The Economist, November 26th, 2016

Breaking the habit

The future of oil

The world’s use of oil is approaching a tipping-point, writes Henry Tricks. But
don’t expect it to end imminently

AT THE TURN of the 20th century, the most malodorous environmental challenge facing
the world’s big cities was not slums, sewage or soot; it was horse dung. In London in 1900,
an estimated 300,000 horses pulled cabs and omnibuses, as well as carts, drays and
haywains, leaving a swamp of manure in their wake. The citizens of New York, which was
home to 100,000 horses, suffered the same blight; they had to navigate rivers of muck
when it rained, and fly-infested dungheaps when the sun shone. At the first international
urban-planning conference, held in New York in 1898, manure was at the top of the agenda.
No remedies could be found, and the disappointed delegates returned home a week early.

Yet a decade later the dung problem was all but swept away by the invisible hand of the
market. Henry Ford produced his first Model T, which was cheap, fast and clean. By 1912
cars in New York outnumbered horses, and in 1917 the last horse-drawn streetcar was
retired in Manhattan. It marked the moment when oil came of age.

That age has been one of speed and mostly accelerating progress. If coal drove the
industrial revolution, oil fuelled the internal-combustion engine, aviation and the 20th-
century notion that mankind’s possibilities are limitless; it flew people to the Moon and
beyond. Products that have changed lives—from lipstick to CD players, from motorcycle
helmets to aspirin—contain petrochemicals. The tractors and fertilisers that brought the
world cheaper food, and the plastics used for wrapping, are the progeny of petroleum
products. 

Oil has changed history. The past 100 years have been pockmarked with oil wars, oil
shocks and oil spills. And even in the 21st century its dominance remains entrenched. It
may have sped everything else up, but the rule of thumb in energy markets is that changing
the fuel mix is a glacial process (see chart). Near its peak at the time of the Arab oil
embargo in 1973, oil accounted for 46% of global energy supply. In 2014 it still had a share
of 31%, compared with 29% for coal and 21% for natural gas. Fast-growing rivals to fossil
fuels, such as wind, solar and geothermal energy, together amounted to little more than
1%.
Horses for courses

Yet the transition from horse power to horsepower, a term coined by Eric Morris of
Clemson University, South Carolina, is a useful parable for our time. A hundred years ago
oil was seen as an environmental saviour. Now its products are increasingly cast in the
same light as horse manure was then: a menace to public health and the environment.

For all its staying power, oil may be facing its Model T moment. The danger is not an
imminent collapse in demand but the start of a shift in investment strategies away from
finding new sources of oil to finding alternatives to it. The immediate catalyst is the global
response to climate change. An agreement in Paris last year that offers a 50/50 chance of
keeping global warming to less than 2ºC above pre-industrial levels, and perhaps limiting it
to 1.5ºC, was seen by some as a declaration of war against fossil fuels.

That agreement has been thrown into doubt by the election of Donald Trump, who has
dismissed climate change as a “hoax”, as America’s next president. But if big energy
consumers such as the EU, China and India remain committed to curbing global warming,
all fossil fuels will be affected. The International Energy Agency (IEA), a global forecaster,
says that to come close to a 2ºC target, oil demand would have to peak in 2020 at 93m
barrels per day (b/d), just above current levels. Oil use in passenger transport and freight
would plummet over the next 25 years, to be replaced by electricity, natural gas and
biofuels. None of the signatories to the Paris accord has pledged such draconian action yet,
but as the costs of renewable energy and batteries fall, such a transition appears ever more
inevitable. “Whether or not you believe in climate change, an unstoppable shift away from
coal and oil towards lower-carbon fuels is under way, which will ultimately bring about an
end to the oil age,” says Bernstein, an investment-research firm.

Few doubt that the fossil fuel which will suffer most from this transition is coal. In 2014 it
generated 46% of the world’s fuel-based carbon-dioxide emissions, compared with 34%
for oil and 20% for natural gas. Natural gas is likely to be the last fossil fuel to remain
standing, because of its relative cleanliness. Many see electricity powered by gas and
renewables as the first step in an overhaul of the global energy system.

This special report will focus on oil because it is the biggest single component of the energy
industry and the world’s most traded commodity, with about $1.5trn-worth exported each
year. Half of the Global Fortune 500’s top ten listed companies produce oil, and unlisted
Saudi Aramco dwarfs them all. Oil bankrolls countries that bring stability to global
geopolitics as well as those in the grip of tyrants and terrorists. And its products fuel 93%
of the world’s transport, so its price affects almost everyone.

Since the price of crude started tumbling in 2014, the world has had a glimpse of the havoc
a debilitated oil industry can cause. When oil fell below $30 a barrel in January this year,
stockmarkets predictably plummeted, oil producers such as Venezuela and Nigeria suffered
budget blowouts and social unrest, and some American shale companies were tipped into
bankruptcy. But there have been positive effects as well. Saudi Arabia has begun to plan for
an economy less dependent on oil, and announced it would partially privatise Aramco.
Other Middle Eastern producers have enthusiastically embraced solar power. Some oil-
consuming countries have taken advantage of low oil prices to slash fuel subsidies.

Western oil companies have struggled through the crisis with a new cross to bear as
concerns about global warming become mainstream. In America the Securities and
Exchange Commission and the New York attorney-general’s office are investigating
ExxonMobil, the world’s largest private oil company, over whether it has fully disclosed the
risks that measures to mitigate climate change could pose to its vast reserves. Shareholders
in both America and Europe are putting tremendous pressure on oil companies to explain
how they would manage their businesses if climate-change regulation forced the world to
wean itself off oil. Mark Carney, the governor of the Bank of England, has given warning
that the energy transition could put severe strains on financial stability, and that up to 80%
of fossil-fuel reserves could be stranded. The oil industry’s rallying cry, “Drill, baby, drill!”
now meets a shrill response: “Keep it in the ground!”

Which peak?

This marks a huge shift. Throughout most of the oil era, the biggest concern has been about
security of energy supplies. Colonial powers fought wars over access to oil. The
Organisation of Petroleum Exporting Countries (OPEC) cartel was set up by oil producers
to safeguard their oil heritage and push up prices. In the 20th century the nagging fear was
“peak oil”, when supplies would start declining. But now, as Daniel Yergin, a Pulitzer-
prizewinning oil historian, puts it: “There is a pivot away from asking ‘when are we going
to run out of oil?’ to ‘how long will we continue to use it?’ ” For “peak oil”, now read “peak
demand”.

Oil to fuel heavy-goods vehicles, aeroplanes and ships, and to make plastics, will be needed
for many years yet. But from America to China, vehicle-emissions standards have become
tougher, squeezing more mileage out of less fuel. Air pollution and congestion in big cities
are pushing countries like China and India to look for alternatives to petrol and diesel as
transport fuels. Car firms like Tesla, Chevrolet and Nissan have announced plans for long-
range electric vehicles selling, with subsidies, for around $30,000, making them more
affordable. And across the world the role of energy in GDP growth is diminishing.

Analysts who think that the Paris accords will mark a turning point in global efforts to
reduce carbon-dioxide emissions say global oil consumption could start to wane as early as
the 2020s. That would mean companies would have to focus exclusively on easy-to-access
oil such as that in the Middle East and America’s shale-oil provinces, rather than expensive,
complex projects with long payback periods, such as those in the Arctic, the Canadian oil
sands or deep under the ocean.

Yet many in the industry continue to dismiss talk of peak demand. They do not believe that
governments have the political will to implement their climate goals at anything like the
speed the Paris agreement envisages. In America they ridicule the idea that a nation built
around the automobile can swiftly abandon petrol. And Khalid Al-Falih, Saudi Arabia’s
energy minister, estimates that the world will still need to invest in oil to the tune of almost
$1trn a year for the next 25 years. Oil veterans point out that even if global oil consumption
were to peak, the world would still need to replace existing wells, which deplete every year
at the rate of up to 5m b/d—roughly the amount added by America’s shale revolution in
four years. Demand will not suddenly fall off a cliff.
 A number of big oil companies accept that
in future they will probably invest less in
oil and more in natural gas, as well as in
renewable energy and batteries. Rabah
Arezki, head of commodities at the IMF,
says the world may be “at the onset of the
biggest disruption in oil markets ever”.

This report will argue that the world needs

to face the prospect of an end to the oil era,
even if for the moment it still seems
relatively remote, and will ask three central
questions. Will the industry as a whole deal
with climate change by researching and
investing in alternatives to fossil fuels, or
will it fight with gritted teeth for an oil-
based future? Will the vast array of
investors in the oil industry be prepared to
take climate change on board? And will
consumers in both rich and poor countries
be willing to forsake the roar of a petrol engine for the hum of a battery?

The Economist, July 13th, 2017

At what cost?

Can the world thrive on 100% renewable

energy?
A WIDELY read cover story on the impact of global warming in this week’s New York
magazine starts ominously: “It is, I promise, worse than you think.” It goes on to predict
temperatures in New York hotter than present-day Bahrain, unprecedented droughts
wherever today’s food is produced, the release of diseases like bubonic plague hitherto
trapped under Siberian ice, and permanent economic collapse. In the face of such
apocalyptic predictions, can the world take solace from those who argue that it can move,
relatively quickly and painlessly, to 100% renewable energy?
At first glance, the answer to that question looks depressingly obvious. Despite falling costs,
wind and solar still produce only 5.5% of the world’s electricity. Hydropower is a much
more significant source of renewable energy, but its costs are rising, and investment is
falling. Looking more broadly at energy demand, including that for domestic heating,
transport and industry, the share of wind and solar is a minuscule 1.6% (see chart). It
seems impossible to eliminate fossil fuels from the energy mix in the foreseeable future.

But all energy transitions, such as that from coal to hydrocarbons in the 20th century, take
many decades. It is the rate of change that guides where investments flow. That makes
greens more optimistic. During the past decade, solar photovoltaics (PV) and wind energy
have been on a roll as sources of electricity. Although investment dipped slightly last year,
the International Energy Agency, a global forecaster, said on July 11th that for the first time
the amount of renewable capacity commissioned in 2016 almost matched that for other
sources of power generation, such as
coal and natural gas. In some countries
the two technologies—particularly solar
PV in sunny places—are now cheaper
than coal and gas. It is no longer
uncommon for countries like Denmark
and Scotland to have periods when the
equivalent of all their power comes from
wind.

Ambitions are rising. The Senate in

California, a state that is close to hitting
its goal of generating one-third of its
power from renewables by 2020, has
proposed raising the target to 60% by
2030; Germany’s goal is to become 80%
renewable by 2050. But whether it is
possible to produce all of a country’s
electricity with just wind, water and
hydro is a subject of bitter debate.

In 2015 Mark Jacobson of Stanford

University and others argued that
electricity, transport, heating/cooling, and industry in America could be fully powered in
2050-55 by wind, water and solar, without the variability of the weather affecting users.
Forswearing the use of natural gas, biofuels, nuclear power and stationary batteries, they
said weather modelling, hydrogen storage and flexible demand could ensure stable supply
at relatively low cost.

But in June this year Christopher Clack, founder of Vibrant Clean Energy, a firm, issued a
stinging critique with fellow researchers in the Proceedings of the National Academy of
Sciences, the journal in which Mr Jacobson et al had published their findings. They argued
that a narrow focus on wind, water and solar would make tackling climate change more
difficult and expensive than it needed to be, not least because it ignored existing zero-
carbon technologies such as nuclear power and bioenergy. They claimed the models
wrongly assumed that hydroelectricity output could continue for hours on end at many
times the capacity available today, and pointed to the implausibility of replacing the
current aviation system with yet-to-be-developed hydrogen-powered planes. In their view,
decarbonising 80% of the electricity grid is possible at reasonable cost, provided America
improves its high-voltage transmission grid. Beyond that is anyone’s guess.

Others take a wider view. Amory Lovins of the Colorado-based Rocky Mountain Institute, a
think-tank, shrugs off the 100% renewables dispute as a sideshow. He takes comfort from
the fact that it is increasingly common for renewables sustainably to produce half a
location’s electricity supply. He believes that the share can be scaled up with ease, possibly
to 80%. But in order to cut emissions drastically, he puts most emphasis on a tripling of
energy efficiency, by designing better buildings and factories and using lighter materials, as
well as by keeping some natural gas in the mix. He also sees clean-energy batteries in
electric vehicles displacing oil demand, as petroleum did whale oil in the 19th century.

Some sceptics raise concerns about the economic ramifications if renewables’ penetration
rises substantially. In an article this month, Michael Kelly of Cambridge University focused
on the energy return on investment (EROI) of solar PV and wind turbines, meaning the
ratio between the amount of energy they produce to the amount of energy invested to
make them. He claimed that their EROI was substantially lower than those of fossil fuels;
using renewables to generate half of the world’s electricity would leave less energy free to
power other types of economic activity.

Critics note that his analysis is based on studies of PV returns in Spain from more than half
a decade ago. Since then solar and wind costs (a proxy for EROI) have plunged, raising their
returns. What is more, other studies suggest returns from fossil-fuel-derived energy have
fallen, and will decline further as they incur increased costs associated with pollution and
climate change. A high share of renewables may be less efficient at powering economic
growth than fossil fuels were in their 20th century heyday. But if the climate doomsayers
are to be proved wrong, a clean-energy system must be part of the solution.

This article appeared in the Finance and economics section of the print edition under the
headline "At what cost?"