplies from Russia and LNG imports from North Africa and elsewhere. Wholesale gas price indexes in Europe reached $7-8 per MMBTU earlier this year.

But it's not clear that the factors that have kept gas expensive in Europe and protected coal, even as nuclear power was being phased out in Germany, will persist. The US now exports more liquefied natural gas (LNG) than it imports. US LNG exports to Europe may not push out much Russian gas, but along with expanding global LNG capacity they are forcing Gazprom, Russia's main gas producer and exporter, to become more competitive.

Then there's the issue of flexibility versus intermittency. Wind and solar power power are not flexible; without batteries or other storage they are at the mercy of daily, seasonal or random variation of sunlight and breezes, and in need of back-up from truly flexible sources. Large-scale hydroelectric capacity, which makes up 75% of today's global renewable generation and is capable of supplying either 24x7 "baseload" electricity or ramping up and down as needed, has provided much of the back-up for wind and solar in Europe, but is unlikely to grow rapidly in the future.

That means the bulk of the growth in renewables that BNEF sees from now to 2040 must come from extrapolating intermittent wind and solar power from their relatively modest combined 4.5% of the global electricity mix in 2015 to a share larger than coal still holds in the US. The costs of wind and solar technologies have fallen rapidly and are expected to continue to drop, while the integration of these sources into regional power grids at scales up to 20-30% has gone better than many expected. However, without cheap electricity storage on an unprecedented scale, their further market penetration seems likely to encounter increasing headwinds as their share increases.

BNEF may be relying on the same aggressive forecast of falling battery prices that underpinned its recent projection that electric vehicles (EVs) will account for more than half of all new cars by 2040. As the Financial Times noted this week, battery improvements depend on chemistry, not semiconductor electronics. Assuming their costs can continue to fall like those for solar cells looks questionable. Nor is cost--partly a function of temporary government incentives--the only aspect of performance that will determine how well EVs compete with steadily improving conventional cars and hybrids.

I also compared the BNEF gas forecast to the International Energy Agency's most recent World Energy Outlook, incorporating the national commitments in the Paris climate agreement. The IEA projected that renewables would reach 37% of global power generation by 2040, or roughly half the increase BNEF anticipates. The IEA also saw global gas demand growing by 50%, passing coal by 2040. That's a very different outcome than the one BNEF expects.

Despite my misgivings about its assumptions and conclusions, the BNEF forecast is a useful scenario for investors and energy companies to consider. With oil prices stuck in low gear and future oil demand highly uncertain, thanks to environmental regulation and electric and autonomous vehicle technologies, many large resource companies have increased their focus on natural gas. Some, like Shell and Total, invested to produce more gas than oil, predicated on gas's expected role as the lowest-emitting fossil fuel in a decarbonizing world. If that bet turned out to be wrong, many billions of dollars of asset value would be at risk.

However, it's hard to view that as the likeliest scenario. Consider a simple reality check: As renewable electricity generation grows to mainstream scale, it must displace something. Is that likelier to be relatively inflexible coal generation, with its high emissions of both greenhouse gases and local pollutants, or flexible, lower-emitting natural gas power generation that offers integration synergies with renewables? The US experience so far says that baseload facilities--coal and nuclear--are challenged much more by gas and renewables, than gas-fired power is by renewables plus coal.

The bottom line is that the world gets 80% of the energy we use from oil, gas and coal. Today's renewable energy technology isn't up to replacing all of these at the same time, without a much heavier lift from batteries than the latter seem capable of absent a real breakthrough. If the energy transition now underway is indeed being driven by emissions and cleaner air, then it's coal, not gas, that faces the biggest obstacles.

Withdrawal Exposes Weakness of the Paris Climate Agreement

When President Trump announced last week that the US would withdraw from the Paris Climate Agreement, he unleashed a flood of condemnation. Foreign leaders, US politicians, corporate executives, and environmental groups all roundly criticized the move. It also hasn't polled well.

As the initial reaction dies down, it's worth considering how this happened, what it means, and what might come next. The invaluable Axios news site has some noteworthy insights on the latter problem that I will get to shortly.

I am convinced it was a mistake to withdraw. In this I share the view of many current and former business leaders, including the Secretary of State, that the US was better off as a party to the deal and all the future negotiations it entails. Even if the goal was truly to renegotiate the agreement on more favorable terms, signaling withdrawal first seems counterproductive. However, I also see the consequences of our withdrawal in less catastrophic terms than most critics of the move.

As I noted not long after it was concluded, the Paris Agreement is by design much weaker than its predecessor, the Kyoto Protocol. Although the 2015 Paris deal was probably the strongest one that could have been negotiated at the time, it still represented a big compromise between developed and developing countries on who should reduce the bulk of future emissions and who should bear the responsibility for the consequences of past emissions. Its text is full of verbs like recognize, acknowledge, encourage, etc., and  the commitments it collected were essentially voluntary.

The agreement was also explicitly negotiated so as to maximize its chances of being enacted under the executive powers of the US president, without his having to refer the agreement to the US Senate for its concurrence. That implied it could be undone in the same way.

In other words, President Obama took a calculated risk that his successor(s) would choose to be bound by his Executive Order endorsing Paris. That was tantamount to a bet on his party winning the 2016 election, since most of the Republicans who had announced at the time were opposed to it, or the Clean Power Plan that was the linchpin of future US compliance with it.

Seeking Senate approval as a treaty would have been a much bigger lift--or required an even weaker agreement--but success would have provided significant political protection for the follow-on to the unratified Kyoto Protocol. Perhaps that explains why President Trump has chosen the much slower exit path--up to three years--provided within the Paris Agreement, rather than the quicker route of pulling out of the umbrella UN Framework Convention on Climate Change. The Convention was signed by President George H.W. Bush with the bipartisan advise and consent of the Senate in 1992.

Setting politics aside, it's also not obvious that US withdrawal from Paris will put our greenhouse gas emissions on a significantly different track than if we stayed in. Even the EPA's review and likely withdrawal of its previous Clean Power Plan, which underpinned the Obama administration's strategy for meeting the voluntary goal it submitted at Paris, may have only a minor impact on global emissions.

Federal climate policy has not been the main driver of recent emissions reductions in the US power sector. Cheap, abundant natural gas from shale and the rapid adoption of renewable energy under state "renewable portfolio standards", supported by federal tax credits that were extended again in 2015, have been the primary factors in overall US emissions falling by 11% since 2005. These trends look set to continue.

The bigger question is what happens globally with the US out of the Paris Agreement--assuming the administration does not reverse course again before it can issue the required formal notice to withdraw roughly 2 1/2 years from now. 

At least in the short term, I doubt much else will change. For the most part, the Nationally Determined Commitments delivered at Paris reflected what the signatories intended to do anyway. China's NDC is a perfect example. That country's ongoing air pollution crisis provides ample incentive to scale back on energy intensity and coal-fired power plants, which are the main source of its emissions. 

Increasing the role of renewable energy in its national energy mix perfectly suits China's ambitions in renewable energy technology. Exhibit A for that is a solar manufacturing sector that went from insignificance to more than 50% of the global supply of photovoltaic (PV) cells in under a decade, while China's domestic market accounted for 21% of global PV installations through 2015. 

The reactions to last week's announcement surely raised the stakes for other countries that might consider leaving. However, this action has also provided China and other high-emitting developing countries with an ironic mirror image of one of the main arguments on which the US government based its unwillingness to implement the Kyoto Protocol. 

What ought to matter more than any of the domestic and geopolitical maneuvering around the US exit is the actual impact on the global climate. Reporting on Axios, Amy Harder (formerly of the Wall St. Journal) portrayed this as a sort of emperor's clothes moment with a column entitled, "Climate change is here to stay, so deal with it." Monday's main Axios "stream" characterized her piece as a "truth bomb." 

As Harder put it, "The chances of reversing climate change are slim regardless of US involvement in the Paris agreement." That's consistent with recent assessments from the International Energy Agency and others. Citing the Bipartisan Policy Center and the UN, her column suggested a pivot to greater focus on adaptation, the hard and deeply unglamorous work of bolstering infrastructure and systems to withstand changes in the climate, including those that are already baked in. Attributing the source of changes in rainfall and sea level matters less than plugging the resulting physical gaps. That makes adaptation politically less toxic than cutting emissions, though still plenty challenging, fiscally. 

As I have been watching the fallout from last week's news, I keep coming back to comparisons to the Cold War that I made when the idea of pursuing climate policy through executive action was emerging in 2010. Like the Cold War, dealing with climate change requires a similarly enduring bipartisan coalition. Major policy swings every 4 or 8 years are just too costly and ineffective, due to the planning horizons involved.

NATO may be going through a difficult moment, but it is approaching its 70th year. After seeing its key weakness exposed, can anyone honestly look at the framework of the Paris Agreement and conclude that it is likely to last as long? Yet if climate change is as serious as many suggest, those are exactly the terms in which we should be thinking.

Pitting Wind and Solar Against Nuclear Power

• With US electricity demand stalled, expanding wind and solar power is increasing the economic pressure on equally low-emission nuclear power.
• New state incentives for nuclear plants are facing resistance from the beneficiaries of renewable energy subsidies, as both battle for market share.

It's an old adage that a growth market has room for all participants, including new entrants. The US electricity market is now experiencing the converse of this, with increasing competition for static demand leading to headlines like the one I saw earlier this week: "Lifeline for Nuclear Plants Is Threatening Wind and Solar Power."

The idea behind that headline is ironic, considering that for more than a decade renewables have depended on government mandates and incentives to drive their impressive expansion. Along with recently cheap natural gas, they have made conditions increasingly difficult for established generating technologies like coal and nuclear power. In the case of coal, that was an entirely foreseeable and even intentional outcome, but for nuclear power it has come as a mostly unintended consequence.

Much as the slowdown in gasoline demand brought on by the recession created a crisis for biofuel quotas, stagnant electricity demand has hastened and  intensified the inevitable fight for market share and the resulting shakeout in generating capacity. US electricity consumption has been essentially flat since the financial crisis of 2008-9, thanks to a weak economy and aggressive investment in energy efficiency. More generation serving the same demand means lower prices for all producers, and fewer annual hours of operation for the least competitive of them.

At the same time abundant, low-priced natural gas from soaring shale production has made gas-fired turbines both a direct competitor in the 24/7 "baseload" segment that coal and nuclear power formerly dominated, and the go-to backup source for integrating more renewables onto the grid.

The US is essentially swimming in energy, at least when it comes to resources that can be turned into electricity. The only rationale left for the substantial subsidies that wind and power still receive--over $3 billion budgeted for wind alone in 2017--is environmental: mainly concerns about climate change and the emissions of CO2 and other greenhouse gases linked to it.

That's the same reason why some states have become alarmed enough by the recent wave of nuclear power plant retirements to consider providing some form of financial support for existing facilities. Nuclear power isn't just the third-largest source of electricity in the US; it is by far our largest producer of zero-emission power: 3.5 times the output of wind in 2016 and 22 times solar. A large drop in nuclear power is simply not compatible with the desire to continue cutting US emissions. Environmental groups like EDF are reaching similar conclusions.

Nuclear's scale is even more of a factor when it comes to considering what could replace it. For example, it takes the output of about 2,000 wind turbines of 2 megawatts (MW) each--roughly half of the 8,203 MW of new US wind installations last year--to equal the annual energy production of a single typical nuclear reactor. An infographic I saw on Twitter makes that easier to visualize:

I can appreciate why utilities and others that are investing heavily in wind and solar power might be convinced that providing incentives to keep nuclear power plants from retiring prematurely is "the wrong policy." After all, we have collectively pushed them to invest in these specific technologies, because it has been easier to reach a consensus at the federal and state levels to provide incentives for renewables, rather than for all low-emission energy.

As long as we are promoting renewables in this way, though, we should recognize that nuclear power is no less worthy. The biggest benefit of renewables is their low emissions (including non-greenhouse air pollutants,) an attribute shared with nuclear power. Yet because of their much lower energy densities, requiring much bigger footprints for the same output, and their lower reliability, incorporating a lot more renewables into the energy mix requires additional investments in electricity grid modernization and energy storage, along with new tools like "demand response." Nuclear power is compact, available about 90% of the time, and it works just fine with the existing grid.

By experience and philosophy, I'm a big fan of markets, so I would normally be more sympathetic to the view expressed by the American Petroleum Institute that states shouldn't tip the scales in favor of nuclear power over gas and other alternatives. However, we don't have anything resembling a level playing field for electricity generation, even in states with deregulated electricity markets. The existing federal incentives for wind and solar power, together with state Renewable Portfolio Standards, are already tipping the scales strongly in their favor. These subsidies will remain in place until at least 2022, consistent with the most recent extension by Congress. Why do renewables merit such subsidies more than nuclear power?

Wind and solar power are key parts of the emerging low-emission energy mix, and we will want more as their costs continue to fall, but not at the expense of much larger low-emission energy sources that are already in place. Less nuclear power doesn't just mean more renewables. It also means more gas or coal-fired power. That's the experience of Germany's "Energiewende", or energy transition.

As long as that is the case, and without corresponding incentives for equally low-emission nuclear plants, as well as for fossil-fuel plants that capture and sequester their CO2, we will end up with an energy mix in the next few years that is less diverse, less reliable, and emits more CO2 than necessary. I wouldn't consider that progress.

Why Oil Forecasting Is So Difficult Now: Short-cycle vs. Long-cycle vs. "Peak Demand"

Oil experts are deeply divided in their views on the future of what is still the world's key commodity. This divergence was on display at last week's CERA Conference in Houston, which brought together industry executives, consultants, media, and government officials from around the world. Although I didn't attend in person, the organizers provided extensive streaming coverage of keynote talks and interviews with thought leaders.

From OPEC oil ministers and the head of the International Energy Agency, we heard that the world could be headed for another supply crunch within a few years, due to low investment following 2014's oil-price collapse. I've mentioned this concern before.

By contrast, the major oil companies seemed more cautious. Low oil prices caught many of them with big, expensive projects underway--too far along to stop but undermined by prices now far below the assumptions on which they were justified. Cash flow seems to be a higher priority than growth. "Peak demand", when global oil consumption stops growing and might begin shrinking, could also arrive within ten years or so, at least according to Shell's CEO, further disrupting markets.

Renewables were discussed frequently, but shale was arguably the star of the segments I watched. Big companies touted their shift toward shale assets that can be brought into production quickly, while independent E&P (exploration and production) companies highlighted both the upside and limitations of focusing on the core, or most productive, cost-effective portions of various shale regions.

With these large, and to some extent mutually contradictory trends in play, any kind of straight-line extrapolation from current or past conditions of price, supply, or demand seems sure to be swamped by uncertainties. Rather than putting my thumb on the scales for one view or another, my best service just now is improving our understanding of these risks and why they look so uncertain.

On the supply side, the relationship between short-cycle and long-cycle investments is especially interesting and a source of great uncertainty. Short-cycle supply, mainly from shale or "tight oil" wells that can be drilled and brought on-stream quickly and for only a few million dollars each--but that also tail off quickly--was the main factor in the drop from over $100 per barrel to less than $40 just a couple of years ago. It now provides many of the lowest-risk, most attractive opportunities available to the oil and gas industry. Yet the more short-cycle oil is developed, the longer the recovery of long-cycle investment is likely to be delayed, because shale is effectively putting a low ceiling on oil prices and will consume ongoing cash flow to sustain it.

Long-cycle oil, which still accounts for over 90% of global supply, is an entirely different domain. It consists mainly of large conventional oil fields that were developed years ago and continue to pump oil with relatively little continuing investment. It also includes new, big-ticket projects in places like the deep waters of the Gulf of Mexico and offshore Brazil, that add to growth but importantly offset the natural decline rates--often 4%-10% annually--that eat into the output of older oil fields every year.

Hundreds of billions of dollars of planned investment in long-cycle projects was deferred or canceled since 2014. Because such projects take years--sometimes decades--to develop from discovery to production, this investment drought implies a hole in future production. That shortfall hasn't appeared yet, because projects like BP's Thunder Horse expansion that were begun when oil was still over $100 are still periodically starting up. The impact of the long-cycle gap might also shrink or vanish entirely if enough short-cycle oil is developed in the meantime.

We might never notice this impending gap, if demand growth slowed sharply from its recent rate of more than 1 million barrels per day per year, or even started to fall. Not so long ago, few could imagine oil demand falling without hitting a wall on supply--so-called "Peak Oil"--but now it's almost harder to envision oil demand continuing to expand in light of competition from renewables, substitution from electric vehicles, and constraints imposed by climate policies intended to comply with the Paris Agreement.

The big uncertainties for these changes are time and scale. The Solar Energy Industries Association (SEIA) forecasts US solar power growing from 42 Gigawatts (GW) last year to nearly 120 GW by the end of 2022. However, that would leave solar generating just 4% of US electricity, even if electricity demand didn't grow at all in the interim. Nor does solar power compete with oil, except in the few remaining places--mainly in the Middle East--where lots of oil is burned to produced electricity, or when it powers electric cars.

With regard to EVs, Tesla's goal of producing 500,000 cars per year by the end of next year is impressively big. However, even if those Teslas replaced only conventional cars of average fuel economy, all of which were then scrapped--unlikely on both counts--they would reduce US gasoline demand by less than 0.2%. It would take more than six times as many EVs to offset last year's growth in US gasoline demand of 1.3%. Only as EV sales ramp up and conventional cars are retired in large numbers would they start to make a serious dent in oil demand. How long will it take to reach that point, and how much would a big jump in oil prices within the next few years nudge it along?

Until recently, most of the speculation that the transition away from oil and other fossil fuels could happen faster came from outside the industry. Lately, though, respected voices in the industry--or at least closer to it--have begun to raise the possibility that the shift to renewables and EVs might accelerate, affecting demand sooner than expected.

To be clear, I am still convinced that constraints on how fast capital stock turns over--vehicle fleets, HVAC, factory equipment, etc.--impose a speed limit on any large-scale transition like this. However, careful examination of the last 20 years of oil prices provides ample proof that smaller-scale shifts can have large impacts. From the Asian Economic Crisis of the late 1990s, to the massive price spike of 2006-8, followed by the financial crisis, the Arab Spring, and the shale boom, we can see that supply/demand imbalances of no more than about 2-3 million barrels per day--say 3-4% of production or consumption--were sufficient to drive oil prices as low as $10 and as high as $145 per barrel.

When we combine the big, new trends outlined above with normal uncertainties about the economy and then factor in the extreme sensitivity of oil markets to relatively modest surpluses and shortfalls, predicting the likely path for oil looks very daunting. The factors driving it may be changing, but accurate oil forecasting remains as challenging as ever. That same realization stimulated interest in scenario planning more than 40 years ago, focused on the insights available from considering multiple possible futures, rather than just one.

Is the US Ready for a Carbon Tax?

• While the Trump administration seeks to undo CO2 regulations, a group of former Republican officials has proposed a new, market-based emissions plan.
• This "carbon tax" looks simpler than EPA's Clean Power Plan or previous cap-and-trade legislation, but not simpler than the pre-Obama status quo.

The idea of taxing the carbon content of energy--and presumably the goods and services produced with it--is back in the news. A group of Republican "wise men" has floated it as an alternative to the regulation-based approach to emissions that the Obama administration pursued after its preferred "cap & trade" legislation died in the Congress.

Reduced to its basics, a carbon tax is a focused version of a consumption tax, based on usage rather than income or valuation. The level of the tax would be set by law, either as a fixed amount per ton of emissions or at an initial rate with preset future increases. What can't be known with certainty in advance is just how much a given level of carbon tax would reduce actual emissions.

This contrasts with the method of setting a price on carbon preferred by many other economists and environmental groups, called "cap & trade." In this approach, the government sets a cap, or maximum level, on emissions for a designated sector or the economy as a whole, while parties subject to the cap are allowed to trade emission allowances and credits with each other under that cap. Thus policy makers set the level of emission reductions, and allow the market to find the resulting price on carbon. In principal, that ought to be more efficient than the simpler carbon tax, because market forces should drive participants with low costs of cutting emissions to make the deepest reductions and then sell their excess cuts to others, for less than it would cost the latter to reduce by that amount.

From the late 1990s until 2009 or '10 I was convinced that cap & trade was the better approach to pricing emissions. However, the experience of watching the US Congress attempt to design a cap-and-trade system for the US economy cured my certainty. As I have described at length, the inclination of legislators to help favored companies, industries and sectors, combined with the extraordinary temptations created by the sheer scale of the revenue such a system would channel through the government's hands, revealed practical problems that look insurmountable in the real world, at least under our political system.

In fairness, cap-and-trade is currently used to promote emissions reductions in various jurisdictions, including California, the mainly northeastern states participating in the Regional Greenhouse Gas Initiative, and the European Union. From what I have observed, all of them have experienced technical difficulties involving the allocation of free allowances, inadequate liquidity, and other issues. The biggest practical problem is that the carbon prices these systems have tended to deliver might be characterized as the opposite of a Goldilocks price; i.e., they are typically high enough to generate substantial revenue, creating strong constituencies for their continuation, but too low to influence behavior very much.

For example, California's emissions credits currently trade at around $13 per metric ton of CO2, equivalent to $0.10 per gallon of gasoline containing ethanol. Would an extra $1 per fill-up make much of a difference in how much you drive, which car to buy when you replace your current car, or whether to sell your car (or forgo buying one) and take public transportation?

Moreover, California's emissions have been essentially flat since the state implemented cap-and-trade in 2012. However, since 2002 the state's electric utilities--historically the highest emitting sector--have operated and invested under a Renewable Portfolio Standard requiring them to increase the share of renewable energy in their generation mix to 20% by 2010, 33% by 2020, and now 50% by 2030. I suspect that accounts for most of the 7% drop in emissions since 2002, while the impact of a carbon price equivalent to 0.6 cents per kilowatt-hour (kWh) is likely lost in the noise. Of course a carbon tax would create its own political and practical complications.

First, consider how a carbon tax would affect different energy sources. As with cap & trade, a carbon tax should have its biggest impact on the highest-emitting forms of energy. In practice that would compound the current disadvantages for coal compared to abundant, low-priced natural gas and rapidly growing, essentially zero-emitting renewables like wind and solar power. At least on the surface, that seems at odds with the stated goal of the Trump administration to attempt to rescue the US coal industry and the communities that depend on it.

Like cap & trade, a carbon tax would also require a significant amount of new bookkeeping to track the path of "embedded emissions"--the CO2 and other greenhouse gases emitted at each step of a product or service's supply chain--through the economy. Some of this is already done voluntarily by companies participating in various sustainability reporting efforts, but it would be new for many others. The EPA, Department of Energy, and numerous non-governmental agencies have done much work to quantify such emissions, but a carbon tax would require a level of rigor and audit trail consistent with the creation of what amounts to a shadow currency within the economy.

A carbon tax also raises similar questions of how to spend the resulting revenue that have bedeviled cap & trade. At the current US emissions and assuming few sources were exempted, the proposed $40 per metric ton initial carbon tax would raise around $275 billion per year. That's 8% of this year's federal budget. It doesn't take a cynic to guess that the first inclination of any Congress enacting such a tax would be to hang onto this money to fund new programs, reduce the federal deficit, or some combination, rather than returning it to taxpayers as former Secretaries Baker and Schultz and the economists who back them suggest.

Their proposal would require that the proceeds of the carbon tax be rebated to essentially the same people who would be paying it at the gas pump or in their gas and electric bills. This sounds similar to the "Cap and Dividend" approach to cap & trade proposed by Senators Cantwell (D) and Collins (R) a few years ago. Their bill had the great advantage of simplicity, requiring just a fraction of the 1,427 pages of the 2009 Waxman-Markey cap & trade bill, the main purpose of which seemed to be to redistribute vast sums of money outside the tax code. But like W-M, it went absolutely nowhere.

Like it or not, that's my best guess of the fate of the current carbon tax idea, too. The biggest challenge facing a carbon tax today is that it would not be running as a simpler, more market-oriented alternative to prescriptive legislation or complex EPA regulations. After all, the administration's intention appears to be to eliminate the EPA's main emissions-reduction regulation, the Clean Power Plan, not to replace it.

And although the new US Secretary of State, Mr. Tillerson, is on record numerous times in support of a carbon tax, that position seems to have been put forward mainly in preference to cap & trade, rather than on its own merits in the absence of any other strict climate policy.

A carbon tax would raise the effective price of energy commodities in which we appear to have a global competitive advantage, at least for now. The current proposal may rebate the carbon tax on exports, but most economic activity starts and ends within this country. And as noted in the NY Times op-ed by Dr. Feldstein and the other economists backing this measure, the revenue recycling to consumers would be on an equal basis, rather than proportional to usage, so there would be winners and losers as with any redistributive taxation. Lower-income Americans driving older cars seem likelier to come out on the short end of that than wealthier consumers driving new cars that meet rising fuel economy standards.

Ultimately, we must ask why President Trump or his team would want to impose a new tax on US consumers and businesses to address a problem that has probably just become an even lower priority for them than it was. Notwithstanding Mr. Trump's demonstrated unpredictability, the simplest answer seems to be that he wouldn't.

US Energy Under Trump

• President-Elect Trump and his appointees plan a major policy and regulatory shift for energy, focusing more on economic benefits and less on environmental impacts.
• Obama-era regulations most at risk of roll-back are those justified mainly on climate concerns not shared by Mr. Trump and his team.
• Emissions are still likely to fall in the next four years as shale and renewable energy output grow. 

Next week's presidential inauguration will trigger the biggest policy and regulatory shift for the US energy industry in at least ten years. That's how long it has been since energy policy was set by a Republican president and Congress. Donald Trump is a different kind of Republican, though, and his goal does not seem to be a return to scarcity and high energy prices. What should we expect, instead?

To gauge how sharply the energy polices of the incoming Trump administration will diverge from those of the last eight years, we need to understand what motivates both leaders. The Obama administration's approach was driven by a deep, shared conviction that climate change is the most important challenge the US--and world--faces. The cost of energy and its impact on the economy became secondary concerns, subordinated by the belief that the added cost of climate policies would be offset in whole or part by the benefits of the green investment they unleashed--remember "green jobs"?

We saw this in President Obama's first year in office. Amid a deep recession he worked with Congress to attempt to limit greenhouse gas emissions by means of an economy-wide cap-and-trade system, on which he had campaigned. The House of Representatives passed the Waxman-Markey bill (HR.2454), a veritable dog's breakfast of economic distortions. Yet despite a filibuster-proof majority in the Senate in 2009, Waxman-Markey and every subsequent cap-and-trade bill died there.

That failure set in motion the agenda that the Obama administration has pursued ever since, to achieve via regulations the emissions reductions it could not deliver through comprehensive climate legislation. Last year's publication of the EPA's final Clean Power Plan was a key component of an effort that seems set to continue until just before Inauguration Day.

The transformation of energy regulations under President Obama was dramatic enough that a transition to any Republican administration would be a big change. The transition now in prospect will be even more jarring. Mr. Trump's rhetoric and his choices for key administration positions point to a concerted effort to unravel as many of the Obama-era regulations affecting energy as possible. That isn't just based on philosophical differences over regulation and markets. For President-Elect Trump the economy and jobs are paramount, so the Obama energy regulations must look like an unjustifiable threat to the fossil fuel supplies that still meet 81% of the nation's energy needs.

Despite that, it is unlikely the new administration will go out of its way to target renewable energy or the tax credits that have driven its growth to date. Renewables are becoming increasingly popular with conservatives. However, because Mr. Trump sees climate change as, at best, a secondary issue that may not be amenable to human intervention, his administration's won't put renewables on a pedestal as the Obama administration has done.

The biggest challenge for renewable energy may come from tax reform intended to make US companies and factories more competitive globally and shrink the incentive for them to relocate to lower-tax countries. This appears to be a high priority for the new White House and Congress, and one on which they broadly agree. If corporate tax rates drop, the value of the tax credits renewables enjoy is likely to fall, too, making wind, solar and other such projects less attractive and less competitive.

It remains to be seen how many of the Obama energy regulations can be rolled back. The most recent regulations might be averted through legislation like the Midnight Rules Relief Act, or the REINS Act, both of which would update the Congressional Review Act, a rarely used 1990s law intended to limit what presidents could impose by last-minute executive actions. Other regulations may eventually stand or fall as the courts rule. The stakes are high, particularly for regulations affecting the production of oil and gas from shale by means of hydraulic fracturing and horizontal drilling.

Energy independence was a touchstone of Mr. Trump's candidacy. Despite his campaign's focus on coal, it is fracking, as hydraulic fracturing is more commonly known, that holds the key to achieving that goal in the foreseeable future. It has been the main driver of the growth in US energy production since 2010.

The latest long-term forecast from the US Energy Information Administration (EIA) puts energy independence within reach--in the sense of the US becoming a net exporter of energy--by 2026 or sooner. However, the recent flurry of regulations affecting such things as drilling on federal land, and putting large portions of US waters off-limits for offshore drilling would not have been part of that projection. As EIA Administrator Adam Sieminski remarked at a briefing on the forecast, "If you had policy that changed relative to hydraulic fracturing, it would make a big, big difference to everything that's in here."

That's a key point, because most past notions of energy independence assumed that energy prices would have to be very high to promote lots of efficiency and conservation and stimulate large amounts of expensive new supply. The shale revolution changed that.

However, the global context is also changing. OPEC is attempting to reassert its control over the oil market, with help from non-OPEC countries like Russia. Two years of low oil prices shrank global oil and gas investment budgets by around a trillion dollars, and the International Energy Agency has warned of coming oil price spikes as a result. Forestalling tighter US regulations on fracking and offshore drilling increases the chances that US supplies could grow by enough to balance shortfalls elsewhere and avert much higher prices at the gas pump.

Energy infrastructure is likely to be another focus of the new administration, because the economic and competitive benefits of abundant energy will be diluted if, for example, Marcellus and Utica shale gas or Bakken and Permian Basin shale oil have to be exported because domestic customers don't have access to them.

That suggests an early effort to reverse decisions by the current administration to block the construction of various pipelines, starting with the Keystone XL pipeline and more recently the Dakota Access Pipeline. That will force new confrontations with activists and environmental organizations that have raised their game to a new level in the last eight years.

Such opposition would likely intensify if the new administration sought to withdraw the US from the Paris climate agreement, which recently went into effect, or submitted it for review by the US Senate as a treaty. But it's not clear that a big change in direction would require leaving Paris.

The US commitments at Paris, like those of the other signatories, were voluntary and non-binding. For that matter, recent shifts in US energy consumption and especially electricity generation have put the US in a good position to meet its initial Paris goals with little or no additional effort, as noted by outgoing Energy Secretary Moniz. The Paris Agreement will only become a major point of contention if President Trump chooses to make it one.

In his list of the top energy stories of 2016, fellow blogger Robert Rapier rated the election of Donald Trump ahead of the OPEC deal and many other important events of the year, based on its likely impact on "every segment of the US energy industry." In retrospect that was equally true of Barack Obama's election in 2008. The shift we are about to experience on energy will be that much sharper, because President Obama and President-Elect Trump both set out to make big changes to the status quo for energy, in opposite directions. We shouldn't miss one important difference, however.

The course that Barack Obama's administration followed on energy was largely predictable from the start, because it was based on openly and deeply held beliefs about energy and the environment. Donald Trump's well-known preference for deals over dogma sets up the prospect of some big surprises, in addition to what we can already anticipate.