Donald Trump vs. OPEC

As of last week's price report from the US Energy Information Administration, the average US pump price of regular gasoline has gone up by $0.19 per gallon since the first week of March. That reflects normal seasonal factors but is mainly due to a jump in international crude oil prices of around $8 per barrel in the same period. President Trump's accusation that OPEC is responsible for rising fuel costs shouldn't have surprised anyone:

Last Friday's tweet prompted a quick retort from Saudi Oil Minister al-Falih: "there is no such thing as an artificial price." It doesn't require a deep study of OPEC or economics to conclude that, however phrased, Mr. Trump's remark was closer to the truth than his chosen foil's reply on this issue.

The more interesting question is whether OPEC's very intentional efforts in conjunction with Russia to tighten oil markets are actually harmful to US interests at this point. Could our instinctive reaction to rising oil prices be based on outdated thinking from the long era of perceived scarcity that began with the oil crises of the 1970s and ended, more or less, with this decade's US shale boom?

Let's recall that less than four years ago oil prices fell below $100 per barrel as the rapidly growing output of US shale, or "tight oil" production from wells in North Dakota and South and West Texas created a global oil surplus and rising oil inventories. Oil prices went into free fall around the end of 2014--eventually bottoming out below $30 per barrel--after Saudi Arabia and the rest of OPEC abandoned their output quotas and opened up the taps.

That response to the shale wave began the only period in at least four decades when the oil market could truly be characterized as free, when all producers essentially pumped as much oil as they desired. Some referred to it as OPEC's "war on shale."

However, those conditions proved to be just as hard on OPEC as on US shale producers, and by the end of 2016 OPEC blinked. The output agreement between OPEC's members and a group of non-OPEC producing countries led by Russia has been in place over a year, and it has taken this long to dry up the excess inventories that had accumulated in 2015-16. OPEC's quota compliance--historically mediocre at best--was aided significantly by geopolitical factors affecting several producers, notably the ongoing implosion of Venezuela's economy and the oil industry on which it depends.

Given all this, it's fair to say that OPEC has engineered today's higher oil prices, while its leading members contemplate even higher prices. It's much less obvious that this is bad for the US, which now has a vibrant and diverse energy sector and is finally approaching the energy independence that politicians have touted since the late 1970s.

Prior to the shift in the focus of the shale revolution from natural gas to oil, the US was still a substantial net importer of petroleum and its products. In 2010, we imported over 9 million barrels per day more than we exported. That was around half of our total petroleum supply. Today, these figures are under 4 million barrels per day and 20%, respectively.

That means that when the price of oil rises, this is no longer followed by enormous outflows of dollars leaving the US to enrich Middle East and other producers. Something like 80 cents of every dollar increase in the price of oil stays in the US, and in the short run the effect may be even more beneficial as investment in US production steps up in response.

In other words, when oil prices go up and gasoline and diesel prices follow, the main effect on the US economy is to shift money from one portion of the economy to another, rather than the whole economy springing a large leak. What makes that shift challenging is that consumers come out on the short end, while oil exploration and production companies, and to some extent oil refiners, gain.

A useful way to gauge the impact on consumers is to compare one year's prices to the previous year's. When oil prices were falling a few years ago, year-on-year drops of as much as $1.00 per gallon for gasoline (2014-15) put up to $100 billion a year back into the pockets of consumers. That provided a timely stimulus for an economy still recovering from the financial crisis of the previous decade.

As oil prices started to recover last year, these comparisons turned negative. Currently, the average regular gasoline price is $0.31/gal. higher than last year at this time. If gas prices were to stay that much higher than last year's for the rest of 2018, it would impose a drag of about $45 billion on consumer spending. $2.75/gal. is the highest US average unleaded regular price for April since 2014. Although gas is still nearly $1.00/gal. cheaper than it was then, memories tend to be short.

We may be living in a new era of energy abundance, but I am skeptical that our political instincts have caught up with these altered circumstances. The price of gasoline is still arguably the most visible price in America. When it goes up week after week, consumers notice, even in an economy running at essentially "full employment" and growing at 3% per year.

Most of those consumers are potential voters, and this is another election year with much at stake. In that light, I would not expect President Trump to abandon his attack on "artificial prices" for oil, even if it's arguable that the US economy as a whole may not be worse off with oil over $70 instead of below $60 per barrel.

Should the US Energy Future Depend on Cheap Solar Imports?

The pending administration decision on whether to impose a tariff or other fee on US imports of solar equipment from China raises serious concerns. The right choice in this case is less obvious than suggested by the jobs and free-trade arguments from the main US solar trade association (SEIA) or the Wall St. Journal's editorial page. Solar power generates less than 2% of US electricity today. However, if it is to grow as experts forecast and advocates claim is essential, then considerations such as long-term energy security can't be ignored, while near-term job losses from a new tariff would be more than offset by subsequent growth.

Last October the US International Trade Commission issued its recommendations in favor of the complaint by two US manufacturers of solar panel components. I usually favor low tariffs and open access, especially when the markets in question are functioning smoothly and the principal impacts from trade are the result of "comparative advantage" in production or extraction between countries. However, there is little about the market for solar equipment, including the photovoltaic (PV) cells and modules at issue here, that qualifies as free.

The production and deployment of solar energy hardware has depended since its inception, and from one end of its value chain to the other, on significant government interventions. In the case of China-based PV manufacturing, these have included low-interest government loans, preferential access to land, and minimal environmental regulations. China-based PV manufacturers were also able to take advantage of extravagantly generous European solar subsidies in the 2000s to scale up their output, drive down their costs, and ultimately send much of the EU's solar manufacturing industry into bankruptcy.

On the US end, both solar manufacturing and deployment (installation) have benefited greatly from federal tax credits, cash grants from the US Treasury, and a web of state quotas for aggressively increasing utilization of renewable energy sources. Justified on grounds of energy security, "green jobs", and climate change mitigation, these measures have strongly promoted solar power and  delivered an extraordinary 68% compound annual growth rate in US solar installations since 2006. On a per-unit-of-energy basis, these supports are also at least an order of magnitude more valuable to the solar industry than the federal tax benefits received by the oil and gas industry.

One of the factors that makes this decision so difficult and politically sensitive is that a whole industry has apparently grown up around cheap solar imports, to the point that the main solar benefit to the US economy today is from installation, not manufacturing. US companies and their employees build solar panel racks and other "balance of system" gear, finance rooftop and other solar projects, and construct these installations.

These companies could be at risk of losing business and shedding jobs, if a large tariff were imposed on imported solar cells, modules and panels. Those impacts might be less than feared, though, because the cost of the actual sunlight-converting PV hardware now makes up less than a third of total solar project costs. In other words, a tariff that doubled effective PV cost would drive up total solar costs to a much smaller degree, and least of all for residential solar, which has the highest total costs per kilowatt.

There's another important aspect of this debate that hasn't received much attention. If solar power is as important to our future energy diet as many think, then it should be no more desirable to become heavily reliant on China for our supplies of PV components than it did to depend on growing imports of Middle East oil. That was the main energy security issue for the US for the last 30 years, until the shale revolution unexpectedly reversed that trend. Relying on solar imports from China in the long run will be nothing like depending on Canada for the largest share of the petroleum the US still imports.

It also makes sense to address this situation now, before solar power has grown to 20% or 30% of the US electricity mix, and with the US economy near full employment, when those workers that did lose their jobs would have the best chance to replace them quickly.

From the start, the complaint of unfair competition lodged by Suniva Inc. and Solar World Americas--Chinese- and German-owned, respectively--has been derided as an effort to prop up a couple of marginal players at the expense of the much larger US solar-installation sector. That ignores the position of First Solar (NASDAQ:FSLR), a US-based PV manufacturer with $3 billion in global sales. The company is on record supporting the trade complaint. Of course they aren't a disinterested party; they stand to benefit from a tariff that would raise the cost of competing PV gear from China and elsewhere.

That's precisely the point of the complaint: strengthening US solar manufacturers, so that the growth of solar energy in this country doesn't end up like TV sets and other consumer electronics. There's more at stake, because PV isn't TV. If solar power becomes a major part of US energy supplies by mid-century, it will actually matter if we have a robust manufacturing base to drive its deployment, rather than relying on any one country or region for its key building block.

Iran and Oil Prices in 2018

The turn of the year brought the usual year-end analyses of energy events, along with predictions and issues to watch in the year to come. I tend to focus on tallies of risks and large uncertainties. There's no shortage of those this year, and the current unrest in Iran moves the risks associated with that country higher up the list, at least for now.

The implications of instability in Iran extend well beyond oil prices, but let's focus there for now. The sources of instability include both the internal economic and political concerns apparently behind the protests, as well as US-Iran relations and the fate of the Iran nuclear deal and related sanctions.

As former Energy Department official Joe McMonigle noted, a decision by President Trump to allow US sanctions on Iranian oil exports to go back into effect could remove up to one million barrels per day of crude oil from the global market. He sees the protests making the reinstatement of sanctions likelier. Whether that would lead directly to much higher oil prices is harder to gauge.

A little history is in order. Sanctions on Iran, including those covering the receipt of Iranian oil exports, were one of the main tools that brought its government to the nuclear negotiating table. For a roughly three-year span beginning in late 2011, international sanctions reduced Iran's oil exports by more than one million barrels per day, at a cumulative cost exceeding $100 billion based on oil prices at the time. The effectiveness of those sanctions was also enhanced by the rapid growth of US oil production from shale. 

Starting in 2011, expanding US "tight oil" production from shale began to reduce US oil imports and eased the market pressures that had driven oil back over $100 per barrel as the world recovered from the financial crisis and recession of 2008-9. In the process, shale made it possible for tough oil sanctions to be imposed on Iran and sustained without creating a global oil price shock.

Instead, oil prices actually declined over the period of tightest sanctions. By 2014 US oil output had grown by more than Iran's entire, pre-sanctions exports and cut US oil imports so much that OPEC effectively lost control of oil prices. Seeking to drive shale producers out of the market, OPEC's leadership switched tactics and attempted to flood the market, driving the price of oil briefly below $30. That cut even further into Iran's already-reduced oil revenues and put the country's leadership in an untenable position, forcing them to negotiate limits on their nuclear program. 

If Iran's oil exports were to drop again this year, for whatever reason, the impact on oil prices would depend on the extent to which the factors that allowed us to absorb such a curtailment just a few years ago have changed. One measure of that is that after several years of painfully low prices--at least for producers--the price of the Brent crude global oil benchmark is now well over $60. Yesterday it flirted with $68/barrel, a three-year high. 

That recovery is the result of a roughly 18-month slowdown in US oil production in 2015-16, an agreement between OPEC and key non-OPEC producers like Russia to cut output by around 1.2 million barrels per day, and production problems in places as diverse as Venezuela and the North Sea.

These events have largely put the oil market back into balance and worked off much of the excess oil inventories that had accumulated since 2014. Commercial US crude oil inventories, which are among the most transparently reported in the world, have fallen 100 million barrels since their peak last spring. However, they remain about 100 million barrels above their typical pre-2014 levels. 

Viewed from that perspective, a reduction in supply from any source might be exptected to send prices higher. However, although global oil demand is still growing, we should realize that today's tighter oil market is largely the result of voluntary restraint, rather than shortages. Potential production increases from the rest of OPEC, Russia and the US could more than compensate for another big drop in Iran's oil exports.

In particular, US shale output has been climbing again for the last year, boosted by rising prices and the amazing productivity of the venerable Permian Basin of Texas. Meanwhile, production from the deepwater Gulf of Mexico is also increasing as projects begun when oil was still over $100 reach completion. In its latest forecast the US Energy Information Administration projected that US crude production will reach an all-time high averaging 10 million barrels per day this year. Despite that, US shale producers still have thousands of "drilled-but-uncompleted" wells, or DUCs, waiting in the wings. 

So, short of instability in Iran morphing into a regional conflict involving Saudi Arabia and the other Gulf producers, oil prices might drift higher but would be unlikely to spike anywhere near $100. And that's without factoring in the scenario suggested by the Financial Times' Nick Butler, who proposes that the Iranian government might choose to break the OPEC/Russia deal and increase their oil exports, in order to boost their economy and mollify the protesters, thereby shoring up the regime. 

The last point brings us back from a narrow focus on oil prices to larger geopolitical uncertainties. As a noted Iran expert at the Council on Foreign Relations recently observed, Iran's religious government faces challenges similar to those that led to the collapse of the Soviet Union.

It's far from clear that 2018 will be Iran's 1989, or that President Rouhani is capable of becoming his country's Mikhail Gorbachev. Yet surely the 2015 nuclear agreement was a bet by the US and its "P5+1" partners that Iran would be a very different nation by the time its main provisions start to expire in the next decade. The whole world would win if that prediction came true.

On that note I'd like to wish my readers a happy start to the New Year. My top resolution is to post here more frequently and more regularly than in 2017. 

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.