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.

US Energy Independence in Sight?

• The data analysis arm of the US Department of Energy is forecasting that despite low oil prices, the US will become energy independent within a decade. 
• That result depends on frugality as much as resource abundance, and it includes substantial volumes of energy trade with the rest of the world.

The US Energy Information Administration's latest Annual Energy Outlook features the key finding that the US is on track to reduce its net energy imports to essentially zero by 2030, if not sooner. That might seem surprising, in light of the recent collapse of oil prices and the resulting significant slowdown in drilling. EIA has covered that base, as well, in a side-case in which oil prices remain under $80 per barrel through 2040, and net imports bottom out at around 5% of total energy demand. Either way, this is as close to true US energy independence as I ever expected to see.

It wasn't that many years ago that such an outcome seemed ludicrously unattainable. I recall patiently explaining to various audiences that we simply couldn't drill our way to energy independence. The forecast of self-sufficiency that EIA has assembled depends on a lot more than just drilling, but without the development of previously inaccessible oil and gas resources through advanced drilling technology and hydraulic fracturing, a.k.a. "fracking", it couldn't be made at all. The growing contributions of various renewables are still dwarfed by oil and natural gas, for now.

Every forecast depends on assumptions, and it's important to understand what would be necessary in order for conditions to turn out as the EIA now expects in its "reference case", or main scenario. This includes a gradual but pronounced oil-price recovery, to average just over $70/bbl next year, $80 within five years, and back to around $100 by the end of the 2020s. That helps support a resumption of oil production growth next year, followed by a plateau just above 10 million bbl/day--surpassing 1971's peak output--for the next decade and a gradual decline thereafter. EIA also expects natural gas prices to head back towards $5 per million BTUs by the end of this decade, in tandem with a further 34% expansion of US gas production by 2040.  

However, attainment of zero net imports also depends on the continuation of some important trends, including energy consumption that grows at a rate well below that of population, and a continued decoupling of energy and GDP growth. This is crucial, because through 2040 EIA assumes the US population will grow by another 20% and GDP by 85%, while total energy consumption increases by just 10%. That has important implications for greenhouse gas emissions, too. Energy-related emissions barely grow at all in this scenario.

Renewable energy output is also expected to continue growing, with US electricity generated from wind surpassing that from hydropower in the late 2030s and solar power in 2040 yielding roughly as many megawatt-hours as wind did in 2008.

Finally, reaching a balance between US energy imports and exports also depends on the continued contribution of nuclear power at roughly current levels. That suggests that new reactors in other locations will replace those that are retired, including for economic reasons.

In last month's rollout presentation at the Center for Strategic & International Studies (CSIS) in Washington, EIA Administrator Sieminski also emphasized what is not included in the Outlook's assumptions, notably the EPA's "Clean Power Plan" that is currently under review.  It would be hard to imagine US coal consumption remaining essentially unchanged at 18% of the total energy mix in 2040, if EPA's plan to reduce emissions from the electricity sector by 30% by 2030 were fully implemented. EIA will apparently issue its analysis of the impact of the Clean Power Plan this month.

It's also worth comparing EIA's view of zero net energy imports with popular notions of what energy independence. It certainly does not mean that the US would no longer import any oil, natural gas, or other fuels from other countries. Even as the US approaches zero net imports, routine imports and exports of various energy streams will remain necessary to address imbalances between regions and fuel types.

Because EIA's forecast is predicated on current laws and regulations, it does not include any significant growth in oil exports. As a result, exports of refined products such as propane, gasoline and diesel fuel would continue to expand, eventually exceeding 6 million bbl/day gross and 4 million net of imports. In its "High Oil and Gas Resource" case the constraint on US oil exports forces an expansion of refined product exports that seems nearly incredible when refinery capacity in Asia and the Middle East is also slated for expansion, while refined product demand growth slows globally. Perhaps this is EIA's subtle way of focusing attention on the US's outdated oil export regulations. 

Exports of liquefied natural gas (LNG) would also take off, accounting for around 9% of US production by 2040, while imports of pipeline gas from Canada would shrink but not disappear. In the high resource case, US LNG exports would grow dramatically until the late 2030s, reaching 20% of a much bigger supply.

The report provides a few surprises, including one that won't be welcomed by advocates of biofuels and a continuation of the current federal Renewable Fuels Standard, the reform of which has gradually become a topic of lively debate in the US Congress. EIA's figures show total US biofuel consumption growing by less than 1% per year, with ethanol's only real growth coming in the form of a modest increase in sales of E85, a mixture of 85% ethanol and 15% gasoline, to around 3% of gasoline demand in 2040.

Overall, I'm struck by several things. First, the value of the EIA's forecasts comes mainly from identifying the implications of current trends and policies, rather than accurately predicting the future. Administrator  Sieminski seemed appropriately humble about the latter task in his remarks at CSIS. Yet the reference case this time suggests an eventual reversion to pre-oil-crash conditions, ending in 2040 at the same oil price in 2013 dollars as last year's forecast--a level that would exceed the 2008 peak by a sizeable margin. That seems inconsistent with a world of expanding energy options, improved drilling efficiency, at least for shale, and a growing focus on the decarbonization of energy.

There also appears to be a disconnect between the forecast's rising real price of natural gas, with implications for the cost of electricity generation, and its virtual flatlining of solar power's expansion after the scheduled expiration of the current solar tax credit in 2016. This looks like a bet against further solar cost reductions and technology improvements, along with structural changes that are already occurring in some electricity markets.

Despite these reservations, I wouldn't dispute the headline finding of steady progress toward a version of US energy independence featuring large volumes of energy trade with both North America and the rest of the world. The combination of resource growth and steady energy efficiency improvements looks like a recipe for finally putting the US on an energy footing that politicians of both major parties have only dreamed of for the last 40 years.

 

A different version of this posting was previously published on the website of Pacific Energy Development Corporation

2012: The Year in Energy

As in most recent years, energy was constantly in the news in 2012. A post attempting to catalog every noteworthy story or event would be quite long.  However, a few big trends stand out. For starters, it's a near-certainty that the average US gasoline price will set a new record for the second year running, in both real and nominal terms. Americans are responding by choosing more fuel efficient cars. Meanwhile, fundamental shifts emerged from obscurity into the awareness of policy makers and the public.  US energy exports have become a mainstream topic of conversation, and the goal of energy independence--a concept with debatable meanings--has acquired renewed respectability after spending a couple of decades on the fringes of energy policy debate.  Perhaps more significantly, our views of climate change and future oil supplies--once aligned--have diverged. 

For renewable energy it has been the best and worst of years.  Global overcapacity in solar equipment manufacturing drove down the costs of solar panels, at least partly counteracting reductions in government incentives, especially in Europe, and making solar power more competitive.  The US is on track to add a record 3,200 MW of solar capacity this year, while China could add 5,000 MW.  However, solar manufacturers' rapid expansion depressed their margins and extended last year's string of solar bankruptcies, with firms like Abound Solar, Konarka, Solarwatt, Q-Cells and others forced to restructure or liquidate in 2012.  A similar, if less dramatic wave is working through the more mature onshore wind industry, which faces the expiration of a key US incentive, the Production Tax Credit, or PTC on December 31.  In anticipation of that loss, wind developers have added 4,728 MW of new capacity in the US through the first three quarters of 2012, the most since 2009.

Energy played a complex and possibly decisive role in the US presidential election.  Remarkably, President Obama successfully co opted his opponent's energy platform by embracing an oil and gas revival that his administration had done little to help and much to hinder, even though it appeared to conflict with his emphasis on renewable energy and climate change mitigation.  Meanwhile, the shale gas revolution was creating hundreds of thousands of direct and indirect jobs and lowering energy costs across the economy, contributing to US manufacturing competitiveness.  The resulting economic growth, while still below the level of other post-war recoveries, apparently helped the President make his case for a second term.

The inherent tension between surging US oil and natural gas production and concerns about climate change--fanned by Hurricane Sandy--reflects a major shift that occurred this year, at least as an influence on future energy policy.  Recall that until recently, memories of past energy crises, combined with the influential Peak Oil perspective, shaped our expectations of resource availability and future production.  This narrative of hydrocarbon scarcity complemented prescriptions for a rapid transition away from fossil fuels as the only viable solution to climate change, supporting a shared goal of a more sustainable energy economy based on renewable energy, smart grids and electric vehicles.   The exploitation of unconventional oil and gas resources in previously inaccessible source rock--shale gas and "tight" or shale oil--poses significant challenges to both strands of that argument.

First, it undermines the notion of energy scarcity for at least the next decade, and probably well beyond.  US natural gas production set a new record this year, and US oil production returned to levels not seen since 1997, putting increased pressure on OPEC's control over global oil pricing. Nor does the US have a monopoly on these unconventional resources. Canada looks like the next big shale gas play, with China and South Africa possibly not be far behind.  The technologies that enabled the US shale gas revolution and its oil offspring are being transferred around the world.

Yet we also learned that US energy-related CO2 emissions have fallen back to 1992 levels, largely because of a dramatic reduction in the use of coal in power generation.  While renewable energy sources like wind and solar power deserve some of the credit, natural gas-fired turbines--driven by cheap shale gas--have added three times as much net generation since 2007 as non-hydro renewables.

Shale gas and oil might not provide a long-term solution to global warming, but they could at least buy us the time to develop the innovations like improved electric vehicle batteries and low-cost grid-storage that will be necessary if renewables are to displace fossil fuels across the entire spectrum of their use--and dominance.  They could also provide the time to develop and deploy the next generation of nuclear power, including small modular reactors.

I'd like to thank my readers for your continued interest and encouragement and wish you a happy holiday season.

Are Films the Answer to Understanding Energy's Complexities?

The issues and choices surrounding our use of energy have rarely been more complex than today, yet our main channels for information about them are discouragingly shallow.  The web is often more effective at spreading misperceptions than fact-based analysis.  When our visual media focus on energy, it's usually to flash bad news before flitting on to the next story, leaving behind images of burning oil platforms or blacked-out cities.  One bright spot is the recent wave of documentary films on energy topics.  Films engage us on a deeper level, and the energy challenges we face deserve such longer-form treatment. August seems like a perfect time to suggest a few of them to you.  If you're reading this blog, then I'm betting you might at least consider watching a movie about energy instead of the latest summer blockbuster.   

Although it was hardly the first serious film about energy, the recent trend seemed to start with "Gasland". For all its inaccuracies, which have been documented by groups outside industry, that film helped start a national conversation about the right way to develop the enormous unconventional oil and gas resources that new combinations of technology have unlocked. In the spirit of making that dialog more constructive and even-handed, you should also know about two other documentaries covering the same topic and region from a different angle.  To many of the farmers and other landowners in depressed counties of New York and Pennsylvania, fracking is not a curse but an actual or potential lifeline. Seeing "Truthland" and "Empire State Divide" might not convert fracking skeptics into gas industry supporters, but it should at least fill in some of the gaps left by the "Gasland's" starkly one-sided portrayal of shale gas.

Another energy film I recently ran across, "spOILed", offers a timely reminder that despite oil's many problems it remains an essential ingredient of our global civilization, providing affordable mobility and a host of products that have made our lives much easier than those of our ancestors--or of people in countries that still lack reliable access to energy.  "spOILed" is also very much a movie about the dangers of Peak Oil, which envisions a world in which declining oil production, rising demand in developing countries, and geopolitical risks create persistent and growing shortages of oil.  This is particularly sobering when combined with a sense of just how challenging it will be to obtain the services that oil now provides from other energy sources.   Unfortunately, the film's message was undermined by occasionally jarring choices of visuals, some hyperbolic claims--no indoor plumbing without oil?--and by political overtones that might limit its effectiveness with the wider audience it appears to target. 

The energy film project that I'm most excited about is one aimed consciously at finding and cultivating "The Rational Middle" in the energy debate.  According to its director, Gregory Kallenberg, it started with a TED talk following his previous film, "Haynesville", which examined the impact of shale gas in Northern Louisiana.  As I understand it, the current project consists of 10 short videos on energy, four of which have been released on the group's website so far.  From the episodes I've seen, Mr. Kallenberg's team assembled an impressive group of experts, including Amy Myers Jaffe of the Baker Institute at Rice University, Michael Levi of the Council on Foreign Relations, former Energy Information Agency Administrator Richard Newell, and Dr. Michael Webber of the University of Texas. The series is being launched with a road show featuring panels of some of the same experts interviewed in the films, starting with a session at this year's Aspen Ideas Festival.  The films are focused on information and process, rather than on selling one point of view. Aside from a few assertions in a couple of interviews, the factual presentation in the initial videos was very sound.  I expect to have more to say about The Rational Middle as additional episodes become available. 

If the we are to develop effective energy policies for the 21st century, the public's desire for clean, secure, reliable and affordable energy must be grounded in facts and figures that help us to differentiate realistic expectations from wish fulfilment.   I'm encouraged that a growing number of filmmakers seems willing to explore energy issues in the depth they deserve, with production values that will connect with today's audiences, rather than turning them off. Enjoy!

Could Oil's Surge Sink Renewable Energy?

A new forecast of global oil production by the end of the decade attracted a fair amount of attention this week.  The study, from Harvard's Kennedy School of Government, indicates that oil production could expand by about 20% by 2020 from current levels.  The Wall St. Journal's Heard on the Street column cited this in support of the view that the influence of "peak oil" on the market has itself peaked and fallen into decline.  I was particularly intrigued by a scenario suggested in MIT's Technology Review that this wave of new oil supplies could trigger an oil price collapse similar to the one in the mid-1980s that helped roll back the renewable energy programs that were started during the oil crises of the 1970s.  That's possible, though I'm not sure this should be the biggest worry that manufacturers of wind turbines and solar panels have today.

The Harvard forecast is based on a detailed, risked country-by-country assessment of production potential, with the bulk of the projected net increase in capacity from today's level of around 93 million barrels per day (MBD) to just over 110 MBD coming from four countries: Iraq, the US, Canada and Brazil. However, the study's lead author, former Eni executive Leonardo Maugeri, sees broad capacity growth in nearly all of today's producing countries, except for Iran, Mexico, Norway and the UK.  Although this is certainly a diametrically opposed view of oil's trajectory than the one promoted by advocates of the peak oil viewpoint, it is accompanied by the customary caveats about political and other risks, along with new concerns about environmental push-back.  The latter point is particularly important, since much of the expansion is based on what Mr. Maugeri refers to as the "de-conventionalization of oil supplies", based on the expansion of unconventional output from heavy oil, oil sands, Brazil's "pre-salt" oil, and the "tight oil" that has reversed the US production decline. 

Although this de-conventionalization trend is very real, it's one thing to envision a shift to an environment in which oil supplies could accommodate, rather than constrain global economic growth; it's another to see these new supplies bringing about an oil price collapse.  It's helpful in this regard to consider the three previous oil-price collapses that we've experienced in the last several decades.  The mid-1980s collapse is the one that Kevin Bullis of Technology Review seems to have latched onto, because much like today's expansion of unconventional oil, the wave of new non-OPEC production that broke OPEC's hold on the market was the direct result of the sharp oil price increases of the previous decade, after allowing for inherent development time lags. The analogy to this period looks even more interesting if the new Administrator of the Energy Information Agency of the Department of Energy is correct in speculating that the US government might be willing to allow exports of light sweet crude from the Bakken, Eagle Ford and other shale plays, to enable Gulf Coast refineries to continue to run the imported heavy crudes for which they have been optimized at great expense.  That could dramatically alter the dynamics of the global oil market.

However, I see two significant differences in the circumstances of the 1980s price collapse, compared to today. First, oil consumption was then dominated by a small number of industrialized countries, the economies of which were still much more reliant on oil for economic growth than they are today. Second, these economies were already emerging from the major recession of the late-1970s and early '80s--a downturn in which the 1970s' energy price spikes played a leading role.  For example, US GDP grew at an annual rate of 7.2% in 1984, the year before oil prices began their slide from the high $20s to mid-teens per barrel.  So when new supplies from the North Slope and North Sea came onstream, the market was ready and eager to use them.  Lower, relatively stable oil prices persisted for more than a decade. 

Current global economic conditions have much more in common with either the late-1990s Asian Economic Crisis or the combined recession and financial crisis from which we're still emerging.  Each of these situations included a short-lived global oil price collapse that ended when OPEC constrained output and the economy moved past the point of sharpest contraction.  The late-90s oil price collapse looks especially relevant for today, because increased production contributed to it.

A new factor that would tend to make any oil-price slump due to unconventional oil self-limiting is its relatively high cost.  Mr. Maugeri makes it clear that his output forecast depends on prices remaining generally above $70/bbl, and that any drop below $50-60/bbl would result in curtailed investment and slower expansion.  The picture that this paints for me is one in which new oil supplies would be there if we need them to meet growing demand but not otherwise.  That should narrow the implications of such an expansion for renewable energy.

As Mr. Bullis reminds his readers, the connection between oil and renewable energy is much more tenuous than many of the latter's proponents imagine.  The US gets less than 1% of its electricity supply from burning oil, so technologies like wind and solar power simply have no bearing on oil consumption, and vice versa.  That is less true outside the US, but the trends there are also moving in this direction.  So other than for biofuels, a steep drop in oil prices for any reason would have little impact on the rationale for renewables, except perhaps psychologically.  The two factors on which renewable energy investors and manufacturers should stay focused are the economy and the price of natural gas, against which renewables actually do compete and have generally been losing the battle, recently. 

Time will tell whether the Harvard oil production forecast turns out to be more accurate than other, more pessimistic views.  Yet while a drop in oil prices due to expanding supply wouldn't do any good for renewables, the single biggest risk the latter face is the same one that would be likeliest to trigger a major oil price collapse: not surging unconventional oil output, the impact of which OPEC will strive hard to manage, but a return to the kind of weak economy and frozen credit that we should all be able to recall vividly.  If anything, the consequences for renewables from that risk look much bigger today than a couple of years ago, because of the global overcapacity in wind turbine and solar panel manufacturing that built up as the industry responded to policy-induced irrational exuberance in several key markets.

Energy Crisis Prices Persist

Watching oil prices is a hard habit to break, once formed. They're always moving up and down, sometimes for obvious reasons and sometimes not. It has probably escaped most observers' notice that the magnitude of this year's price moves has exceeded the total nominal price of oil that prevailed not many years ago, yet without the sort of apocalyptic events that one might expect such volatility would require. Perhaps that's because we seem to be stuck in the middle of an ongoing, slow-boil oil crisis from which the financial crisis and the demand contraction that accompanied the global recession only provided a brief respite. In fact, when you glance at the oil price trend in real dollars over the last 40 years, it's apparent that prices are back at the level associated with the peak of the oil crisis of the late 1970s and early 1980s:


One reason I've been paying extra attention to oil prices lately is that I've been observing the impact of the coordinated release from the US Strategic Petroleum Reserve (SPR) and strategic reserves of other members of the International Energy Agency. So far, my initial assessment that it would have little lasting effect seems to have been validated, though I'll reserve judgment until the oil is actually delivered during August, when we might see the market respond to the increase in commercial oil inventories that should result. Robert Rapier had an excellent posting yesterday on the folly of this decision. My view is, if anything, less flattering. Not only was this choice unwise, but it also appears to have been ineffective, which in the current economic climate is an even more damning assessment.

The modest response to this move tells us something about the fundamentals of the market. In the past, an SPR release on this scale would have crushed prices--not just for a few days, but for months at least. Consider the release that accompanied the start of the first Gulf War in 1991. Only about half of the nearly 34 million bbls authorized was eventually sold, but the price of oil dropped by 33% overnight and took 13 years to recover to the peak it had reached during the lead-up to Desert Storm. By comparison, the announced release of 30 million bbls from the US SPR--the sale of which was fully-subscribed--and another 30 million bbls from other IEA members managed to depress the price of oil by only around 5% for a week or so. As of this morning Brent crude, the global marker, is $4/bbl higher than it was on June 22nd. And as of this Monday's survey, the average pump price of unleaded regular in the US was also higher than before the President announced the release.

The market's tepid reaction to the SPR release suggests that oil prices have been driven up by more than just speculators. Speculation may be playing a role, but it's more like the head on a glass of beer. Beneath that froth lies the robust demand growth in the developing world, which has pushed global oil consumption to a record level of 89 million bbl/day this year. On the supply side, some point to incipient Peak Oil, but characterizing the crisis we're in doesn't require a grand theory. In addition to the curtailment of production from places like Libya and Yemen, and OPEC's desire to keep a lid on output to preserve their revenues, there's a fundamental mismatch between the companies that have the capital and the desire to invest in new production, and the willingness of some governments to grant access to the resources, whether in the Middle East or the US. All of this is compounded by the inherent time lags in resource development, which can range from 5-10 years, depending on the technology and permits required.

As different as the causes and symptoms of this crisis are from those of the 1970s, the broad outline of solutions remains quite similar: Reduce demand, increase supplies, and diversify our sources of energy. We have more and better options than in 1979, but still no miracle cures.

Where's the Peak?

I've been going through the International Energy Agency's new forecast for medium-term oil and natural gas markets, issued yesterday. In contrast to the IEA's warnings of last summer concerning an imminent oil supply crunch, the agency now sees ample supplies to accommodate the level of demand growth it anticipates for the next five years. Yet while this scenario does not envision a peak in global oil supplies before 2015, its components offer ample cause for concern about the growing market power of OPEC and the risk of geopolitical disruptions. It also signals the growing importance of non-traditional sources of liquid fuels, including natural gas liquids (NGLs) and biofuels, which are included in the IEA's oil supply & demand balance.

The headline features of the IEA's oil forecast include continued growth in global oil capacity from 91 million barrels per day (MBD) in 2009 to 96.5 MBD in 2015. This is driven by the growth of OPEC's capacity, the NGL output of a global natural gas expansion that the US shale gas boom has accelerated, and increased production of ethanol and other biofuels. IEA sees this combination as more than sufficient to counteract a roughly 3.5% annual decline in the output of existing oil fields, including a peak and net decline in non-OPEC production within the next year or two. The latter won't surprise anyone who's been following the Peak Oil issue, but it's all the more worrying when you consider that it doesn't include the impact of project delays owing to the on-again, off-again US deepwater drilling moratorium, which the administration seems determined to switch back on.

This picture is fraught with risks and vulnerabilities, including the prominent role of Iraqi oil revitalization projects, which appear to account for half of the growth in OPEC crude oil capacity in the period. Although there's ample scope to stimulate more output from Iraq's mature fields, and the potential of its undeveloped fields represents the largest conventional oil opportunity in the world, none of it will come to fruition if the county doesn't remain quasi-stable. This might be one area in which the reassignment of General Petraeus to Afghanistan from his CentCom post, where he retained oversight of the Iraq security situation, might not look so positive.

Then there's that shift toward NGLs and biofuels, including the IEA's somewhat surprising prediction that while biofuels will continue to grow globally, the rate of growth will slow, with US output reaching a plateau long before it has attained the targets of the Renewable Fuels Standard. They also appear to be even more skeptical than I am that cellulosic ethanol is on the verge of scaling up rapidly. The larger problem is that both of these sources constitute what I would call "hamburger helper" for oil. Neither ethanol nor first-generation biodiesel (FAME) constitutes an effective gallon-for-gallon substitute for petroleum products, except in blends limited by both infrastructure and legacy vehicle fleets not equipped to handle more than small percentages of these fuels. NGLs provide propane and butane essentially indistinguishable from crude-sourced LPG and just as useful for petrochemicals and heating fuel, but they yield much less in the way of gasoline components, and the ones they do require significant processing to boost their octane, now that tetra-ethyl lead is out of the picture.

On the demand side, things look pretty much as we'd expect in the aftermath of a global recession that hit the developed world harder than the big developing countries--BICs, if not BRICs. As was true before the financial crisis, however, the Middle East contributes the second-biggest source of new demand, after Asia. That means continued growth in domestic demand within some of today's largest oil exporters. Even if that doesn't lead to "peak exports", it buttresses the fundamental shift in global market power underpinning a forecast that might otherwise appear calming to markets.

Anyone looking to the IEA for signs of an imminent peak in global oil supplies won't find it in their Medium Term Oil and Gas Markets 2010 report. What I see instead is a continuation of the world we are already in, with OPEC holding the trump cards. Traders tend to focus on the weekly fluctuations of oil market inventories and indications that supply or demand may grow or shrink in the months and years ahead. Yet while the release of this report, together with another build in US crude inventories this week, reportedly contributed to the $2/bbl drop in oil prices in the last two days, these reactions seem oblivious to a larger reality. With more than 5 million barrels per day of OPEC production capacity shut in, the main reason that oil is trading in the mid-to-high $70s, rather than the mid-to-high $40s, is that OPEC is functioning as a truly effective cartel that is much happier with higher prices. Politicians looking for another economic stimulus might consider the anti-stimulus that oil prices are currently providing, and the consequences of policies that could hand even more power to OPEC in the short-to-midterm.

A Self-Fulfilling Bet on Biofuels?

An article in today's Financial Times (registration required) raises a worrying possibility concerning the plans of the US and other oil-consuming countries to rely on biofuels for an increasing fraction of future fuel needs. What if oil-producing countries took those plans seriously and reduced their investment in new oil capacity, on the assumption that it wouldn't be needed? In some respects, that's exactly what we have in mind. However, if biofuels then failed to materialize in sufficient quantities to fill the gap between oil supply and total fuel demand, or proved to be economically or environmentally unsustainable, then we might inadvertently create precisely the sort of crisis these efforts were intended to avert. It would be easy to dismiss this argument as OPEC-inspired propaganda, if global oil production didn't require enormous ongoing investments to counteract the natural decline rates of producing fields, and if producing-country governments weren't already under internal pressure to spend their oil profits on programs other than reinvesting in future production.

The good news here is that biofuels have reached a scale at which they actually matter in the global oil supply and demand balance. That wasn't the case during the oil crises of the 1970s, and they were still only a marginal factor when oil prices last peaked in 2008. The latest publicly-available issue of the International Energy Agency's Oil Market Report indicates that biofuels now contribute the equivalent of 400,000 barrels per day (bpd) of oil, before including US and Brazilian ethanol volumes that together equate to another 650,000, bringing the global total to just over a million bpd. That might not sound like a large share of a total market of 85 million bpd, but it's enough to influence the global price of oil, which is set at the margin. Doubling or tripling biofuel output would certainly cost oil producers money, if they ignored this factor in their capacity planning.

So far, this is only a problem for oil producers. It becomes a problem for the rest of us when the biofuel plans and targets of consuming countries are based on unproven technology that may not be able to deliver in time, or possibly at all. Unfortunately, that's the position in which we find ourselves. Consider the Renewable Fuel Standard (RFS) enacted by the Congress in 2007 and refined in new regulations issued by the Environmental Protection Agency. Out of the 36 billion gallon per year target for 2022, only around 16 billion gallons is accounted for by corn-based ethanol and first-generation biodiesel--both of which have been amply proven, however much they depend on generous subsidies to remain competitive. 20 billion gallons per year must come from cellulosic ethanol and other advanced biofuels, none of which are in truly commercial production today, in spite of the hype that has been generated by a handful of "demonstration facilities."

One indication of just how unrealistic these targets might be is that EPA was forced to reduce the cellulosic biofuel target it will enforce for 2010 from 100 million gallons to 6.5 million gal.--the equivalent of just over 400 barrels per day of oil--due to lack of supply. And while the agency attributes that shortfall to delays in starting up new facilities using a variety of new technologies, a careful reading of their analysis suggests the problem might be more serious than that. Two firms account for nearly a third of the 694 million gallons of cellulosic biofuel capacity they expect will be in operation by 2014, Cello Energy and Range Fuels. Unfortunately, last year Cello was ordered by a federal court to pay $10 million for defrauding investors concerning its technology claims. Meanwhile blogger Robert Rapier has documented the problems that Range Fuels has experienced in scaling up its process for producing ethanol from gasified biomass. Until both of these firms have demonstrated they can actually do what they claim, at full scale, it's not prudent to bet the ranch on their production forecasts.

Problems such as this are probably just the tip of the iceberg when it comes to scaling up a myriad of new processes for producing motor fuels from non-food biomass, not because it's impossible or because the firms involved don't have sufficient smarts--though one or both of those factors will turn out to apply in at least a few cases--but because it is intrinsically hard. Scientists have been working on cellulosic biofuels and biomass-to-liquids processes for decades, yet the sum total of all that work, up until this point, has only yielded enough fuel production to cover the annual consumption of about 13,000 average American cars. That doesn't mean that companies and investors are foolish to pursue these technologies, or that ExxonMobil is wrong about the potential they apparently see in algae-based fuels, another hot biofuels sector. What it does mean, however, is that when dealing with technologies that can't be made to appear on command and are subject to a number of serious, unresolved technical and logistical challenges, neither consumers nor our governments should base their plans for the future on the assumption they will mostly succeed on schedule.

How realistic is it that the oil-producing countries that control access to the vast majority of the world's oil reserves would be so convinced by our rhetoric concerning biofuels replacing oil, that they will cut back their investments in new capacity? Part of the answer lies in the narrative of Peak Oil that generated headlines when oil prices were spiking a couple of years ago, involving the high decline rates of mature oil fields and the relatively low investment rates of many producing countries. When the government of Venezuela must borrow money from China despite $80 oil, that's one signpost that they might not have enough to reinvest in exploration and production. We can argue about the likely date of a peak in global oil output, but anything that provides governments an excuse to spend less sustaining their oil industries brings that date closer--and that's equally true for a US administration that appears so confident of the success of its biofuels and fuel economy programs that it can allow the timing of the next offshore oil leasing cycle to slip further and further.

Oil is still the lifeblood of our industrial civilization, but it's also a business requiring enormous investments premised on the likelihood of future demand. That doesn't mean we must remain helpless hostages to foreign oil suppliers; fuel efficiency and biofuels are both sensible--even necessary--strategies for us to pursue. But we have an even larger stake in ensuring that the biofuel goals and plans we communicate, not just among ourselves but simultaneously to our oil suppliers, are based on reality. If both we and they are betting on supplies of advanced biofuels that could well fall significantly short of our expectations, then it is we who will suffer the consequences at the gas pump.

Meme Watch: Peak Demand

To whatever degree the oil price spike of 2007-8 was driven by speculation, the latter was riding on a wave of concern about Peak Oil, which anticipates an imminent decline in maximum global oil production. For the moment, the weak global economy has eased such worries, though they have hardly vanished, as I noted two months ago. Lately, however, conventional notions of Peak Oil are increasingly being challenged by a new meme, or contagious idea, called Peak Demand, which suggests that oil consumption is reaching a plateau from which it will soon decline, mitigating the worst consequences of Peak Oil. Neither of these memes would attract much interest if they weren't supported by a welter of statistics, however selective those might seem to their critics. And just as Peak Oil was much less credible and worrisome before we saw super-giant oil fields like Mexico's Cantarell go into precipitous decline, the logic of Peak Demand would have been much less compelling before US oil demand dropped by nearly 6% last year.

Earlier this week, a friend shared a copy of a report from Deutsche Bank Global Markets Research describing their view of the future oil market shaped by coinciding--and related--peaks in global oil supply and demand. Unfortunately, the report doesn't seem to be available on DB's public website, though it was recently summarized on the Wall St. Journal's Environmental Capital blog. While I spotted several possible weak points in their analysis, they make a strong case that the combination of improved efficiency and the electrification of vehicles will result in the global demand for oil stalling and eventually falling, roughly around the same time many analysts expect global oil supplies to peak.

Perhaps I was predisposed to accept this logic. My presentation on the Alternative Energy panel of the recent IHS Herold Pacesetters Energy Conference included a graph highlighting the ongoing compression of US petroleum gasoline demand between falling motor fuel consumption and rising biofuels supplies, a topic that was subsequently reported in the Journal's "Heard on the Street" column. At that same conference I also heard the Managing Director of CERA's Global Oil Group describe his firm's rigorously researched view of an impending peak in global oil demand. Peak Demand can't easily be dismissed as a "fringe" theory, because it is based on a combination of hard data and thoughtful analysis and forecasting.

My purpose in mentioning Peak Demand now isn't to debate its merits in depth; that's a matter for another day. Rather, on the basis of my conviction that there's at least a reasonable case for such an outcome, I thought I'd spend a moment musing on the consequences of the proliferation of this meme in the marketplace of ideas related to energy. After all, the Peak Demand meme challenges two key pieces of conventional wisdom about oil, one or both of which are central to the rate at which Peak Oil (supply) might be approaching. First, it undermines the notion that once the US economy finds its way back to meaningful growth, oil demand will resume its former trajectory, which had seen gasoline demand growing by 1-2% per year and diesel demand growing at an even faster pace. With a major new emphasis on miles per gallon and the demise of the SUV fad, the fuel economy of the total US car fleet doesn't need to improve by very much each year to outpace our underlying population growth and a modest resurgence in vehicle miles traveled. Secondly, the same dynamic might even hold true for large developing markets, if electric vehicle demand grew rapidly enough, undermining the notion that whatever happens in the US and EU, oil demand from China and India constitute an unstoppable juggernaut.

With spare global oil production capacity effectively used up by 2007, the logic of Peak Oil helped to provide the narrative support for an oil market that ran up from the low $50s to $145 per barrel in the course of 18 months. How different might a future oil price spike be, if instead of a widely-shared view that oil was on the verge of becoming truly scarce--rather than merely expensive--there were an equally widely-held expectation that in the long run that scarcity might become irrelevant as a result of the demand for the commodity gradually unwinding of its own accord? Such dueling memes, together with painful memories of oil's collapse down to $33 last winter, might give some traders pause, before again buying into the notion that $100 oil would soon give way to $200, $300, or $500 per barrel.

The Influence of "Peak Oil"

An article in the Washington Post this weekend, together with a must-read interview in The Independent, a paper I used to read regularly when I lived in London, reminded me of an observation I made several years ago concerning the similarities between Peak Oil and Y2K. Having spent a fair amount of time in my former corporate role planning for the serious outcomes the latter might have produced, I don't intend this as a slam on the former. Without rehashing the technical arguments behind either phenomenon, it's worth spending a few minutes thinking about the consequences of a growing belief that we might be only a few years away from the end of oil, as we know it. Whatever one's take on the validity of the Peak Oil argument, it has already evoked noteworthy consequences, both positive and negative.

A week ago The Independent ran an interview with Fatih Birol, chief economist of the International Energy Agency (IEA). In it Dr. Birol repeated a warning he has issued previously, that higher-than-expected decline rates in the world's mature oil fields and "chronic underinvestment by oil-producing countries" are setting up a severe oil supply crunch within the next few years, as a recovering global economy resumes its growth in energy consumption. It's not hard to imagine the "green shoots" withering if oil reprised its 2007-8 march from around $70/bbl to nearly $150. From the supply side, I have little doubt that this is correct, for reasons I've mentioned frequently in the past: restrictions on access to resources, routine diversion of national oil company profits into social budgets at the expense of reinvestment, chronic project delays, and the inherently long timelags between discovery and production. I'm less convinced that the demand side of the equation would play out the same as last time, with that experience so fresh in our minds. At the very least, though, Dr. Birol describes a highly credible scenario, and belief in its likelihood could have far-reaching consequences, good and bad.

On the plus side, our reactions needn't go to the extent of the author of a Washington Post piece, searching for self-sufficiency on a small farm in New Mexico, to have a beneficial impact on consumption patterns. Our best chance of avoiding the apocalyptic outcomes that Mr. Fine fears is to live our lives on the assumption that the days of cheap oil are indeed past, and that it will be more expensive in the future. From initial reports of the transactions involved in the Cash for Clunkers program, many people already sense this, despite gasoline prices that remain one-third below where they were at this time last year. And while I certainly don't advocate survivalism as an indicated strategy for individuals, everyone who chooses to downshift in this way stretches out the supplies available for the rest of us, making the transition to more sustainable energy sources more manageable. Merely being prepared mentally for another oil crisis might reduce the likelihood of counterproductive behavior, such as hoarding, should we find ourselves in one.

Unfortunately, these psychological effects also point to the main downside of a widespread belief in imminent Peak Oil. While I remain unconvinced of the role of speculation in last year's spike in physical oil prices, to whatever extent the s-word was driving prices on the oil futures exchanges it was underpinned by a pervasive mentality that we were experiencing something truly unprecedented, backed by hints that oil supplies had already reached their natural limit. If you believe in the inevitability of Peak Oil, today's oil futures prices must look like a buy--a steal, even at levels over $90 for delivery in 2016 or 2017.

There are many good reasons to invest in the alternative energy sources that would help mitigate a true Peak Oil crisis down the road, and that hold the seeds of eventually escaping from that threat entirely. The real mark of success for our various renewable energy, nuclear renaissance, and energy efficiency efforts would be the eventual arrival of a peak in global oil output without crippling the economy. However, the dark side of Peak Oil is a self-defeating notion that no amount of increased investment in new oil production can make any worthwhile difference in this outcome.

If the IEA is right, we certainly can't escape this pickle by drilling alone. However, it's equally true that if oil production began to drop in the next few years, no other strategy, by itself or in combination--not even dramatic improvements in energy efficiency--could make a big enough difference to avoid a serious, economy-wrenching crisis. Many of the cars on the road in 2015 will either be those already on the road today or others very similar to them, if a bit thriftier with fuel. Nor could we electrify more than a small fraction of the global car park within that timeframe, let alone a US car fleet of 245 million vehicles at a time when sales (and thus turnover) have collapsed. Double today's biofuel output--which in that timeframe mainly means more corn ethanol, with all its problems--and we still won't have made a big enough dent.

Inescapably we will need as much more oil as we could eke out, because the whole world would be going through this transition at once. If we're saving the oil in ANWR, offshore California, and the Eastern Gulf of Mexico for a rainy day, then imminent Peak Oil would be that deluge, and it takes 5-10 years to go from bidding on leases to full production. Even if this bought us only an extra 1 million barrels per day--Mr. Pickens apparently thinks twice that--the value of that to the US in a world of $200 oil would be $73 billion/year in today's dollars, along with the possible preservation of critical services if the shortfall that went beyond a mere price spike. The US can't make up for the problem of "chronic underinvestment by oil-producing countries" of which Dr. Birol rightly warns, but we could certainly exacerbate it through deliberate under-investment in our own oil capacity.

How Much Per Gallon?

A book I recently received from a publisher makes an interesting contrast with last Friday's posting on how many cars our current oil production might eventually support. Its title of "$20 Per Gallon" demands attention, though the book proves to be less of an argument for how we might get there than for what things might be like if--the author would say when--we did. Rather than providing detailed arguments for the imminent arrival of Peak Oil, Mr. Steiner essentially accepts that premise and builds on it to offer a set of scenarios describing life in the US at gasoline prices escalating steadily in $2 increments between $4 and $20 per gallon. It makes for an entertaining and sobering set of "what ifs?" Unfortunately, despite a brief author's note dated from February of this year, the book is something of a victim of the collapse of oil prices late last year. While its premise might have been accepted eagerly and unquestioningly last summer, the world looks a bit different today. The challenges he describes appear somewhat less urgent, particularly after oil's recent surge past $70 per barrel was cut short when it turned out that all that talk of "green shoots" might have been a bit premature.

In a sense "$20 Per Gallon" seems like two books, one quite interesting and the other seriously flawed, at least as a document about our energy future. The interesting part lies in the author's exploration of what successively higher energy prices might mean for different aspects of the US economy and lifestyle. True to its subtitle, it's hardly a tale of uniform woe, unless you have the misfortune of working in one of the sectors he concludes is doomed, including anything connected to commercial air travel as we now know it. He points out the environmental, health and safety benefits that might ensue from our responses to progressively dearer petroleum-derived products. Many of these benefits sound quite appealing, though I would propose that they are neither as inevitable nor as neatly tied to oil use as Mr. Steiner suggests. The book is also filled with anecdotes accumulated from his travels researching its subject. I particularly liked his description of the airplane graveyard and his rides in various energy-efficient UPS trucks. If you come to this book already convinced that we are on the precipice of Peak Oil, I suspect you would find most of this not just entertaining, but riveting.

The book is less likely to appeal to anyone who is skeptical about the inevitability of Mr. Steiner's scenario assumptions. Start with his structural choice of using gasoline prices as a proxy for underlying oil prices, despite the fact that petroleum product markets experience supply and demand fluctuations that differ--sometimes markedly--from oil's. This choice also ignores the enormous influence of taxes and other government policies on gas prices. You don't need $300/bbl oil to reach $8 gasoline, as European drivers can attest. Last week the price of the average gallon of gas in the US fell to $2.46/gal., compared to the equivalent of $6.40/gal. in the UK and $6.77/gal. in Germany. The difference is almost entirely due to taxes. Despite this, daily life in those countries is not so far beyond the pale of recent American experience as to frighten small children. The implications of a world of high fuel prices resulting from the combination of moderate oil prices and high taxation look quite different from those arising from oil prices above last summer's peak of $145/bbl.

There's an even bigger issue lurking under the surface, and it relates to the author's conviction that in the long run oil prices can only go higher--much higher--due to Peak Oil. There's at least some truth to that, and I've posted periodically on the enormous difficulties involved in attempting to increase oil production in the face of constraints on access to resources--internationally and domestically--along with high interest rates, scarce capital, chronic project delays, and the inexorable depletion of mature oil fields. But oil prices are determined by more than supply, and while he eagerly describes all of the ways in which we would have to adjust our habits to a world of higher and higher gasoline prices, I don't get the sense that Mr. Steiner has considered the ways in which these responses would tend to retard the steady price advances he describes. We have only to look at the impact that a demand reduction of less than 4% since late 2007 has had on oil prices in the last 12 months. That responsiveness to lower demand is as inherent in a commodity with a steeply-sloped short-run supply curve as were the high prices that accompanied the steadily increasing demand we saw earlier. This behavior reflects two sides of the same coin.

The complexities of the various feedback mechanisms involved would also make some of the positive outcomes that Mr. Steiner sees more uncertain. Consider the drop in traffic fatalities that he posits as a consequence of higher gas prices. While you would generally expect people to drive less if gasoline were much more expensive, that response would probably be less pronounced in the long run than in the short run, because of the other ways in which consumers would react. $4 gasoline is painful if your current automobile gets 20 mpg. However, once you've traded it in on a 50 mpg hybrid, your cost per mile--and thus your monthly fuel bill--is lower even at $6/gal. than it was before at $3.

In addition to these concerns, I noticed a few basic errors and misleading comparisons along the way. Compared to the above, they are nit-picks, but anyone who reads the book ought to bear them in mind. First, Mr. Steiner suggests a pretty dramatic impact from high gasoline prices on all the plastics we consume, without delving deeply enough to determine that most of the ethylene- and propylene-derivative plastics in North America--including Saran Wrap--aren't sourced from oil but from the liquids produced with natural gas. That's a crucial distinction, with vast new gas resources available and with the prices of oil and gas having diverged rather dramatically, at least for now. He also makes several numerical comparisons between the response to last year's oil price spike and the aftermath of the oil crisis of the 1970s without taking into account the 42% increase in US population since 1974.

I have to believe that Mr. Steiner would have written a somewhat different book, had he begun the project this year rather than last. I don't doubt that some of the outcomes he describes are waiting on the sidelines until the economy climbs out of its current trough, even if oil prices don't quite reach the stratospheric heights he expects. For example, it wouldn't take the oil-price equivalent of $8/gal. to trigger a radical restructuring of the airline business, after what's it's been through. At the same time, though, I doubt we've seen the last oil price cycle, and the relationship between the prices of oil and alternative energy sources remains complex and dynamic. In some respects proposals such as cap & trade or a carbon tax are intended to evoke some of the same responses that Mr. Steiner imagines, but on a gradual basis and without having to pay an external supplier for the privilege of motivating us. I suggest reading "$20 Per Barrel" in that spirit, rather than as a firm prediction of the inevitable future of our oil-based world.

Going Farther on Oil

As I was perusing my UC Davis alumni magazine last night I ran across a short article mentioning a new book from a professor, Dan Sperling, who directs Davis's well-regarded Institute of Transportation Studies. I know him slightly from his participation as in invited expert in a scenario workshop many years ago, so this caught my eye. His book, which I haven't read yet, examines the impact and implications of the rapidly growing global vehicle population, which he sees reaching the two billion mark within the next 20 years. In the article he suggested that this would require an entirely new transportation energy mix, made up of hydrogen, electricity, and advanced biofuels. That certainly fit my own long-standing expectations, as well. However, it occurred to me to wonder just how far we might be able to stretch the transportation fuels we get from oil, and just how far short they would fall as the global car-park expands. To my surprise, it doesn't require very aggressive assumptions concerning improvements in fuel economy, reductions in vehicle miles traveled, and additional oil supplies to cover the needs of a significantly larger number of cars in the world.

The starting point for such an analysis is current oil supplies and the way we process them. Global oil output in 2008 reached 86.5 million barrels per day (MBD), including crude oil, natural gas liquids, and the volumetric gain that occurs when you run them through a modern refinery. Roughly 60% of that input is currently turned into gasoline, diesel and jet fuel. Improvements in refining technology should make it possible to push that fraction to perhaps 70%, at the expense of heavy fuel oil displaced from power generation and shipping. So even if global oil output plateaued at only 90 MBD, a scenario that would probably seem optimistic to the adherents of Peak Oil and pessimistic to some industry experts, it could still yield 63 MBD of liquid transportation fuels. Set aside 7 MBD of that for jet fuel and kerosene and another 26 MBD for trucking and home heating oil, and we're left with 30 MBD of gasoline and diesel for passenger cars. That's roughly 25% more than current global consumption in light-duty vehicles, including the couple of MBD of diesel fuel that power Europe's popular diesel cars.

That doesn't seem to get us nearly far enough, until we consider that in the near future, cars will become much more efficient than they have been, particularly in the US, where an improvement from the current notional average of 25 mpg to the required 35.5 should eventually reduce average fuel consumption per mile by 30%. If the recent reversal in annual vehicle miles traveled persists after the recession ends, that would compound future fuel savings. When we consider that new cars in Europe currently average about 35 mpg and are required to reach approximately 43 mpg by 2015, based on a standard of 130 grams of CO2 emitted per kilometer, and that China has also introduced stricter fuel economy standards, it's not hard to imagine the average world car getting 40 mpg by 2020. That doesn't even require the majority of cars to be hybrids, let alone plug-in hybrids. If that average car drove 9,000 miles per year, it would consume 225 gallons of fuel annually. Following this back-of-the-envelope calculation to its conclusion, our 30 MBD of petroleum-based fuel for light-duty vehicles would be sufficient to cover Dr. Sperling's 2 billion cars with a little bit left over.

I'm not for a moment suggesting that this is the likeliest scenario, or that it means we don't need any of the advanced biofuels or electric vehicle technology currently under development. As I've pointed out frequently, fleet turnover in the developed world has slowed, thanks to the recession, and we can expect a long "tail" of older vehicles to persist for some time. However, the results of this simple exercise surprised me; I had expected the final number of cars that could be supplied by oil to be much lower. So while our transportation energy mix in the next couple of decades is still likely to include a much greater variety of fuels and an increasing penetration of electricity, we should not lose sight of the potential for realistically-achievable fuel economy improvements and non-efficiency conservation--driving personal cars less and relying more on mass transit and electronic trip substitution--to be the most important "transition fuel" in our arsenal, as we reduce our present reliance on oil, in order to tackle energy security and climate change.