My mother used to say that she had considered writing a book on the advantages of being old, but decided on reflection that it would be too short. The same may be true of an attempt to gather encouraging bits of information associated in any way with the coronavirus pandemic while our towns are shut down, and financial markets are crashing around us.
Nonetheless, I’m going to try to at least stretch out some not-altogether-negative thinking on the crossroads between the virus and the Energy and Economic Transition into blog posts over the coming days.
Oil prices have plummeted. Gasoline should drop well below $2 per gallon before long even in relatively high-priced Maine, judging by crude oil’s 50%-plus plunge. It would be better news if people had more places to drive to. Still, it’s helpful for most people. Not so the US oil industry. A very high percentage of the operations that have fed the shale oil boom are now losing money, whether they’re owned by mom-and-pop operators or by Exxon.
Turning the US industry into a loss maker and thereby reducing production is the apparent goal of the two big oil exporting countries of Saudi Arabia and Russia, which recently fell to feuding over how to respond to the plunge in oil demand resulting from the coronavirus-related economic crash. Unable to agree, they dropped long-standing efforts to stabilize crude oil prices by shutting in capacity. The result? Their production is rising even as global demand plummets.
It’s a price war for sure, but who’s on what side is less clear. Are Russia and Saudi Arabia battling each other? Or are they together battling the US industry, which continued to expand rapidly in recent years while global consumption inched up by less than 2% annually? As long as the Russians and Saudis held back capacity, the US could grab an ever larger slice of a barely bigger pie – even though production costs here are comparatively high.
Now comes the important question for those interested in the Energy Transition: What happens if the pie shrinks, as it certainly will in the short-term and as it conceivably may from here on out?
It’s been clear to everyone in and around the oil business for some time that “peak demand” for oil is on its way. Could be in two years or could be in 20, but it’s coming. And when it does, lots of oil will still be sitting in the ground, worth a decreasing amount as consumption declines, and worth nothing once the economy deserts oil altogether.
Whether by design or not, the Russians and Saudis seem to have decided that the coronavirus crash provides the perfect opportunity for knocking out the US oil industry, leaving these big low-cost producers with a bigger share of global sales while the oil party lasts, and insuring that less of their oil is left in the ground when the dancing stops.
Their odds of accomplishing this are bolstered by the fact that big investors turned heavily negative on oil company stocks and bonds some time ago, realizing that the energy transition was on its way and that many of these companies would go out of business or become radically smaller in the process. Share prices of US oil companies have on average earned less for investors than the stock market as a whole, as measured by indexes such as the S&P 500, stretching back to 2008. There may soon be no need to pass the kind of fracking bans that many Democrats support.
What will this fight to the end mean for renewable energy and the electrification of transportation, building heating, industry and agriculture? Low oil prices are often seen as a problem for the Transition, because they theoretically make oil more competitive. This isn’t really an issue in electricity generation, however, since oil hasn’t been used much to generate power for 30 years or more. Prices for natural gas, which does compete with solar and wind in the power sector, increasing move independently of oil markets.
Cheap gasoline could hurt electric vehicle (EV) sales. But prices and operating features of the EVs themselves – increasingly including electric SUVs, pickups and delivery trucks -- are generally considered more important to EV sales growth than fuel prices. And the cost of batteries continues to plummet, insuring that EVs will get cheaper.
Many auto industry analysts see EVs as on track to become as cheap as all but the least expensive gasoline- and diesel-fueled vehicles within a couple of years, even with shrinking subsidies. All car sales are plunging at the moment, but when they come back, EVs should be better positioned than they are now.
On balance, then, a weakened domestic US oil industry could be a good thing for the transition. And then there’s the likelihood that people may learn to live in more fuel-efficient ways. More on that in the days to come.