During the State of the Union address, President Biden wandered off script for a minute and ad-libbed, “We’re going to need oil for another decade.” This remark drew hoots from Republican lawmakers and doubting commentary from conservative influencers. But exactly what did he say that was wrong? Maybe more than a decade? Okay, he added that, after the hoots. But, as far as we can tell, he sent the right message.
There are five ways to decarbonize our economy, three of which would directly affect consumption of fossil fuels. (1) Environmental engineering literally sucks the carbon dioxide out of the air and either uses it in an industrial process or stores it somewhere. Not much commercially available yet and little idea of cost. (2) Carbon capture and sequestration (CCS) removes carbon dioxide as it is created during combustion and similarly either uses or stores the captured CO2. Putting a chemical plant (which is what a CCS facility is) onto a furnace adds considerable expense. But both these CO2 attenuation methods should make fossil fuel producers happy because they only address or remedy after-the-fact emissions, not the consumption of fossil fuels. (3) Producing green hydrogen with renewable resources would create a new, non-carbon emitting fuel to compete with existing fuels. Major industrial gas and fertilizer companies are already at work on this technology. (4) Using energy more efficiently. Conservation, for obvious reasons, is undoubtedly the cheapest emissions reduction technique. (5) Lastly, increasing electrification would replace direct use of fossil fuels with electricity produced without burning fossil fuels. An example here is a battery electric vehicle powered by renewable resources. Note that methods (3) to (5) compete directly with fossil fuels or will, if adopted at scale, reduce the use of fossil fuels.
Now for a few facts, unadorned by speculation. Over 90% of steam coal used in this country is sold to electricity generators, who burn it in old power stations close to or beyond retirement age. As those stations age out and close down, US coal consumption will fall unless somebody comes up with an extraordinarily effective and cheap means of carbon capture and sequestration. Will US producers sell their coal abroad, instead? Maybe during exigencies created by the Ukraine war. But foreign utilities with ancient coal-fired stations often keep them going to keep local miners employed. Would they do so to keep American miners employed? We doubt it. Electrification will produce a sharp drop in coal sales.
Roughly 37% of natural gas consumption in the US is by electricity generators. The electric industry would like to gradually phase in decarbonization, which might mean a slow drop in natural gas sales to the industry. But electrification also involves efforts to eliminate natural gas markets for residential heating, cooking. and industrial processes. Hydrogen producers might attempt to compete for some of these same markets. And natural gas distributors will want to show green credentials by adding renewable gas to their energy mix. Admittedly, like coal, gas producers might eye foreign markets for replacement sales. But remember that other major industrial countries are also pursuing their own versions of electrification. Natural gas usage and sales might be under steady pressure for decades.
As for petroleum itself, about 60% of sales goes to transportation— the number one market for electrification. Virtually all major auto manufacturers have committed to electric vehicles with stated plans to produce no other vehicle types starting in the 2030s. Shortages of computer chips, that have hindered sales, will not last forever. As for the potential shortage of minerals, history tells us that adaptive manufacturers alter their processes to accommodate shortages. Mining companies find new deposits or suitable substitute minerals. We suspect that, in the end, the story of lithium will not be much different than the history of natural tree rubber, first becoming scarce and then synthesized from polymers.
To sum up. Was President Biden right about oil? We would argue that all energy consumption will grow around 1% per year, roughly, in line with current projections. If electricity begins to power all new vehicles by around 2035, we expect oil consumption would decline from then on, maybe stabilizing by 2050 at a substantially lower level than today. As for natural gas, which represents a substantial portion of the US power generating fleet, we expect electric generators will try to maintain these relatively new facilities for as long as possible or at least until enough renewables enter the market so as to render them irrelevant. But, in our view, every US gas-powered electricity generator is at some risk of premature closure. There will be political pressure as the climate heats up and unpleasant transformations occur and economic pressure as renewable technology improves and gets cheaper. And between more efficient gas appliances and competition from renewable gas and electricity, we don’t see much strength in long term gas sales either. So natural gas hangs on at best domestically as a utility boiler fuel. Maybe sell more abroad? As we suggested regarding petroleum, we think natural gas usage will also decline. By 2050 usage will be way down from current levels. As for coal, we aren’t convinced there will be a meaningful industry here in a decade especially as the move towards “green” steel and cement removes their last two big industrial markets.
So, back to the beginning. It seems President Biden was right. But in a decade from now (when battery electric vehicles are the only ones sold) the energy industry will have to face up to the unpleasant possibility of a long period of decline. And that brings up a related financial question. How can energy and utility companies invest in large assets and projects lasting forty or more years when the long term outlook is so uncertain and possibly negative? We’re inclined to think senior management's answer will be: let’s invest as little as possible until the long term outlook clarifies.
By Leonard Hyman and William Tilles for Oilprice.com
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