Oil experts are deeply divided in their views on the future of what is still the world's key commodity. This divergence was on display at last week's CERA Conference in Houston, which brought together industry executives, consultants, media, and government officials from around the world. Although I didn't attend in person, the organizers provided extensive streaming coverage of keynote talks and interviews with thought leaders.
From OPEC oil ministers and the head of the International Energy Agency, we heard that the world could be headed for another supply crunch within a few years, due to low investment following 2014's oil-price collapse. I've mentioned this concern before.
By contrast, the major oil companies seemed more cautious. Low oil prices caught many of them with big, expensive projects underway--too far along to stop but undermined by prices now far below the assumptions on which they were justified. Cash flow seems to be a higher priority than growth. "Peak demand", when global oil consumption stops growing and might begin shrinking, could also arrive within ten years or so, at least according to Shell's CEO, further disrupting markets.
Renewables were discussed frequently, but shale was arguably the star of the segments I watched. Big companies touted their shift toward shale assets that can be brought into production quickly, while independent E&P (exploration and production) companies highlighted both the upside and limitations of focusing on the core, or most productive, cost-effective portions of various shale regions.
With these large, and to some extent mutually contradictory trends in play, any kind of straight-line extrapolation from current or past conditions of price, supply, or demand seems sure to be swamped by uncertainties. Rather than putting my thumb on the scales for one view or another, my best service just now is improving our understanding of these risks and why they look so uncertain.
On the supply side, the relationship between short-cycle and long-cycle investments is especially interesting and a source of great uncertainty. Short-cycle supply, mainly from shale or "tight oil" wells that can be drilled and brought on-stream quickly and for only a few million dollars each--but that also tail off quickly--was the main factor in the drop from over $100 per barrel to less than $40 just a couple of years ago. It now provides many of the lowest-risk, most attractive opportunities available to the oil and gas industry. Yet the more short-cycle oil is developed, the longer the recovery of long-cycle investment is likely to be delayed, because shale is effectively putting a low ceiling on oil prices and will consume ongoing cash flow to sustain it.
Long-cycle oil, which still accounts for over 90% of global supply, is an entirely different domain. It consists mainly of large conventional oil fields that were developed years ago and continue to pump oil with relatively little continuing investment. It also includes new, big-ticket projects in places like the deep waters of the Gulf of Mexico and offshore Brazil, that add to growth but importantly offset the natural decline rates--often 4%-10% annually--that eat into the output of older oil fields every year.
Hundreds of billions of dollars of planned investment in long-cycle projects was deferred or canceled since 2014. Because such projects take years--sometimes decades--to develop from discovery to production, this investment drought implies a hole in future production. That shortfall hasn't appeared yet, because projects like BP's Thunder Horse expansion that were begun when oil was still over $100 are still periodically starting up. The impact of the long-cycle gap might also shrink or vanish entirely if enough short-cycle oil is developed in the meantime.
We might never notice this impending gap, if demand growth slowed sharply from its recent rate of more than 1 million barrels per day per year, or even started to fall. Not so long ago, few could imagine oil demand falling without hitting a wall on supply--so-called "Peak Oil"--but now it's almost harder to envision oil demand continuing to expand in light of competition from renewables, substitution from electric vehicles, and constraints imposed by climate policies intended to comply with the Paris Agreement.
The big uncertainties for these changes are time and scale. The Solar Energy Industries Association (SEIA) forecasts US solar power growing from 42 Gigawatts (GW) last year to nearly 120 GW by the end of 2022. However, that would leave solar generating just 4% of US electricity, even if electricity demand didn't grow at all in the interim. Nor does solar power compete with oil, except in the few remaining places--mainly in the Middle East--where lots of oil is burned to produced electricity, or when it powers electric cars.
With regard to EVs, Tesla's goal of producing 500,000 cars per year by the end of next year is impressively big. However, even if those Teslas replaced only conventional cars of average fuel economy, all of which were then scrapped--unlikely on both counts--they would reduce US gasoline demand by less than 0.2%. It would take more than six times as many EVs to offset last year's growth in US gasoline demand of 1.3%. Only as EV sales ramp up and conventional cars are retired in large numbers would they start to make a serious dent in oil demand. How long will it take to reach that point, and how much would a big jump in oil prices within the next few years nudge it along?
Until recently, most of the speculation that the transition away from oil and other fossil fuels could happen faster came from outside the industry. Lately, though, respected voices in the industry--or at least closer to it--have begun to raise the possibility that the shift to renewables and EVs might accelerate, affecting demand sooner than expected.
To be clear, I am still convinced that constraints on how fast capital stock turns over--vehicle fleets, HVAC, factory equipment, etc.--impose a speed limit on any large-scale transition like this. However, careful examination of the last 20 years of oil prices provides ample proof that smaller-scale shifts can have large impacts. From the Asian Economic Crisis of the late 1990s, to the massive price spike of 2006-8, followed by the financial crisis, the Arab Spring, and the shale boom, we can see that supply/demand imbalances of no more than about 2-3 million barrels per day--say 3-4% of production or consumption--were sufficient to drive oil prices as low as $10 and as high as $145 per barrel.
When we combine the big, new trends outlined above with normal uncertainties about the economy and then factor in the extreme sensitivity of oil markets to relatively modest surpluses and shortfalls, predicting the likely path for oil looks very daunting. The factors driving it may be changing, but accurate oil forecasting remains as challenging as ever. That same realization stimulated interest in scenario planning more than 40 years ago, focused on the insights available from considering multiple possible futures, rather than just one.
Showing posts with label transition. Show all posts
Showing posts with label transition. Show all posts
Friday, March 17, 2017
Tuesday, November 22, 2011
Our Shifting Energy Diet
It's fairly easy to agree on the desirability of shifting our energy diet away from fossil fuels and toward more renewable or sustainable sources, but it's much harder to agree on the time scale involved. While recognizing the great potential of renewable energy technologies such as wind, solar and geothermal power, along with advanced, non-food-based biofuels, I am convinced that the transition will take much longer than many hope--longer than many will have patience for, in light of pressing concerns about energy security and the environment. When considering future shifts in our energy diet, it's instructive to review some of the changes we've already experienced, and how long they took. The graph below displays the relative contribution of America's main energy sources since 1949, based on data from the Energy Information Agency of the US Department of Energy.
This chart, which compares the proportional, rather than absolute contribution of each source as a percent of the total, shows that the US energy diet has experienced constant change over the last seven decades. Some of these changes have been dramatic, such as the erosion of coal's market share in the 1950s and '60s by oil and natural gas, while others, such as the resurgence of biomass-based energy since the 1970s are less dramatic but still noticeable. On the scale of this graph the non-biomass renewables that I've lumped together appear relatively steady, because the recent rapid growth of wind and solar energy has so far only compensated for a contemporaneous decline in hydropower output. I'd expect the growth of that green segment to be more obvious in a few years, though still not on the scale of nuclear power.
The chart also reminds us that however prominent a given energy source might have become during this period, none overwhelmed the others. We talk a great deal about oil's dominance, yet it never exceeded a 48% share of our energy diet, and it has recently fallen below 37%. In fact, you'd have to go all the way back to the 1920s to find an energy source with a market share above 60%, which coal still enjoyed during the early years of oil's rise as the combination of mass-produced cars and the big oil finds in East Texas and Oklahoma upended the US energy landscape. That's one reason I generally find forecasts of renewables capturing 80% of the energy market within a few decades to be improbable.
Perhaps the most relevant example for renewables of a disruptive energy technology capturing a significant share of the market is commercial nuclear power, which contributed just 0.1% of US energy in 1962. That's about what solar provides today. Yet even with a major push by utilities and government and broadly favorable market acceptance until after the Three Mile Island accident, it still took nuclear power 25 years to reach a 6% share of total US primary energy, and nearly 40 years to reach its current 8% or so. Today's renewables also face similar limits on their potential market penetration, albeit due to very different factors relating to intermittency and the high cost of energy storage.
What would it take for renewables to repeat the model of oil's success against coal? In the absence of a high carbon price or incentives on a level unlikely to be either politically feasible or affordable in the current environment, I believe it would require technologies that don't just reduce greenhouse gas emissions or local pollutants, but actually enable something new and very attractive to consumers and businesses, along the lines of the quantum leaps in mobility and other economic activity that oil made possible. Otherwise, their promoters should be prepared to play a long game, in much the same way that the conventional energy industry did when it was building its market post World War II. Do investors and policy makers have the patience that requires?
By the way The Energy Collective is offering a free virtual conference on November 30 on the subject of "How to Save A Planet on A Budget." The conference includes panel discussions and case studies moderated by Marc Gunther of Fortune magazine, Jesse Jenkins of the Breakthrough Institute, and Gernot Wagner, economist at the Environmental Defense Fund. To register click here.
I'd also like to wish my US readers a pleasant Thanksgiving weekend.
This chart, which compares the proportional, rather than absolute contribution of each source as a percent of the total, shows that the US energy diet has experienced constant change over the last seven decades. Some of these changes have been dramatic, such as the erosion of coal's market share in the 1950s and '60s by oil and natural gas, while others, such as the resurgence of biomass-based energy since the 1970s are less dramatic but still noticeable. On the scale of this graph the non-biomass renewables that I've lumped together appear relatively steady, because the recent rapid growth of wind and solar energy has so far only compensated for a contemporaneous decline in hydropower output. I'd expect the growth of that green segment to be more obvious in a few years, though still not on the scale of nuclear power.
The chart also reminds us that however prominent a given energy source might have become during this period, none overwhelmed the others. We talk a great deal about oil's dominance, yet it never exceeded a 48% share of our energy diet, and it has recently fallen below 37%. In fact, you'd have to go all the way back to the 1920s to find an energy source with a market share above 60%, which coal still enjoyed during the early years of oil's rise as the combination of mass-produced cars and the big oil finds in East Texas and Oklahoma upended the US energy landscape. That's one reason I generally find forecasts of renewables capturing 80% of the energy market within a few decades to be improbable.
Perhaps the most relevant example for renewables of a disruptive energy technology capturing a significant share of the market is commercial nuclear power, which contributed just 0.1% of US energy in 1962. That's about what solar provides today. Yet even with a major push by utilities and government and broadly favorable market acceptance until after the Three Mile Island accident, it still took nuclear power 25 years to reach a 6% share of total US primary energy, and nearly 40 years to reach its current 8% or so. Today's renewables also face similar limits on their potential market penetration, albeit due to very different factors relating to intermittency and the high cost of energy storage.
What would it take for renewables to repeat the model of oil's success against coal? In the absence of a high carbon price or incentives on a level unlikely to be either politically feasible or affordable in the current environment, I believe it would require technologies that don't just reduce greenhouse gas emissions or local pollutants, but actually enable something new and very attractive to consumers and businesses, along the lines of the quantum leaps in mobility and other economic activity that oil made possible. Otherwise, their promoters should be prepared to play a long game, in much the same way that the conventional energy industry did when it was building its market post World War II. Do investors and policy makers have the patience that requires?
By the way The Energy Collective is offering a free virtual conference on November 30 on the subject of "How to Save A Planet on A Budget." The conference includes panel discussions and case studies moderated by Marc Gunther of Fortune magazine, Jesse Jenkins of the Breakthrough Institute, and Gernot Wagner, economist at the Environmental Defense Fund. To register click here.
I'd also like to wish my US readers a pleasant Thanksgiving weekend.
Thursday, August 26, 2010
Looking Back to Look Ahead
Last week the Energy Information Agency of the US Department of Energy released its Annual Energy Review for 2009. Although it doesn't offer predictions concerning the energy transition that was the subject of last Wednesday's posting, it does include a wealth of charts and graphs visualizing the remarkable energy shifts that have already occurred in the last several decades. Understanding these could help calibrate our expectations concerning the pace of the hoped-for clean energy revolution, while shedding light on characteristics that could move some technologies into the market faster than others. For energy the past isn't necessarily prologue, but it's certainly relevant.
Start with the US primary energy overview for the last 60 years, which shows the steady growth of our energy consumption, interrupted only by two sets of events: the oil shocks of the 1970s and the recent financial crisis and recession (accompanied by a demand-driven oil shock.) Since the early '70s much of that growth was fueled by imported energy, led by oil. This is the part of the story we know best, because its impact on energy security has kept us focused on it for my entire adult life, no matter how ineffective our responses have seemed at times. However, other aspects of our energy situation reflect big, but less obvious changes over that interval, particularly with regard to the production of electricity, the supply and uses of natural gas, and the growth of nuclear power.
We've recently heard a lot about the significance of shale gas, which for many parts of the country could bring the sources of our natural gas much closer to where it's used. Yet this is only the latest aspect of a broader shift that has turned gas from a mainly Gulf Coast and mid-continent resource into a truly national one. In 1970 Texas, Louisiana and Oklahoma accounted for more than 80% of US gas production, while last year they supplied well under half. In the intervening period, production outside these three states more than tripled. At the same time, the ways we use gas have also been transformed. Gas for electricity generation has outstripped residential gas consumption and is about to eclipse industrial gas demand, which has fallen steadily since the mid-'90s, due to volatile prices and the offshoring of manufacturing. The marriage of gas to electricity was driven by a major technology change, in the form of aero-derivative gas turbines for power generation. A chart I could only find in the report's Energy Perspectives section and have reproduced below indicates how much more natural gas-fired capacity has been added in the US in the last 20 years than all other generation technologies combined. Natural gas was more expensive than coal for that entire period, yet no other technology could match its combination of low capital cost, infrastructure efficiency, low emissions, and capability to deliver power when and where needed. Can renewables succeed without matching at least a majority of those attributes?
The report puts the recent upsurge of biofuels, wind, solar and geothermal power into the context of a larger renewable energy sector that still meets just 8% of our total energy needs, mainly from mature sources such as hydroelectricity and wood. I can't help wondering whether the development of the US nuclear power sector holds any relevant analogies for the new renewables. Nuclear grew from nothing to 8% of US primary energy and 20% of electricity generation between the mid-'60s and 2000, and in the process helped displace most oil from power generation. Essentially all our current nuclear capacity was built in two waves that rose quickly, peaked in the mid-'70s and again in the mid-'80s, and then subsided to little more than capacity optimization since then. Renewables and nuclear could not be more different, other than sharing a low emissions profile, but the former face enough real-world constraints--including concerns about the environment in its broadest sense--that a scenario in which they, too, stall well short of their full potential isn't so hard to imagine. When you consider a rise as steep as that exhibited by ethanol, or the asymptotic growth of photovoltaic module shipments, it's hard to look at these graphs and not wonder what the rest of the curve will look like: continued rapid growth, plateau (and at what level?), or decay.
I found numerous other charts, graphs and tables offering insights into topics as diverse as the population of alternative fuel vehicles and their energy consumption, the breakdown of electricity consumption in commercial buildings, and the steady drop in energy consumption for space-heating by households, particularly from oil--despite a 35% increase in US population--offset by a near-doubling of household electricity consumption within a generation. And I can't close without mentioning the positive trends in the energy intensity of the US economy--a steady decline for 40 years in BTUs per dollar of GDP--and more recently in per-capita energy consumption. We've accomplished that without a full-court press on energy efficiency, beyond what was incentivized by volatile market prices. What could we accomplish on this front if we put our minds to it?
Start with the US primary energy overview for the last 60 years, which shows the steady growth of our energy consumption, interrupted only by two sets of events: the oil shocks of the 1970s and the recent financial crisis and recession (accompanied by a demand-driven oil shock.) Since the early '70s much of that growth was fueled by imported energy, led by oil. This is the part of the story we know best, because its impact on energy security has kept us focused on it for my entire adult life, no matter how ineffective our responses have seemed at times. However, other aspects of our energy situation reflect big, but less obvious changes over that interval, particularly with regard to the production of electricity, the supply and uses of natural gas, and the growth of nuclear power.
We've recently heard a lot about the significance of shale gas, which for many parts of the country could bring the sources of our natural gas much closer to where it's used. Yet this is only the latest aspect of a broader shift that has turned gas from a mainly Gulf Coast and mid-continent resource into a truly national one. In 1970 Texas, Louisiana and Oklahoma accounted for more than 80% of US gas production, while last year they supplied well under half. In the intervening period, production outside these three states more than tripled. At the same time, the ways we use gas have also been transformed. Gas for electricity generation has outstripped residential gas consumption and is about to eclipse industrial gas demand, which has fallen steadily since the mid-'90s, due to volatile prices and the offshoring of manufacturing. The marriage of gas to electricity was driven by a major technology change, in the form of aero-derivative gas turbines for power generation. A chart I could only find in the report's Energy Perspectives section and have reproduced below indicates how much more natural gas-fired capacity has been added in the US in the last 20 years than all other generation technologies combined. Natural gas was more expensive than coal for that entire period, yet no other technology could match its combination of low capital cost, infrastructure efficiency, low emissions, and capability to deliver power when and where needed. Can renewables succeed without matching at least a majority of those attributes?
The report puts the recent upsurge of biofuels, wind, solar and geothermal power into the context of a larger renewable energy sector that still meets just 8% of our total energy needs, mainly from mature sources such as hydroelectricity and wood. I can't help wondering whether the development of the US nuclear power sector holds any relevant analogies for the new renewables. Nuclear grew from nothing to 8% of US primary energy and 20% of electricity generation between the mid-'60s and 2000, and in the process helped displace most oil from power generation. Essentially all our current nuclear capacity was built in two waves that rose quickly, peaked in the mid-'70s and again in the mid-'80s, and then subsided to little more than capacity optimization since then. Renewables and nuclear could not be more different, other than sharing a low emissions profile, but the former face enough real-world constraints--including concerns about the environment in its broadest sense--that a scenario in which they, too, stall well short of their full potential isn't so hard to imagine. When you consider a rise as steep as that exhibited by ethanol, or the asymptotic growth of photovoltaic module shipments, it's hard to look at these graphs and not wonder what the rest of the curve will look like: continued rapid growth, plateau (and at what level?), or decay.
I found numerous other charts, graphs and tables offering insights into topics as diverse as the population of alternative fuel vehicles and their energy consumption, the breakdown of electricity consumption in commercial buildings, and the steady drop in energy consumption for space-heating by households, particularly from oil--despite a 35% increase in US population--offset by a near-doubling of household electricity consumption within a generation. And I can't close without mentioning the positive trends in the energy intensity of the US economy--a steady decline for 40 years in BTUs per dollar of GDP--and more recently in per-capita energy consumption. We've accomplished that without a full-court press on energy efficiency, beyond what was incentivized by volatile market prices. What could we accomplish on this front if we put our minds to it?
Wednesday, August 18, 2010
Scaling the Energy Transition
The August 13 issue of Science, the journal of the American Association for the Advancement of Science (AAAS), devotes a special section to "Scaling Up Alternative Energy". Most of the section, including some nifty comparative infographics, can be accessed free of charge until August 27, requiring only a free site registration. I encourage you to read it while it's available. The articles cover topics such as the prospects for cellulosic ethanol and the challenges of siting renewable energy projects. Another entitled, "Do We Have the Energy for the Next Transition?" particularly caught by attention. I've been focused on this issue from the inception of this blog in 2004 and long before that. This is an issue that's not about to go away or be solved overnight, no matter how much wishfulness we apply to it.
I know I've been beating this drum for a long time, but here's a clear and concise explanation from the top science journal in the country on why the transition to alternative energy won't--and can't--be quick, cheap or easy, as well as why it's necessary to pursue in spite of these limitations. The low energy and power density, intermittency, and uneven geographic distribution of renewables aren't just talking points; they're genuine technical problems that must be overcome. The author compares the transition that's now underway to previous energy transitions and finds fundamental reasons why such shifts take a long time, and why the transition to renewables can't be as quick as many would like. He quotes one expert as saying, "They don't offer new services; they just cost more."
That's a crucial point for anyone who sees this energy transition driven not just by concerns about energy security and greenhouse gas emissions, but by notions of clean energy as the next big wealth-creating global trend, akin to the computer revolution. A kilowatt-hour or BTU does the same work, regardless of its source, so unless it can be produced for significantly less than from conventional sources, greener energy offers no productivity gains of the kind that have fueled the global infotech transformation. As the article notes, using current technologies it is likely to reduce productivity, at least in the energy sector, unless it addresses cost-effective energy efficiency.
And while it's certainly true that the current price of conventional energy omits a number of important externalities, including those relating to climate change, monetizing them by increasing the price of energy will not improve productivity in the sense of creating new wealth; it will merely transfer of wealth from one sector to another. We may still have to do that, but we shouldn't harbor illusions about the ultimate source of the earnings this will create for green energy companies and entrepreneurs, until someone comes up with an energy source that is truly better/faster/cheaper than what it's replacing (without subsidies.)
Although the article doesn't dismiss the potential of renewables to supply a much larger proportion of our energy needs, it suggests that the greatest near-term potential lies in reducing energy consumption, which would simultaneously stretch out our conventional energy resources, reduce their impact, increase the leverage of the renewables we have, and provide more time to improve them. It also points to a transition that looks more like a gradual shift in our energy mix than a sudden displacement of one set of sources by another. That doesn't sound nearly as radical or glamorous as what some pundits have suggested is possible, but it still provides renewable energy businesses with the enviable prospect of making steady inroads into a vast market, the potential of which they couldn't exhaust for decades, as long as they've got a proposition that makes economic sense in light of current and anticipated regulations and incentives.
I know I've been beating this drum for a long time, but here's a clear and concise explanation from the top science journal in the country on why the transition to alternative energy won't--and can't--be quick, cheap or easy, as well as why it's necessary to pursue in spite of these limitations. The low energy and power density, intermittency, and uneven geographic distribution of renewables aren't just talking points; they're genuine technical problems that must be overcome. The author compares the transition that's now underway to previous energy transitions and finds fundamental reasons why such shifts take a long time, and why the transition to renewables can't be as quick as many would like. He quotes one expert as saying, "They don't offer new services; they just cost more."
That's a crucial point for anyone who sees this energy transition driven not just by concerns about energy security and greenhouse gas emissions, but by notions of clean energy as the next big wealth-creating global trend, akin to the computer revolution. A kilowatt-hour or BTU does the same work, regardless of its source, so unless it can be produced for significantly less than from conventional sources, greener energy offers no productivity gains of the kind that have fueled the global infotech transformation. As the article notes, using current technologies it is likely to reduce productivity, at least in the energy sector, unless it addresses cost-effective energy efficiency.
And while it's certainly true that the current price of conventional energy omits a number of important externalities, including those relating to climate change, monetizing them by increasing the price of energy will not improve productivity in the sense of creating new wealth; it will merely transfer of wealth from one sector to another. We may still have to do that, but we shouldn't harbor illusions about the ultimate source of the earnings this will create for green energy companies and entrepreneurs, until someone comes up with an energy source that is truly better/faster/cheaper than what it's replacing (without subsidies.)
Although the article doesn't dismiss the potential of renewables to supply a much larger proportion of our energy needs, it suggests that the greatest near-term potential lies in reducing energy consumption, which would simultaneously stretch out our conventional energy resources, reduce their impact, increase the leverage of the renewables we have, and provide more time to improve them. It also points to a transition that looks more like a gradual shift in our energy mix than a sudden displacement of one set of sources by another. That doesn't sound nearly as radical or glamorous as what some pundits have suggested is possible, but it still provides renewable energy businesses with the enviable prospect of making steady inroads into a vast market, the potential of which they couldn't exhaust for decades, as long as they've got a proposition that makes economic sense in light of current and anticipated regulations and incentives.
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