Some very wrong but intuitively appealing ideas about energy keep recurring. These are the ideological equivalents of vampires in old movies, waking hungry and rising from the coffin every night until the hero arrives with a silver stake. The latest “vampire” argument, is that energy decarbonization is an unreasonable goal at this time because it’s too expensive. What is surprising is that we saw this argument published in the Financial Times recently. If the argument had stopped there, so far so bad. But it got worse. The author then “explained” that reducing carbon emissions in the time of COVID elevates energy prices, which would reduce demand for energy which would hinder economic recovery, because of a posited “close relationship” between domestic gross domestic product and energy usage. Hence, policies that reduce greenhouse gas emissions and raise energy prices “would reduce economic growth.”
We don’t have the space to debate all these points. Consider just a few.
First, energy demand has a low, short term price elasticity, meaning that demand does not change much as a result of price changes. Perhaps down 2% on a 10% price hike. Second, the cost of energy equals about 6% of gross domestic product. So it would take a massive price increase to make a dent in the economy, although some consumers would suffer, admittedly. Third, since the analysis seems to be aimed at renewables, keep in mind that most renewables feed into the electric network and consumers pay for electricity delivery not renewables. Recent contracts with the grid seem to show that renewables are increasingly competitive with other new power sources, and we have calculated elsewhere that putting no-carbon generation into the network, over time, makes little difference to the electric bill, and the electric bill equals 2% of GDP, so let’s not get carried away about impact. Finally, the best and cheapest way to reduce greenhouse gas emissions is to use less energy, not to install renewables. And this is relevant to the argument that follows.
We thought that the notion that the economy moves in lockstep with energy consumption (or vice versa, more accurately) had been discredited years ago. Energy usage may rise and fall in the short term due to the economic cycle, but over the long term there has been a gradual decoupling of energy usage from economic growth. Take a look at energy required to produce a dollar of real GDP in the United States from 1950 to 2018. (Figure 1.) Note the consistent drop in energy intensity. If that is not a secular trend, what is?
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FIGURE 1. Energy required in USA per dollar of real GDP (1990=100)
Next, let’s compare the change in energy intensity in the USA with that in the world as a whole, from 1990 to 2018. For all practical purposes, the trends are identical. (See Figure 2.)
FIGURE 2. Energy usage per dollar of GDP (1990=100)
Next, let’s see if this phenomenon applies to both rich and poor countries. If wealthier nations are shifting manufacturing to poorer countries we should see a divergence in usage trends. Energy intensity should decline more in richer than poorer countries. As Figure 3 shows, high income countries use more energy to produce a dollar of GDP than do low income countries. But between 1990 and 2015 (latest available data), consumption of energy per unit of GDP fell 27% in the low income countries and 30% in the high income countries. In other words, hardly any difference.
FIGURE 3. Energy usage per unit of income (1990-2015)( in kwh).
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These figures show, on a rough basis, that society modifies its consumption of energy in the same way as other commodities. But unlike other commodities, say sugar and coffee which we directly consume, we only “consume” the direct benefits of electricity—heating, cooling, illumination, refrigeration etc. The trend we see is constant effort to achieve the desired benefit with less energy inputs. The COVID pandemic should not become an excuse to abandon climate change mitigation measures or to promote a new strategy of doing less with more.
Fossil fuels are fighting renewables for a slice of a shrinking pie —the energy required to produce a dollar of GDP. Consumers of energy treat it the same way they treat any commodity. They look for ways to make do with less. Copper miners, now, rejoice at how many pounds of copper go into electric vs conventional vehicles. They need not get complacent. History suggests vehicle manufacturers will look for a cheaper replacement as soon as they can.
As for the disturbance of the oil and coal markets by renewables, which seems to be the real beef, is this a new type of phenomenon? Looking at the last 200 years of energy usage we see an ongoing process of displacement. Coal displaced wood and water power. Kerosene and manufactured gas displaced sperm whale oil. Petroleum displaced coal and horses. Natural gas displaced manufactured gas and coal. Now it appears renewables will displace fossil fuels. And in due course something else is likely to replace renewables. The long term problem for fossil fuel producers lies with consumers who not only like to do more with less but also to try new products. It is not all about price.
We have to hand it to fossil fuel advocates (or opponents of renewables) for coming up with COVID as the latest reason to not tackle climate change. Very ingenious. But not terribly convincing.
By Leonard Hyman and William Tilles for Oilprice.com
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Whilst energy intensity (meaning energy required to produce a dollar of global GDP) has been declining with technological advances, conservation and efficiency, a decoupling of energy needs from economic growth will never happen.
If anything, the coronavirus outbreak with its destructive power of both the global economy and the global oil market has proven irrevocably how inseparable oil and the global economy are by demonstrating that destroying one automatically destroys the other and vice versa.
Furthermore, there could neither be a global economy nor a modern civilization as we know and enjoy without oil and gas and vice versa. The global economy operates on oil and gas and will continue to do so throughout the 21st century and probably far beyond.
And while Covid-19 has severely affected the use of all sources of energy including renewables without differentiation, the global energy scene will continue to be governed by four pivotal realities well into the future.
The first is that there will be no post-oil era throughout the 21st century and probably far beyond. Oil will continue to reign supreme all through.
The second reality is that there will be no peak oil demand either. While an increasing number of electric vehicles (EVs) on the roads coupled with government environmental legislations could decelerate the demand for oil, EVs could never replace oil in global transport throughout the 21st century and far beyond.
The third reality is that an imminent global energy transition from oil and gas to renewables is a myth. The slower pace of oil majors toward alternative energies is due to two key reasons. First, they all say that oil and gas will continue to be needed well into the foreseeable future. And second, and probably much more important, is that financial returns from renewables are nothing compared to that from oil and gas.
The fourth reality is that oil and gas will continue to be the core business of Big Oil well onto the future.
For now, we are in an era of energy diversification where alternative sources to fossil fuels, notably renewables, are growing alongside - not at the expense of - the incumbents.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London