Bad Natty Emissions
British Petroleum confirmed in its latest outlook that global oil demand has peaked, and is now entering an extended plateau. The supermajor first glimpsed such an outcome in 2019. Now, in the aftermath of the war’s energy supply disruptions, BP unsurprisingly is more confident in its view and sees an echo of previous energy shocks that catalyzed broad changes in behavior, efficiency measures, and demand. To put a fine point on it, BP now sees 2019 as the start of oil’s long stagnation, as global demand remains at that level from now through the end of the decade. Obviously, there will be oscillations along the way.
These themes are already well understood by readers of the The Gregor Letter, and the Oil Fall series, 2018-2023. As Oil Fall forecasted, electrification of transport would eventually act as a drag on oil demand growth, but would not trigger oil demand declines for some time, owing to the rate of fleet turnover and the lengthening lifespan of existing internal-combustion-engine vehicles. Observe, for example, that analytical groups like BNEF are already charting the volume of oil demand now avoided, as global vehicles of all types electrify. Their estimate that over 1.6 mbpd was avoided last year, in a total global market of 100 mbpd, is your portal to better understand how change propagates through a large, global market: to halt further demand growth is its own project. Only after that project is complete, can one start to focus on declines.
There’s a psychological component also to this concept. Humans are wired for either/or thinking. The BP forecast, which is now basically a duplicate of the Oil Fall and The Gregor Letter forecast, is going to serially frustrate observers because the expectation of decline is going to keep knocking at the door of analysis, simply because demand growth is now over.
Don’t let this happen to you. :-) Try to reflect that it’s a huge development that global oil demand is finally set to flatten out, even at admittedly high levels. This is how big systems change. The turns are slow, and not dramatic. Along the way we will see many domains enter petroleum-demand decline. Europe and US oil demand peaked in the first decade of this century. California petrol demand may also have entered decline. There will be many discrete declines to observe, but the big kahuna, the world, is just not ready to do so.
As the Oil Fall series laid out, this is also a particularly big moment for the global oil industry. But let’s be honest: the industry has been thinking about the end of demand growth for years. Global supermajors started curtailing investment in the middle of last decade. It was only the US independents who carried onward, overproducing until investor discipline finally took over. The BP forecast will further cement the expanding awareness of oil’s no-growth future, and will no doubt have a trailing effect on supply. Paradoxically, therefore, global oil prices will remain more firm than many expect, because producers will now be permanently on guard, sensitive to the risk of over-investment. But oil prices sustained at slightly more elevated levels than they might otherwise be, in the old boom-bust dynamic, will also have an effect: further supporting EV economics, thus hastening the electrification of transport, already underway. Good times.
see: BP Energy Outlook 2023.
Russian gas flows to Europe declined steeply last year, and are not likely to recover. No surprise here, right? A portion of flows were cut off by Russia, another portion was supplied by US LNG exports, and a final portion was mediated through demand reductions led by behavior change, and a fury of efficiency efforts like the deployment of heat pumps. (see: Heat pump adoption across Europe last year looks like a form of revenge, Gregor Letter, 23 January 2023.) These lessons are as old as history itself. Needless to say, it’s yet another self-destructive blunder by Putin. Becoming an unreliable supplier of any commodity is an excellent method to take yourself out of the game, permanently.
We won’t try to forecast where EU natural gas demand settles out, in the years ahead. But a starting point is to consider the recent assessment from EIA (Washington) released in a brief tweet:
Iron-Air battery technology should have been receiving more attention. Lower cost, longer duration storage is a killer combination and the deal just announced between Form Energy and Xcel Energy suggests we’re on the threshold of a breakthrough. Form Energy has chosen a manufacturing location in West Virginia to produce their batteries, on the site of an old ArcelorMittal Steel facility. Production is expected to start later this year. The timeline to deployment at two Xcel energy sites meanwhile—old coal plants to be retired in Colorado and Minnesota—is not clear, but one would venture sometime in 2025. Although the announcements don’t highlight it, that these large grid-level batteries will be replacing coal plants (and tied, no doubt to new wind and solar) means that the coveted, legacy grid-connections are conveniently part of the plan. As readers may know, the US has wind and solar projects waiting, stacked up like airplanes, unable to be built because of a bottleneck in securing the on-ramp to the grid.
Form Energy is offering a 100 hour battery, and will exploit a technology that oscillates iron rust and oxygen to charge and discharge. The technology is slower to charge, and thus slower to discharge. It’s still premature to know how all the various theoretical claims will pan out, in reality. But if the company gets near its $20/kWh target, in combination with longer duration, that is transformative. Profound, really.
As The Gregor Letter has explained previously, wind and solar are quickly becoming commodified. Cheap, replicable. The value-add technology therefore continues to migrate to an array of grid software, algorithmic demand and supply management, distributed energy devices, and other cool tools coming onto the grid. And of course, storage. The cost declines in storage, compared to wind and solar, have been slower. Form Energy’s technology would speed them up. But the most important insight is that every hour we add of affordable storage is a step we take towards making utility scale wind and solar true 24/7 powerplants, with much higher (effective) capacity factors. In other words, if you built a utility scale solar plant five years ago, with another twenty-five years to run in its lifespan, and someone shows up with four-day storage, the value of your solar plant increases, as the risk of unusable or wasted power (curtailment) goes down. A four-day battery in fact starts to look less like storage, and more like generation.
Hydrogen has been called the Swiss army knife of energy sources. But unfortunately, that turns out to be a not very helpful describer. Somewhat paradoxically, hydrogen’s versatility is also its achilles heel. Hydrogen can be blended with natural gas in gas-fired power turbines; can be used to make battery cells; can be used as a high heat source to drive metallurgical coal out of steelmaking; could be used as transportation fuel in short-haul air travel; and could work as a form of energy storage. These and other potentialities present a kind of where-to-begin problem for governments looking to catalyze hydrogen development. And then of course there is the high cost problem of how to make green hydrogen through electrolysis powered exclusively by clean electricity sources. Again, where to begin.
Let’s begin here: hydrogen has a fundamental distribution problem. When wind and solar crossed key affordability thresholds, they found themselves standing before a readymade distribution system called the powergrid. The most dramatic example of this providential fact has been seen in China, where two decades of coal growth and investment in an expanding powergrid turned out to be the very platform to then undermine coal growth with soaring deployment of new wind and solar. All you had to do was plug in the new sources.
Hydrogen has no such distribution system on which it can free-ride. Let’s say you’re Alaska Airlines and you’re exploring the potential to integrate hydrogen into short-haul turboprop aircraft. Well, you are going to need to build an enormously expensive electrolyzer near your hub in Seattle to make green hydrogen using local electricity supply, because sourcing hydrogen made from natural gas defeats the effort, of course, undermining the very intention to get fossil fuels out of air travel. Now you have two new problems: the payback on the capital equipment investment is going to be slow, unless you can run that electrolyzer 24/7 using some of the supply for yourself and selling the surplus to….another airline? Also, you don’t control your electricity supply. Sure, Washington State power supply is pretty green with hydro, wind, and solar. But there’s still lots of natural gas in it too.
What Alaska Airlines really needs is a pipe full of clean hydrogen to tap. Doesn’t exist. And won’t, anytime soon. And this is the same hurdle for every steel plant, petrochemical plant, power plant, or industrial or municipal user with a turbine: where are you going to get supply? Recognizing that co-locating supply with demand is the big first hurdle, the US Department of Energy (DOE) is concentrating in the initial rounds of its hydrogen effort to do just that. One of the more compelling projects now funded by the DOE’s Loan Program Office is an advanced clean storage facility in Delta, Utah. As important, the Inflation Reduction Act creates a production tax credit, significantly lowering the cost of green hydrogen.
So hydrogen doesn’t face a technical problem, really. And now it enjoys a policy tailwind. Rather, hydrogen faces a scaling problem. We know that the cost of green electrolysis will come down with each electrolyzer produced. We know that eventually, nations will build hydrogen pipelines. What we have to be cautious of however is believing that hydrogen will sweep through the system like wind and solar.
The writer of a recent, very detailed piece at Carbon Brief does an excellent job working through the big gap that exists between what we hope or expect hydrogen to do for us, and what it can reasonably be expected to do for us. The piece’s central conclusion is easy to understand: unless the world builds out hydrogen infrastructure on an emergency basis—something similar to a wartime effort—then many of the theorized gains from hydrogen will not be realized. In short, hydrogen is full of potential, but faces a serious speed-of-deployment problem.
Autonomous vehicles continue to occupy a half-state of functionality, operational enough to be allowed on streets but dysfunctional enough to cause serious problems. In San Francisco, the AV fleet from Cruise is frequently malfunctioning, blocking streets, disrupting public transportation, and in several incidents, interfered with the business of the fire department. You can read about these incidents in this twitter thread from Harvard fellow and transportation writer, David Zipper. And it’s not just Cruise, but Waymo too. And to be honest, this no longer looks like the original utopian version of a world of AV—increasing safety by removing human decisions from the driving experience, while also reducing car ownership. Rather, this looks like something more dystopian, in which AV present not a solution to society but a new set of risks.
US fossil fuel consumption was traveling along nicely on a downslope. And then, natural gas happened. We are all aware that natural gas, comparatively, has fewer emissions than coal. And that natural gas, working in tandem with the rise of wind and solar, has helped to kill US coal, and lowered emissions. However, at some point, the emissions from natural gas start to matter as the grand harvesting of the coal emissions slows down. And we seem to have arrived at that juncture.
US natural gas emissions are up a very substantial 26% from 2011 - 2021, and using a shorter timeframe are up 11% from 2016 - 2021. While the chart doesn’t show 2022 emissions, a quick glance suggests they spiked even higher. This is un-good.
Some readers of The Gregor Letter may be unhappy to hear me say what I am about to say. Here goes: the problem here can be largely blamed on the failure of the US to build new nuclear capacity. Without a second clean power source to support the stellar growth of combined wind+solar, the retirement of coal—and concurrent growth of electricity demand—is going to continue to be exploited by natural gas. And importantly, this sharing of the growth with natural gas is settling into a long-term pathway. That’s right. Natural gas every year now is becoming further embedded in the US power system, and it will not be dislodged easily.
In the next chart, observe how total US fossil fuel consumption was rolling over quite nicely from the 2007 highs. This is the chart that echoes the rollover in US emissions, and has been supportive of the view that the US is not the laggard everyone assumes, in the decarbonization effort. But look at how the trend gets chopped to pieces after 2017. That’s not oil, and that’s not coal doing the damage, here. That’s natural gas.
Perhaps you would like to take the other side of my argument. Perhaps someone would like to make the case that combined wind+solar, paired with storage, is about to reach critical mass and will take over all marginal growth in power system demand. OK, fair enough. At one time, I actually began to make that argument too. Indeed, combined wind+solar continue to threaten to dominate power system growth—and yet natural gas keeps finding a way. To be fair, growth of natural gas consumption and its associated emissions can’t entirely be blamed on power system demand. The US uses a ton of natural gas in petrochemicals and industry.
This discussion therefore is going to demand further analysis. Let’s finish up this first installment with a market observation. The world just passed through a natural gas crisis caused by Russia. This lifted demand for coal and natural gas everywhere, from China to Europe to the US. The demand spike then fed into prices, deepening fears and reminding everyone just how embedded natural gas has become into global economies. (global natural gas consumption growth has also been on a rip higher the past decade). But now look at what’s happened to price—it’s crashed, in winter!
It’s time to be blunt: the problem natural gas presents to the decarbonization effort is that it’s cheap. The equilibrium price outside of temporary demand shocks is low. And for good reason. North American natural gas reserves are gargantuan. This is inarguable, and all analysts who still foolishly talk about peak natural gas or imminent supply problems should be ignored today, just as they should have been ignored five, ten and fifteen ago. Indeed, the US is now a natural gas giant on the back of these economically recoverable reserves—and is on course to become even more of a giant! US production of natural gas is going to keep making higher highs. US exports of LNG are going to keep making higher highs. North America is the Saudi Arabia of natural gas. We have only just begun to tap what’s available. And that means unless there is a policy intervention, or a profound revolution in the affordability of grid level storage (maybe that happens?) then the US is going to have a refreshed emissions problem, as natural gas undoes the progress made in oil and coal consumption.
Volatility is a solid concept to use when thinking about the effects of climate change. And California is an excellent domain to apply this framing. The western megadrought has dealt a severe blow to the state in recent years, with power generation from hydropower down by roughly half from 2016-2021. That is shocking.
Peter Gleick notes, for example, that while the average annual rainfall has held up, the distribution of that rainfall is the best way to think about the problem:
New York City’s largest power plant is set to retire, becoming a center for offshore wind. The Ravenswood Generating Station, located in Queens, runs on fuel oil and natural gas. Upon closure, its existing connection to the powergrid will be utilized by a high voltage direct current (HVDC) cable that will run power from offshore wind turbines into the city. Reporting on the plan has not yet mentioned the inclusion of a battery. But that seems like an inevitability.
—Gregor Macdonald
The Gregor Letter is a companion to TerraJoule Publishing, whose current release is Oil Fall. If you've not had a chance to read the Oil Fall series, the 2018 single title is newly packaged and now arrives with a final installment: the 2023 update, Electric Candyland. Just hit the picture below to be taken to Dropbox Shop.
