Publications

- November 1, 2020: Vol. 7, Number 10

The powershift taking place in global energy

by Mike Consol

File this report about the decline of the global oil business under LIBERAL, ANTI-AMERICAN PROPOGANDA. Wait … scratch that. Exxon has been kicked off the Dow Index of 30 companies (of which it has been a member since 1928) and replaced by Salesforce.

Salesforce? A cloud-based customer management software outfit? Sounds kind of lame next to Big Oil.

When you think about it, Big Oil has never been so big. We have finally come to the conclusion we are not going to run out of oil anytime soon. The U.S. shale boom and major offshore discoveries of oil reserves have made sure of that. Then there are the technology advances that have made the extraction of crude ever less expensive.

Estimated oil reserves have increased! Once upon a time that would have given us that warm and fuzzy feeling that everything was right with the world. But that glut along with sharply decreased demand has driven the value of the U.S. oil sector down by more than 50 percent since January.

This is when we all say in unison: Oil prices will come back; they always have and always will.

Hmm …

Something still isn’t right here, though. Energy demand is way down and yet clean energy stocks have risen by about 45 percent this year.

If we connect the dots we might come to this conclusion: Capital markets (i.e., investors) have decided the oil biz has entered a long, slow, irrevocable decline. The violins are playing their dirge and the upside to oil investing is dissipating like a cloud of smoke from the tailpipe of a hot-rod Lincoln.

Stop right there, please. Don’t even argue this point with me. I would prefer you take your protestations to Spencer Dale, chief economist for BP, one of the bigs of Big Oil, who says the company has adopted a different strategy going forward, a renewable-based strategy.

Yada, yada. We’ve heard members of Big Oil profess their commitment to clean energy before, only to budget trifling amounts of cash to biofuels and such. But maybe BP and others aren’t playing the pacification game this time. BP is talking about gradually tipping the scales in a way that derives less of its revenue from oil and more from renewables.

To be clear, renewables means solar, wind, bioenergy, geothermal — and one would presume coming breakthroughs in nuclear and hydrogen sources of power. Consider that renewables accounted for a piddling 5 percent of global energy in 2018 but is forecast by BP economist Dale to account for 20 percent to 50 percent of global energy production by 2050, depending on the pace of transition. And that does not account for the advent of new forms of energy. Even so, the current array of renewable energy options is “penetrating the energy system more quickly than any fuel ever seen,” Dale said on a recent Money Talks podcast from The Economist magazine.

BP has seen the same thing investors have seen — many governments enacting policies aimed at accelerating the shift away from fossil fuels because of concerns about climate change and their own energy independence. Most countries do not have significant oil reserves, including China, leaving them dependent on the United States, Russia and Saudi Arabia. And how many tears would be shed watching Iran, Russia, Saudi Arabia and other petrostates shrivel on the vine and stop making trouble around the world? How much sturdier would economies around the world be if each had their own domestic energy business?

Chief among those countries hellbent on kicking its oil addiction is the ascendant China, which imports 75 percent of the oil it needs. China doesn’t like being dependent on anybody; quite the contrary, it has been busy for several decades trying to make the world’s economies dependent on Beijing and all it has to offer by way of everything from sheer market size to critical industrial elements such as lithium and cobalt. Chinese president Xi Jinping envisions his nation becoming the world’s renewable energy superpower, as both a way to ensure its security and to create an entirely new and hugely profitable sector of its economy. China is already well on its way, dominating the manufacture and export of solar panels and batteries. Kevin Tu of Beijing Normal University observes that even as China is the world’s largest user of coal, it has simultaneously become the world largest clean energy market — and is targeting the setting of renewable industry standards.

U.S. proponents of renewables make much the same argument, claiming renewables and their associated technologies are the new computer industry, and the United States should set the goal of leading the world into this massive sea of dollars. But that won’t happen if China has anything to say about it.

A massive energy transition is under way, one that aims to take the business from dirty to clean. The so-called electrification of transportation and other systems is in progress, with some countries and U.S. states banning the combustion engine by certain dates. Again, how wistful will people become about not hearing traffic noise from bad mufflers and revving engines. Electric vehicles promise a meditative silence, and the ability to rocket from zero to 60 mph in two seconds (if we are to believe Elon Musk’s latest prophecies from the executive suites of Tesla).

Daniel Yergin also did a brief segment on the Money Talks podcast, and he’s one of those guys worth paying attention to, given that he won a Pulitzer Prize for writing books about the oil business. He marveled that it was only a decade ago when people talked about “peak oil” and how we were destined to run out of that precious natural resource.

Realistically, the fossil fuels to renewables handoff will not happen anytime soon. Yergin points an index finger at the 12 million jobs the fossil fuel industry supports, and I have written here before that solar and wind cannot possibly scale to the desired targets for decades, which is why nuclear power would make sense to at least bridge that gap. In the meantime, what a mindblower it would be if we can finally move from radioactive nuclear fission to non-radioactive and inexhaustible nuclear fusion. Who would even need the sun to shine and the wind to blow at that point?

But even with our current state of affairs, we are seeing enormous retrenchment by the major oil companies; witness their capital spending budget reductions of 30 percent or more. Meanwhile, the once fearsome and loathsome OPEC has become impotent.

Asked whether, in the grand scheme of things, the new energy order is a good thing, Charlotte Howard, energy and commodities editor at The Economist, speaks with a singular tongue: “Absolutely. The old system was hugely dysfunctional, it made the whole world dependent on a minority of oil producers and increased economic volatility in the global market. In states that did have very rich resources, it helped to foster corruption and cronyism. Those economies didn’t diversify. A shift away from the old oil system is hugely preferable, basically, for everybody. Most important, the energy system will become far less dirty. The single biggest risk is that it happens too slowly, because the damage of not maximizing this opportunity to move on from fossil fuels would have huge and deeply serious political and economic consequences. Secondly, if the shift is disorderly, if governments don’t think about this properly, it could add to instability in petrostates and concentrate control of the green supply chain within one country, in particular China.”

Okay, it’s all coming into focus for me now.

File this report about the emergence of renewable energy and other technology breakthroughs under THE ENERGY FUTURE IS BOUNTIFUL AND SHINING BRIGHTLY (SORT OF).

 

Mike Consol (m.consol@irei.com) is editor of Real Assets Adviser. Follow him on Twitter @mikeconsol to read his latest postings.

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