The End Game for Fossil Fuels

Here are some notes and related links from a stunning talk given tonight by Dieter Helm, Professor of Energy Policy at New College, Oxford.

The End Game for Fossil Fuels - Geopolitical Consequences

The 20th century was built upon using energy from fossil fuels to transform manufacturing processes, transportation and people's lives.

We can already observe some salient features of the near future:

• Bio-diversity is under huge threat - by the end of the century, around half of the species on the planet will have disappeared. 
• With 2-3% per annum growth rates, people will be 16 or 17 times richer by the end of this century.  

Conventional wisdoms about fossil fuels

1. Until 2014 - peak oil theory - predictions about the soaring price of oil have proved wide of the mark - oil and gas prices have fallen, threatening the commercial viability of renewables.
2. China and the US would "fix" climate change and the Paris agreement would be a turning point - the agreed carbon caps no longer exist. 

Game changer number 1

The (permanent) end of the commodity price super-cycle

The real price of oil fell for a hundred years from 1870 to 1970 - supply always responded to demand.

1970s - two big spikes in oil prices as the OPEC cartel flexed their muscles

1980 - everyone believed the oil price would rise forever (France shifts to nuclear power investment), Carter fitted solar panels to the roof of the White House!

Next two decades - world oil prices fell back sharply

2000s - steady rise in oil prices to a peak of $147 per barrel (about equal to $39 in 1979 in real terms)

Putin gets a rise in the world oil price every year from 2000 to 2014 - but no longer - oil export revenue for Russia is falling sharply away, the impact of the fall in price is even worse for Saudi Arabia.

Now we are down at $50 a barrel. USA has added 3 million barrels of oil to world supply through shale oil - a transformation of the world oil market. 

The earth's crust is riddled with fossil fuels - we are not going to run out of the stuff.

Until today, Saudi has assumed that the stability of their regime will be supported by a rising future price of oil. Who will produce the last barrel of oil? Saudi Arabia needs a break-even price of $100 to finance their budget. It is forward selling oil because they now think it will be worth less in the future. In a world where oil prices are falling, oil is becoming more competitive against renewables, not less.

Game changer number 2

De-carbonisation is for real and it is ustoppable

Kyoto ended up as an agreement with only European countries in the frame. Cutting carbon emissions tackled in part by the carbon trading emissions scheme. Since 1990, Europe has been exiting energy-intensive industries. Huge swathes of heavy manufacturing has been out-sourced to China. 

The UK has replaced carbon production with carbon consumption. 

Emissions cut by 15% but carbon consumption went up 19% - e.g. due to the enormous coalburn in Chinese manufacturing industry.

Top-down carbon production limits can make things worse - government failure in environmental policy

The Paris Agreement is a series of voluntary pledges - there is no compulsion to the carbon caps

• China likely to peak their carbon emissions anyway 
• US's abundant natural gas is substituting away from coal 
• Since 2000, Germany has expanded coal power station capacity despite her reputation for being at the forefront of a renewable revolution

What really matters is urban pollution - China is acting strongly on these, along with many other cities around the world.

Game changer number 3

Rapid technological change is underway and zero marginal cost changes the structure of the energy markets

(a) We are experiencing the digitisation of everything

• Robots
• Artificial intelligence
• 3D printing

Absolutely profound structural changes in economies going forward - there is little or no point producing Adidas trainers in China in a world where trainers are printed to a digital specification next to where people consume.

China's cheap labour is no longer cheap - they know this - hence their huge investment in building the human capital of their workforce to become a more innovative economy.

The Living Wage makes it more attractive for employers to digitise. Brexit will drive up wage costs and speed up the process. The social consequences are politically significant.

(b) We are seeing the electrification of everything

• Everything that is digital is electric
• Energy in this century will be an electric century
• What matters is what is going to make the electricity
• Electricity will drive entire transport systems because transport is digitising

Key question: Is there enough technological change to drive this to a low carbon outcome? 

In the 21st century, households and businesses will generate and store their own power

Dyson is now producing a solid state battery / battery power technology is improving quickly

People will have an active demand-side in the market! People want their energy supply managed and they will expect their devices in the home automatically to find the cheapest source of supply.

The characteristics of almost all renewable energies is that they have no marginal cost compared to the marginal cost of oil and gas.

Energy will be consumed in a similar way to how people use broadband at the moment.

Vertically integrated energy and transport companies will be severely challenged by the likes of Dyson, Amazon, Google - dinosaurs will die - they are stuck with their existing costs. They don't have the mentality of the start-ups. BT or EDF don't have an entrepreneurial mindset - instead they rely increasingly on buying up start-ups in an attempt to catch up.

Suggestions for enrichment reading on this topic