Monday Chart
Monday 28 August 2023
Trying to flight climate change through supply side actions against fossil fuels is largely futile. Halting new pipelines, cutting-up credit cards from banks that lend to the fossil fuel industry, and board shakeups at oil companies are actions more akin to religious incantation. What leads people to undertake these strategies is mostly the availability heuristic. In other words, many succumb to the casual, unexamined observation of where oil is coming from, rather than where it’s going. The systemic path dependency of fossil fuels—the actual and true location of the problem—is maintained not by companies or their lenders, but rather, by a world of maximally distributed fossil fuel devices and machines. And, the governments and voters who choose to keep this arrangement going. Because this system is global, and built over the course of a century, it has successfully and repeatedly thwarted all attacks on fossil fuel supply: reduction in one location simply gives rise to compensating extraction and supply in another location. The world has gargantuan reserves of coal, natural gas, and oil. Results of all supply-side actions so far: all three energy sources are once again at record highs of production.
But sometimes the world provides a natural experiment, testing out ideas that would otherwise be impossible to replicate in a world of status-quo policy choices. Last year’s natural gas crisis in Europe previews how a supply-administered shock would impact a large, multi-national economy. What would be the response? Well, let’s start with the change in demand. The EU, highly dependent on natural gas, saw its largest drop in natural gas consumption in twenty years. The 13.5% decline exceeds the 11.6% decline of 2014 during the European debt crisis, and the 6.1% decline during the great recession of 2009.
The supply shock also unleashed a substitution effect across the continent in the form of widespread heat pump adoption. Heat pumps are expensive, but they represent a way to control future costs in a geo-political world of energy volatility. Last year, sales rose 40% over the prior year and early indications are that sales remain strong in 2023. The rising interest in heat pump adoption is not limited to Europe, either. In 2022, for the first time, US heat pump sales actually outpaced natural gas furnaces.
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The Gregor Letter continues to advocate for oil consumption policies that would, like a constant ratchet, start to curb demand through disincentives around miles driven: everything from congestion charges, to extra fees on ICE vehicles, to higher petrol taxes. These would fall well short of anything draconian because, of course, no elected leader would freely choose to instigate an energy crisis, and the ensuing risk of recession.
What’s particularly exciting, however, is that Europe’s newly installed heat pump army represents a permanent, structural downshift in natural gas dependency. A heat pump displaces natural gas in heating, and diverts demand over to the powergrid. And Europe has plenty of electricity. This leaves us with a number of takeaways. First, if your dream is to induce a supply shock to kick economies off fossil fuels, there is no plausible political path to such an outcome. Second, regardless of how these supply shocks are administered, they are, it must be said, remarkably effective! The 2006-2008 oil shock and financial crisis without question set back oil demand growth for years—and certainly unleashed the broad cultural interest in EV. Finally, outside of these non-discretionary crises, the normal course policy path with the highest return remains entirely on the demand side of fossil fuels, and the supply side of clean energy. The supply side of fossil fuels is a dead end, and cannot be efficiently pursued.
—Gregor Macdonald
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