Fatih Birol’s “I Have A Dream” Speech is Wrong

IEA executive director Fatih Birol gave his renewable energy  “I Have a Dream” speech this week.

In an opinion editorial in The Financial Times, Birol channeled American civil rights prophet Martin Luther King’s 1968 rhetoric as he proclaimed that

“The world is on the cusp of a historic turning point…Demand for each of the three fossil fuels is set to hit a peak in the coming years. This is the first time that a peak in demand is visible for each fuel this decade.”

Fact check—that’s not true. The IEA projected a -36% decrease in fossil fuel final consumption in last year’s 2022 announced pledges scenario (Figure 1).  In that report, consumption of all three fossil fuels were projected to decrease—liquid fuels by -26% from 2021 to 2050, natural gas by -38% and coal by -64%.

Figure 1. -36% decrease in fossil fuel final consumption in IEA’s 2022 announced pledges scenario. Liquid fuels expected to decrease -26% from 2021 to 2050. Natural gas to decrease -38% and coal -64%. Source: IEA & Labyrinth Consulting Services, Inc.

In this week’s op-ed, Birol went on to say that

“The growth of electric vehicles around the world, especially in China, means oil demand is on course to peak before 2030.”

That’s not true either. Despite the headlines about the explosive growth of EVs as a percent of new car sales, IEA data shows electric passenger cars accounted for only 2.1% of the global fleet in 2022 (Figure 2).

Figure 2. Electric passenger cars accounted for 2.1% of the global fleet in 2022. Source: IEA & Labyrinth Consulting Services, Inc.

Birol neither showed nor cited any data in his article but the The Financial Times published an IEA graph in a separate article meant to support his I have a Dream speech (Figure 3).

Figure 3. Oil demand set to plateau. Source: Financial Times.

The graph is problematic because the energy values on the y-axis are about 68% higher than the historical levels indicated by IEA published data (Figure 4).

Figure 4. Historical oil demand data in Fatih Birol’s FT chart are wrong. 2020 and 2021 data are 68% higher than IEA’s WEO 2022 report data. Source: IEA & Labyrinth Consulting Services, Inc.

I look forward to IEA’s release of its 2023 World Energy Outlook in October so I can decipher what Birol suggested in his recent op-ed. I give him credit for at least acknowledging that progress toward a low-carbon future is inadequate.

“The projected declines in demand we see based on today’s policy settings are nowhere near steep enough to put the world on a path to limiting global warming to 1.5C.”

In the meantime, the world does not need speeches about renewable energy dreams. It needs ruthlessly honest direction from leaders like Birol. He should but will not state that the only solution to climate change is greatly reduce consumption of all energy, not just fossil fuels.

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Substituting Renewable Energy for Fossil Fuels is a Doomsday Stratagem

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Insanity Check on Climate Change

Stanford climate scientist and ecologist Chris Field talked with podcast host Sam Harris last week. He was quite good through most of this episode called Sanity Check on Climate Change: A Conversation with Chris Field until he said,

“A few years ago, it was really unclear how we would bring emissions of carbon dioxide especially down to zero but now there are really clear pathways.”

That statement and everything that followed needed an insanity check.

Most climate-change policy addresses only electric power generation. That makes some sense since that sector is responsible for about 40% of global CO2 emissions.

At the same time, the power sector represents less than 20% of global energy consumption. It is unlikely to increase to much more than that 25% by 2050 if we optimistically assume that countries meet their stated-policy climate commitments (Figure 1).

Figure 1. IEA expects electric power to increase from 20% today to about 25% of world final energy consumption by 2050 in its stated policies scenario. Source: IEA & Labyrinth Consulting Services, Inc.

What is the plan for the other 80% of world energy consumption?

If you think that electric vehicles (EVs) are the answer, you have a lot more faith in things that haven’t happened yet than I do. Despite the headlines about the explosive growth of EVs as a percent of new car sales, electric passenger cars accounted for only 2.1% of the global fleet in 2022 (Figure 2).

Figure 2. Electric passenger cars accounted for 2.1% of the global fleet in 2022. Source: IEA & Labyrinth Consulting Services, Inc.

Perhaps you imagine a burst of EV growth that has not yet appeared as of 2022. The U.S. Department of Energy’s EIA does not share that view. EV energy consumption is expected to increase to only 5% of world transportation by 2050 (Figure 3).  Gasoline use is expected to decrease from 41% to 36% and diesel use from 37% to 30%. Those are steps in the right direction but hardly consistent with the popular idea that oil use will collapse because of EVs.

Figure 3. EV energy consumption increased expected to increase to 5% of world transportation consumption by 2050. Gasoline is expected to decrease from 41% to 36% and diesel from 37% to 30%. Source: EIA & Labyrinth Consulting Services, Inc.

Some will say that these projections are wrong and I agree. All projections are wrong. Still, projections by credible organizations like EIA and IEA should not be dismissed. They are based on the best available data and both agencies have an energy transition bias. If EIA is 100% wrong, that means that EVs will account for 10% of energy consumption by 2050. Big deal. You can play those multiplication tables forward and see that it would require a miracle for EVs to replace gasoline and diesel over the next few decades.

To compound this problem, passenger cars accounted for only 8% of global CO2 emissions in 2020 (Figure 4). People should buy EVs if they like them but not because they will save the planet from climate change.

Figure 4. Only 8% of CO2 emissions from passenger cars–buy an EV and save the world 18% from 4 pillars of civilization and 40% from electric power and heat. Source: IEA & Labyrinth Consulting Services, Inc.

Most renewable energy enthusiasts ignore the cost and land use-implications of increased wind and solar energy use, and the effect of energy substitution on the environment. Solar PV is expected to account for 24% of world electric power generation by 2050 in IEA’s stated policies scenario (Figure 5). Wind will account for 21%, hydro 14%, nuclear 9%, natural gas 13% and coal 12%.

Figure 5. Solar PV expected to account for 24% of world electric power generation by 2050. Wind to account hydro 14%, nuclear 9%, natural gas 13% and coal 12% IEA Stated Policies scenario. Source: IEA & Labyrinth Consulting Services, Inc.

That means adding 9,550 Gigawatts of wind and solar electric power generation from 2020 to 2050. The incremental land-use for that additional capacity will be approximately 3.2 million square kilometers or an area about the size of India. The cost will exceed $10 trillion.

Table 1. Cost and land-use effects of increased wind and solar for electric power generation in IEA’s “stated policies” scenario. Source: IEA & Labyrinth Consulting Services, Inc.

IEA’s Net Zero by 2050 scenario requires roughly seven-and-a-half times the land use and five times the cost.  The additional land use compared to 2020 is approximately 24 million square kilometers or an area about the combined size of Russia and Australia (Table 2). The cost would be more than $51 trillion.

Table 2. Cost and land-use effects of increased wind and solar for electric power generation in IEA Net Zero scenario. Source: IEA & Labyrinth Consulting Services, Inc.

Renewable researchers will correctly point out that neither solar nor wind farms occupy 100% of the area on which they are located, and may be integrated into existing crop and pasture land to a greater or lesser degree. It’s also important to note that not all areas are well-suited for wind and solar so country boundaries only serve as visual guidelines. The amount of land use is, nonetheless, stunning and its potential effect on the natural world is horrifying.

In addition to these concerns, IEA’s projections assume unrealistic improvements in energy efficiency. IEA’s Net Zero Roadmap assumes that consumption per $ GDP (energy intensity of GDP) will average 4% through 2030, and will then average 2.2% from then through 2050.

“A major worldwide push to increase energy efficiency is an essential part of these efforts, resulting in the annual rate of energy intensity improvements averaging 4% to 2030—about three‐times the average rate achieved over the last two decades.
–IEA

It is unclear where these improvements in energy intensity will come from but historically, the rate has been decreasing instead of increasing. Without these outsized efficiency gains, energy consumption and carbon emissions will almost certainly continue to increase. As the IEA explained,

Without a projected annual average reduction of 2.2% in energy intensity, i.e. energy use per unit of GDP, TES (Total Energy Supply) in 2050 would be around 85% higher.”
–IEA

In other words, all of these “really clear pathways” to net zero are not only unclear but are almost certainly wrong.

Most well-intentioned climate-change activists are energy blind and simply don’t know that renewable energy is a partial solution to carbon emissions that applies mostly to electric power generation. Field, however, should know better. He apparently doesn’t see or chooses not to talk about the limitations of renewable energy.

 

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The Big Lie About Fossil Fuel Subsidies

The IMF’s media release on fossil fuel subsidies is a big lie.

The International Monetary Fund (IMF) claimed that 2022 fossil fuel subsidies were $7 trillion in its IMF Fossil Fuel Subsidies Data: 2023 Update released last week. Although the report implied that much of this was not money given directly to fossil fuel companies, the explanation was confusing at best and misleading at worst.

That doesn’t really matter because its news release and ensuing media reports stated that $7 trillion was a gift to an industry that is destroying the planet.

Figure 1. IMF blog post, August 24, 2023. Source: IMF.

I do not want to defend the fossil fuel industry but the IMF’s message is opportunistic, political, journalistically dishonest and more appropriate to Fox News than to an international opinion leader and supposedly honest broker.

Only $1.3 trillion (23%) of $7 trillion in government fossil fuel support is really a subsidy—what the IMF calls “explicit” subsidies—and only $51 billion (4%) of that goes directly to support fossil fuel companies (Figure 2). $5.7 trillion (77%) are “externalities” for environmental damage & under-pricing—what the IMF calls “implicit” subsidies.

Figure 2. Only $1.3 trillion (23%) of $7 trillion in government fossil fuel support is really a subsidy and only $51 billion (4%) of that goes directly to support fossil fuel companies. $5.7 trillion (77%) are “externalities” for environmental damage & under-pricing. Source: IMF & Labyrinth Consulting Services, Inc.

The IMF news release shown in Figure 1 went on to say that

“Subsidies for oil, coal and natural gas are costing the equivalent of 7.1 percent of global gross domestic product. That’s more than governments spend annually on education (4.3 percent of global income) and about two thirds of what they spend on healthcare (10.9 percent).”

Figure 3 puts that hyperbolic statement in perspective. The 2022 $1.3 trillion “explicit” subsidy was 1.3% of world GDP. The $51 billion true subsidy to fossil fuel companies was 0.0001% of world GDP.

Figure 3. The 2022 $1.3 trillion “explicit” subsidy was 1.3% of world GDP. The total $7 trillion 2022 “subsidy” was 7.1% of world GDP. The $51 billion true subsidy to fossil fuel companies was 0.0001% of world GDP. Source: IMF & Labyrinth Consulting Services, Inc.

More detailed data for U.S. provides further clues about how subsidies are distributed. Renewable energy accounted for 53% of 2022 U.S. subsidies compared to 11% for fossil fuels (Figure 4). Energy conservation accounted for 34%.

Critically, 77% of all 2022 subsidies were in the form of tax credits.

Figure 4. Renewables accounted for 53% & conservation for 34% of 2022 U.S. energy subsidies Fossil fuel subsidies accounted for only 11% of total and 77% of all 2022 subsidies were tax credits. Source: EIA & Labyrinth Consulting Services, Inc. EIA Current/EIA Federal Financial Interventions and Subsidies in Energy in Fiscal Years 2016–2022_AUG 2023_DATA TABLES

This is quite a different picture than the IMF report and media headlines suggest.

There is little doubt that fossil fuels are the principal source of carbon emissions. Nor should we excuse the intentional efforts by companies to conceal early knowledge of these dangers from the public.

Neither should we excuse the IMF’s intentional effort to blame fossil fuel companies for subsidies that they do not receive. Ninety-six percent of the “explicit” subsidies in 2022 went to help consumers bear the strain of higher fossil fuel prices. Should they be criticized for taking money from education and healthcare as the IMF falsely implies that fossil fuel companies did?

Our global economy is more than 80% dependent of fossil fuels. All economic players for the last 200 years are accountable for that. The IMF report implies that fossil fuel companies are solely responsible for climate change when we’re all to blame for not only using their products but demanding them in ever greater volumes and at lower prices.

Lisi Krall recently observed in a podcast with Nate Hagens that,

“We have a system that’s been in play in various forms for 10,000 years…Fossil fuel did not create capitalism…We can’t manage to have the expansionary kind of [economic] dynamic that we have going on now without fossil fuels.”

Blaming fossil fuel companies for climate change is a childish form of behavior that does nothing to help clarify our present planetary predicament.

 

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Another Oil Meme Bites The Dust: Tight Supply Turns to Oil Surplus

Mainstream oil analysts have bombed on their two big calls for 2023.

The first call was for oil prices to soar as China’s economy and oil demand recovered after Covid lockdowns. That idea went down in flames several months ago. It was replaced by a call for prices to soar as global oil supply fails to keep pace with demand, and a huge supply-demand deficit opens.

Goldman Sachs recent statement summarizes this view concisely:

“The main reason for oil outperformance is that the oil market continues to price sizeable deficits”

That now seems ready to flop as new supply from Iran, Iraq, Canada and several other producers is coming into the market

After months of daily drum-beating about tight supply, PVM’s Tamas Vargas made this comment yesterday:

“Whilst the oil balance could obviously deteriorate, currently there is no reason to believe that global oil consumption would approach, let alone fall below supply.”

The big supply-demand deficit probably isn’t happening but at least there won’t be a big SD surplus! Another meme bites the dust.The key element for Vargas is that Iraq may resume Kurdish exports that have been stalled for many months.

Grant Smith made this observation today:

“Since the start of the year, oil watchers have widely predicted that prices would end 2023 on a high note. That forecast is looking more and more precarious.”

How can mainstream analysts get things so consistently wrong? Because they take perfectly reasonable hypotheses and fail to test them against updated production and projections by credible sources.

For example, Canada production is estimated to increase +6% in the second half of 2023 compared with the first half (Table 1). Guyana output is expected to rise +11.2% over the same period and +52% in 2024 compared to 2023.

“Canadian crude output to increase 175,000 bpd this year & another 200,000 bpd in 2024.”
—RBN Energy

Table 1. Incremental production changes from August 2023 EIA STEO. Source: EIA & Labyrinth Consulting Services, Inc.

What about the OPEC production cuts and other OPEC and non-OPEC countries? Angola, Iran and Venezuela production increased in June and July compared with the first four months of 2023 (Table 1). EIA projects that non-OPEC liquids will be 1% higher in 2H 2023 than in 1H and 2% higher in 2024 than in 2023. Middle East output is expected to be 3.6% higher in 2H than in 1H 2023, and 2.4% higher in 2024 than in 2023.

Of course, these are projections but they do not support that meme that supply will fall.

That’s supply but what about demand? Figure 2 shows both OPEC and EIA supply and demand data, and corresponding projections. At the bottom of the chart, the blended supply-demand balances are indicated. They suggest that the supply-demand deficit in the second half of 2023 is unlikely to be greater than in the same period in 2021 when Brent monthly average price did not exceed $83.54 and WTI did not reach $81.50 per barrel.

Figure 1. Blended OPEC-EIA oil data indicates -1.6 mmb/d supply-demand deficit in 2H 2023. 2024 average SD balance expected to be a slight -0.24 mmb/d deficit. Source: OPEC, EIA & Labyrinth Consulting Services, Inc.

I’ve shown in previous posts that supply-demand balance is a terrible indicator of oil price and that comparative inventory does a much better job. Figure 2 shows Brent comparative inventory (C.I.) and the price-inventory volume yield curves for 2021 and early 2022 (orange), and 2022 through the present in blue.

The orange circles and arrow near the text “4Q 2022 excursion” represent the early part of the price-discovery excursion that resulted from the first failed analyst meme about the China oil-demand rebound. The blue circles and arrows near the text “1Q 2023 excursion” mark the second part of that price-discovery excursion including its reversion to the blue yield curve in May and June 2023.

The promotion of the second false meme about global supply deficits triggered a third price-discovery excursion away from the blue yield curve leading to the August 2023 data point at -69 mmb less than the 5-year average and $85 per barrel.

Projecting a perpendicular line from the August data point to the blue yield curve and following a horizontal line to the y-axis indicates a market clearing price of about $75 per barrel for Brent. That means that its $85 average August price is about $10 over-priced. The market is now including a $10 premium based on the failing supply-demand deficit meme that analysts have been pushing for months.

Figure 2. Estimated average Brent spot price of $85 for August is about +$10 over-priced based on the comparative inventory yield curve. Source: EIA STEO & Labyrinth Consulting Services, Inc.

Analysts like to blame their failed calls on broader market trends like a weak global economy, a strong U.S. dollar and rising interest rates.They don’t understand that oil price is the macro indicator because oil is the economy.

They haven’t yet grasped that the oil paradigm that guides them isn’t working, and hasn’t been working very well for at least the last five years. I am sometimes accused of being negative about oil markets but I am neither pessimistic nor optimistic.

I am a scientist. I do not rely on what others say unless the data supports those views. That doesn’t mean that I’m right.

What perplexes me most about mainstream analysts is their certitude about reductionist cause-and-effect axioms that become memes when enough of them repeat what the other said.

Oil markets are complex systems in which uncertainty is given. That said, my sense is that global oil prices will probably fluctuate between $75 and $90 for the rest of 2023, and that the broader trend will be generally lower.

 

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The Future of Oil

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We Can’t Handle The Truth About The Human Predicament

Climate change is as obvious as gravity. The only people who debate gravity have advanced degrees in theoretical physics. Almost everyone in America—regardless of training or experience—has a strong opinion about climate change for some reason.

Cognitive dissonance is part of the problem. This is what happens when two strongly held beliefs conflict.

Most Americans believe in the progress narrative—that human ingenuity, technology and hard work can overcome almost any obstacle.  The idea that the effects of progress may be harming the planet, other species and future generations of humans creates psychologic conflict or cognitive dissonance. We cannot hold both beliefs at the same time so we deny the existence of one or the other—in this case, climate change.

For many, the default position is—in the unlikely event that climate change is a problem—that technology, ingenuity and hard work will find a solution. That works just fine as long as we are energy- and systems-ignorant. Once we open our eyes to the bigger picture, it becomes clear that it’s not that simple.

The progress narrative is only partly true. It leaves out the fact that most of civilization’s progress—at least as measured by economic growth or GDP (gross domestic product)—over the last few centuries is because of fossil fuels (Figure 1). The role of technology and innovation was secondary.

Figure 1. The increase in world economic growth correlates with fossil fuel consumption. Source: EIA, BP, IEA, FRED, OWWD, World Bank & Labyrinth Consulting Services, Inc.

Oil is the economy and profits are linked to its consumption. The R-squared (r2) correlation between oil consumption and global GDP is 96% (Figure 2). That correlation is as statistically perfect as it gets in the real world.

Figure 2. World oil consumption vs GDP (gross domestic product). Oil is the Economy and profits are linked to its consumption. Source: EIA, World Bank & Labyrinth Consulting Services, Inc.

For all of our technology and ingenuity, oil, natural gas and coal are responsible for the wealth of nations. Every barrel of oil equivalent (boe) contains about 4.5 human-years of work. That means that our civilization has more than 380 billion fossil-energy slaves working for us all of the time (Table 1).

Table 1. Oil, natural gas and coal account for about 85 billion barrels of oil equivalent consumption every year. That converts to more than 380 billion years of human work. Source: BP 2020 Statistical Review of Energy and Labyrinth Consulting Services, Inc.

 

We have added an average of 4.7 billion fossil slaves every year for the last decade in addition to the base amount of almost 340 billion 10 years ago (Figure 3).

Figure 3. Average addition of 4.7 billion work-year equivalents from coal, natural gas and oil consumption over the last decade on top of the base level of 340 billion human work-year equivalents 10 years ago. Source: EIA, BP, IEA, FRED, OWWD, World Bank & Labyrinth Consulting Services, Inc.

This broader perspective shows that simply switching from fossil fuels to renewable energy is not a solution, certainly not in the time window of urgency for climate change. Nor has anyone proven that net emissions from renewable energy are substantially less than from fossil fuels once all of the embedded energy consumption in their extraction, transportation, manufacture and distribution are taken into account.

Assuming that renewable emissions are lower, there is simply not time nor resources available to scale from about 7% wind and solar to a large enough percentage of world energy consumption to make a difference. Even the most optimistic net-zero projections do not indicate that wind and solar energy will account for more than one-third of total final energy by 2050.

More importantly, climate change is not the biggest problem facing the world. It is a symptom of the much larger problem of overshoot.

Overshoot means that humans are using natural resources and polluting at rates beyond the planet’s capacity to recover. The main cause of overshoot is the extraordinary growth of human population made possible by fossil energy.

Overshoot is more difficult to dispute than climate change—the destruction of rainforests, the extinction of other species, the pollution of land, river and seas, the acidification of the oceans, and loss of fisheries and coral reefs. These are not part of any natural process and human activity is clearly responsible.

Technology, unfortunately, is no more a solution to climate change, overshoot or the human predicament that it was the primary cause for human prosperity.

Carbon emissions and the overshooting of planetary boundaries are unlikely to decrease as long as energy consumption, world GDP and population continue to increase (Figure 4). The interrelationship of these factors with the degradation of Earth’s ecosystem means that there are no solutions without a structural change in all of these factors as a starting point.

Figure 4. Carbon emissions and overshoot of planetary boundaries are unlikely to decrease as long as energy consumption, world GDP and population continue to increase. Source: OWID, Global Footprint Network , Global Carbon Atlas & Labyrinth Consulting Services, Inc.

This implies that a civilization paradigm shift is required but I think that we are psychologically incapable of acknowledging that. Even if we could notionally concede this possibility, we would immediately start rationalizing that of course technology, efficiency and human ingenuity are central to any path forward. In short order, we’d be back to carbon capture, renewable energy, circular economies and related fantasies.

We just can’t handle the truth about the human predicament.

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What The Market Knows About Oil’s Future

Warren Buffet is bullish on oil and gas. He recently committed more than $3 billion to an LNG export terminal in Maryland after increasing his stake in Occidental Petroleum. That’s because Buffet is a value investor and energy stocks are relatively cheap. Energy also generates more cash than any other sector.

Why doesn’t the market agree with Buffet?

Robert Bryce wrote a thoughtful article this week in which he explored this question. He argued that gasoline demand is booming and is likely to remain strong, and that world oil demand is expected to reach record levels in the next few years.

Javier Blas echoed some of those observations in a post this morning.

“Even with the boom in electric cars, the absolute number of gasoline-powered cars is still increasing; consumers are holding onto their vehicles longer, delaying the improvement that comes with newer and more fuel efficient models; and in Europe, consumers have swapped their diesel cars for gasoline ones, giving the latter an unlikely boost.”

Bryce further explained that America has a long-lived fleet of 284 million conventional cars that will last for years despite the strength of electric vehicle sales. He concluded that seven oil and gas companies are under-valued based on standard price-to-earnings and enterprise value-to-EBITDA ratios.

“The supermajors are all selling at big discounts to the S&P 500. So are the independents, including Devon and Diamondback.”

I agree with most of what Bryce says but am hesitant to say that the market’s view of oil and gas companies is wrong.

On the most basic level of net returns, energy stocks have consistently under-performed the S&P 500 for most of the last decade (Figure 1). The 10-year net total return for the energy sector is 3.2% compared with 11.9% for the broader market.  Moreover, energy stocks have returned -0.6% so far in 2023 while S&P performance has averaged 19.7%.

Figure 1. The energy sector has under-performed the broader S&P 500 by almost 9% over the last 10. years. Source: S&P Global.

Furthermore, U.S. transport fuel consumption does not seem quite as straight-forward to me as it does to Bryce. Gasoline consumption has been less than the 5-year average 73% of the time since January 2022 (Figure 2).

Figure 2. U.S. gasoline consumption has been less than the 5-year average 73% of the time since January 2022. Source: EIA & Labyrinth Consulting Services, Inc.

 

Similarly, diesel consumption has been less than its 5-year average 68% of the time since January 2022 (Figure 3).

Figure 3. U.S. diesel consumption has been less than the 5-year average 68% of the time since January 2022. That’s a bad signal for the economy. Source: EIA & Labyrinth Consulting Services, Inc.

Despite reports about the strength of the U.S. economy and the recent oil-price rally, energy is the economy. Neither gasoline nor diesel data provide strong support for the popular idea that the U.S. economy and oil markets are booming. Lower-than-average diesel consumption is especially disturbing because it is the hemoglobin for the movement of goods and materials. Its use is fairly inelastic in normal economic conditions. When diesel consumption falls, it is ordinarily because orders are weak.

The U.S. and world economies are still recovering from the effects of the Covid economic closure and associated supply chain problems. The supply and price shocks that followed Russia’s 2022 invasion of Ukraine will probably have a lasting effect on global markets. This coincides with a reversal in the globalization of trade that led to commodity deflation throughout much of the last 30 years.

Liam Denning made these observations a few days ago.

“As much as the onset of the war in Ukraine offered a taste of those lucrative periods where OPEC could capitalize on disruption, it was also another visceral indicator of wider disruptions. Oil embodied globalization before that was even a term, but the notion of relying on fragile or even hostile nations for life’s essentials is fast falling out of fashion. At the same time, climate change is forcing a reevaluation of energy’s physical foundations.”

Public debt rose to extraordinary levels because of both Covid and Ukraine.  It is naive to believe that is all or even mostly behind us, and it is easy to see why why markets remain cautious.

Vaclav Smil’s four pillars of modern civilization—steel, cement, plastic and ammonia—require fossil fuels now and in the foreseeable future.

“The scale of our dependence on fossil carbon make any rapid substitutions impossible…Modern economies will always be tied to massive material flows and…will remain fundamentally dependent on fossil fuels used in the production of these indispensable materials.”
–Vaclav Smil, How The World Really Works

The idea that electric vehicles may displace gasoline reflects a fundamental ignorance about the oil refining process. The idea that a green energy transition is reshaping society ignores the way the world really works.

Warren Buffet’s investments in oil and LNG make good sense because energy will always be important and well-managed companies will be successful.

At the same time, it is impossible to ignore that oil production and consumption are declining—forecasts to the contrary notwithstanding.  That is because of massive public and private debt loads, inflation, economic contraction, declining oil affordability, consumer behavior change, and limited credit for new drilling and development. The imagined transition to renewable energy is a secondary factor at best.

 

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Oil’s March to $100 or Just Another Little Rally?

Mainstream analysts feel vindicated. After three months of reprising the incredibly tight market meme, WTI has finally increased into the mid-$70 range (Figure 1). Is this the beginning of the oil price’s march to $100 or just another little rally?

Figure 1. Over-bought WTI futures come down to earth. Price has increased +$7.03 (+10%) from $67.12 to $75.42 since June 12. Source: CME & Labyrinth Consulting Services, Inc.

Today, Citigroup’s Ed Morse said about the potential trajectory for price,

“I’m comfortable thinking $90 as a real ceiling.”

That seems reasonable to me but let’s put it into some context. U.S. comparative inventory (C.I.) was about 20 mmb less than the 5-year average as of last week’s oil storage report (Figure 2). It’s been falling about 2.3 mmb per week since March. At that rate, WTI could reach $90 per barrel in about 25 weeks so it’s possible by late 2023 or early 2024.

Figure 2. Comparative inventory needs to fall about 55 mmb (275%) for WTI to reach $90/barrel. C.I. has fallen an average of 2.3 mmb per week since March so $90 is possible by early 2024. Source: EIA & Labyrinth Consulting Services, Inc.

Does that reflect the incredibly tight supply that analysts have been hyperventilating about for months? Hardly. That’s about half-way back to levels in the aftermath of Russia’s invasion of Ukraine.

Figure 3 shows blended OPEC and EIA supply-demand data and it suggests a potential deficit of about 1.7 million barrels in the second half of 2023. That’s similar to deficits in the second half of 2021 and 2022 when WTI averaged $74 and $87, respectively.

Figure 3. Blended OPEC-EIA oil data indicates -1.7 mmb/d supply-demand deficit in 2H 2023 2024 average SD balance expected to be a slight -0.24 mmb/d deficit. Source: OPEC, EIA & Labyrinth Consulting Services, Inc.

In other words, over the next six months or so, oil prices are likely to return to pretty much where they have been in recent years at similar supply-demand balance and inventory levels.

There are a million things that could and are likely to happen in 2023 that could profoundly change this context. I just don’t see any extraordinary structural change about to happen that is outside of what is normal and expected for oil markets.

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The Net Effect of Net Zero Will Be Zero

Net Zero is a naive and unscientific fantasy. The silver bullet is decoupling.

Decoupling or the energy intensity of GPD means that it takes progressively less energy consumption to produce a dollar of GDP because of improved efficiency. The net zero dream includes the counter-factual delusion that GDP and energy consumption can continue to increase while carbon emissions magically decrease simply by decoupling and by substituting one form of energy for another.

IEA’s Net Zero Roadmap assumes that consumption per $ GDP (energy intensity of GDP) will average 4% through 2030, and will then average 2.2% from then through 2050.

“A major worldwide push to increase energy efficiency is an essential part of these efforts, resulting in the annual rate of energy intensity improvements averaging 4% to 2030—about three‐times the average rate achieved over the last two decades.
–IEA

It is unclear where these improvements in energy intensity will come from but historically, the rate has been decreasing instead of increasing (Figure 1). The average from 2010 through 2021 was 1.6%, a decrease from 3.8% during the previous decade.

Figure 1. Energy consumption per $GDP has decreased progressively over time and has averaged -1.6% per year since 2010. Source: World Bank, BP & Labyrinth Consulting Services, Inc.

The agency goes on to say that,

“Without a projected annual average reduction of 2.2% in energy intensity, i.e. energy use per unit of GDP, TES (Total Energy Supply) in 2050 would be around 85% higher.”
–IEA

And that is precisely the problem. Net zero is only dream without energy intensity improvements for which there is no basis over the last 11 years.

The energy intensity of GDP calculation involves a simple arithmetic average. That may result in distortion from rich, service-oriented economies that offshore considerable energy consumption, and then import finished products. Those countries include the U.S. and other OECD nations like Japan and Germany (Figure 2).

Figure 2. GDP is proportional to oil consumption (Logarithmic scales). Source: EIA, World Bank & Labyrinth Consulting Services, Inc.

To test that potential distortion, I calculated primary energy consumption per $ real GDP for every country, and then computed a world average weighted by population. Weighted-average energy consumption per dollar GDP has averaged-1.3% since 2010 (Figure 3). In other worlds, efficiency gains are probably somewhat lower than in the simple arithmetic calculation.

Figure 3. Weighted average energy consumption per dollar GDP has averaged a -1.3% since 2010. Source: Our World in Data & Labyrinth Consulting Services, Inc.

The bigger problem is that CO2 emissions have increased since at least 1980. It is unclear if falling energy consumption per $GDP is the controlling factor  (Figure 4).

Figure 4. CO2 emissions have increased since at least 1980. It is unclear if falling energy consumption per $GDP is the controlling factor. Source: OWID, World Carbon Atlas & Labyrinth Consulting Services, Inc.

Figure 5 shows that energy consumption, economic growth, population growth and carbon emissions all increase and decrease together. It seems unlikely that consumption per $GDP—a derivative of two of the curves in the figure—is, in fact, the controlling factor for carbon emissions. What is clear from the graph is that carbon emissions are unlikely to decrease as long as energy consumption, world GDP and population continue to increase. There’s no obvious escape.

Figure 5. Carbon emissions and overshoot of planetary boundaries are unlikely to decrease as long as energy consumption, world GDP and population continue to increase. Source: OWID, Global Carbon Atlas & Labyrinth Consulting Services, Inc.

Among the factors shown in Figure 5, energy is primary. The rest are secondary. Few of those concerned about climate change seem to understand this. That’s because they want to solve the emission problem without considering the whole system. They want to treat the symptom but not the disease.

For most, this means replacing fossil fuels with renewable energy but not making other changes in their lifestyles or behavior. Others believe that economic growth is the problem and that degrowth is the solution. Still others think that by limiting population growth, emissions will decrease. They are all partly right and but mostly wrong.

The concept of clean energy is absurd. All energy is clean until it is used and converted into work. Carbon emissions and heat are the unavoidable waste products of that conversion. When the full life-cycle of energy-plus-work is considered, no energy source or technology is substantially cleaner or more energy-efficient than any other.

Technology plays a role in addressing emissions but it is not the solution. There is only thing that really matters, and that is to use less energy. Less energy use will eventually result in reduced emissions, lower GDP and a smaller population. No other approach will work, at least not in time to make a difference for our ecosystem and for climate change.

As I wrote in late May,

“I favor a future society that is based largely on renewable energy. That society will look very different that what we know today. Substituting renewables for fossil fuels is not a solution without greatly curtailing our total energy consumption. That’s what the physics indicates will happen in a renewable future. I suggest that we stop trying to make renewables look like something that are not and cannot be, and just learn to live with them as they are.”

The great irony is that I doubt that the IEA understands the flaws in its net zero plan. The agency is narrowly focused on carbon emissions. It is not taking a system view of the problem. It is—like most of the protagonists on all sides of the climate-change debate—fundamentally energy-blind.

That does not change the fact that decoupling is a mirage and the net effect of net zero will be zero.

 

The post The Net Effect of Net Zero Will Be Zero first appeared on Art Berman.

The post The Net Effect of Net Zero Will Be Zero appeared first on Art Berman.

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