The Empty Quarter
Monday 6 April 2020
Intuitions are plentiful during a crisis. But it’s an error to mistake them for forecasts. Currently, there’s an emerging view that the devastation now visited on fossil fuel industries, oil and gas in particular, somehow translates into a faster energy transition, bringing previously projected changes forward in time. I’d resist the temptation of that view. To make reliable progress, energy transitions—while drawing succor from the low interest rate environment which recessions typically provide—still require moderate economic expansion. As we saw this past decade, it would be a mistake for example to conflate the collapse of an industry like coal, with a collapse in coal demand. In the short term, the severity of the current moment, a form of sudden stop, will function as a kind of vanishing act for demand of every kind—in the quarter that’s just begun. Such severity will tempt our intuitions. For now, let’s agree this massive disruption will have an echo, depressing energy demand for at least the rest of this year. If the echo is strong enough, these effects will last well into next year too. But energy transition is a largely a growth phenomenon, not a replacement phenomenon. As we saw last decade, the axe in energy transition only falls when affordability enters the scene, and starts to grab an increasing share of new growth, from incumbents. Until then, slashed consumption of fossil fuels is everywhere and always part of a much more conventional phenomenon, best explained by mainline economics.
The global pandemic has created a demand shock so severe, that any semblance of trend continuity in global data time series has now been destroyed. Accordingly, all forecasting around energy transition will have to grapple with the same primary uncertainties now facing macroeconomists: the depth, and then the duration, of the current crisis.
But trends interrupted are not trends denied. Certain systems, like electricity, are going to be less susceptible to sudden stop because they are slower moving by necessity, plotting their transformations on longer timelines. This month, The Gregor Letter will examine our current location in world energy, messy and disturbed as it may seem, through the lens of the Oil Fall update and there’s no better place to begin than California’s power system.
The Golden State needs to continue pressing forward with the buildout of new power from wind and solar for two reasons: to dent further growth from natural gas, and also to supply its growing fleet of new electric vehicles—both passenger and commercial—with clean and efficient electricity. On this front, we have good news: last year, combined wind and solar produced 58.77 TWh (terawatt hours) in a system that used 247.68 TWh, thus taking a whopping 23.73% share of California’s electricity demand. That pushed the share of power from sources ex-wind and solar below 190 TWh, a fresh decade low. There are two slight disappointments, however, that bear mentioning.
First, California wind and solar fell short of the original 2018 Oil Fall forecast. I expected the two sources to produce 57.8 TWh in 2018, and 68.2 TWh last year. Instead, we came up short: 53.9 TWh in 2018 and well short in 2019, at just 58.77 TWh. Second, total system demand continued to fall; last year especially, by 2.9%. While there is certainly an efficiency-effect at play here (something I will address further in this letter) it’s now clear some moderate weakening in the California economy took place in 2019, because gasoline demand also fell notably. Here, we have a tiny version of how macroeconomics influence trends: wind and solar, along with EV adoption, took very favorable shares of California demand last year. However, they both thrived on a declining overall market. This tale-of-two-cities effect, where cleantech growth slows as economies slow, but manages to eke out a slightly better share of an overall declining market, could be a preview of the next two years. This won’t be true in the near term, but it could offer a guide to the medium term.
Running an EV in California is more efficient than ever, as the Golden State’s electricity system tips strongly towards wind and solar, and further away from inefficient combustion. The just released data comes from the Department of Energy’s Argonne National Lab, and is a key theme in the third installment of the Oil Fall series, Waste Crash.
To make this plain: a Tesla Model 3 driving each day in Louisville, Kentucky offers the exact same efficiency as a counterpart Model 3 driving each day in Santa Barbara, California—at the level of the motor. Each Model 3 uses the same amount of electricity to go 100 miles. But when the Santa Barbara Tesla charges up, it’s drawing on a grid that’s supplied with so much wind and solar that it increasingly avoids the energy loss that comes from power plant combustion. Not so, with our Tesla in Louisville, which plugs into a grid with significantly higher heat loss. Utility scale wind and solar plants, just like utility scale natural gas and coal plants, experience similar line loss—the electricity lost through grid transmission. But this is minor, by comparison. Coal and natural gas fired power plants experience massive heat loss, before the electricity is even transmitted.
What does Argonne calculate as the difference? It’s not small, and I reported Argonne’s 2018 estimates in an issue of the Gregor Letter last year. Let me present the newest figures, and also let me quote from last year’s letter, for consistency:
Here are the two figures for 2019:
The United States: 2,500 btu/mile.
California: 1,960 btu/mile.
The first figure represents a whole-system accounting of the energy required to run an electric vehicle for one mile, on average, in the United States outside of California. This accounting looks at all the energy required to drill, extract, lift, ship, pipe, and burn coal or natural gas and other energy sources, necessary to “fill” that EV with electricity. The accounting also includes the expenditure of that electricity in the engine to drive that EV one mile. It’s called a “Well-to-Wheel” accounting.
The second figure performs that exact same calculation. This time, for an EV running one mile in California. As you can see, the California EV requires 21.6% less energy, in this whole system accounting, to run one mile. Why? Because California now derives nearly 24% of its electricity from sources that require no excavation, no transport, no shipping, no piping, and most important of all—no combustion.
And now the kicker: this 21.6% efficiency edge against the rest of the country is up from Argonne’s previous calculation of a 17.8% edge, for obvious reasons: California’s grid is steadily removing the waste associated with combustion.
There is perhaps no more confounding concept than the idea that by moving towards renewables the global economy will perform the same amount of work, but with less energy. Waste Crash conducts an informal meta-review of research estimates of these potential savings and finds that, conservatively, the world only utilizes about half of the fossil fuel energy it burns. Harvesting those savings is how energy transition partly pays for its own buildout, through a positive return to the economy, and society.
Intuitions are also commonly wrong when it comes to growth projections for how much power we’ll need, as transport is increasingly electrified. While Oil Fall conducts the definitive accounting in this regard, it can be summed up as follows: an internal combustion engine loses 70% of its energy to waste heat. As we electrify, we claw back a large portion (not all) of that loss. The transition to electric transport is inevitable; our only task is to forecast the rate, and thereby the savings to the economy.
Last year was a disappointing one everywhere for EV sales growth. This was especially true for China. But it was also true for California.
Auto sales will be absolutely trashed this year. And nigh impossible to forecast. As you can see from the chart, we were already in decline, with total sales falling 5.46% to 1,892,672 units last year from 2,001,995 units the year before. EV (plug-in sales) also fell to 145,864 units last year from 157,659 units the year before. But the EV share managed to hang tough, at 7.7%. While this is encouraging, it presents a quandary. We know, for example, that sales of internal combustion engine vehicles (ICE) have now peaked in California, and will never recover growth against EV. OK, sounds good….
… But the global pandemic is going to savage the auto market for a time indeterminate. And worse, could delay the rollout of a broader offering of EV, thus causing EV to underperform their potential during the economic rebound, when it finally arrives. This is why one must be both cautious, and discrete, when applying the thesis that a recession—even one that has hit the oil industry, and oil demand very hard—is going to smooth the pathway for energy transition.
The declines in oil demand will be spectacular. But those declines will tell us little about our future dependency on oil. The destruction endured by the oil industry will even be worse. But again, per the Oil Fall thesis, that too will tell us little about our ongoing oil dependency. Oil Fall is quite clear in its warnings, and they are still worth repeating: it’s the energy industry itself that bears the early damage, as global demand growth for oil falls to zero. But ongoing oil dependency could push off the date of outright demand declines to the latter part of this decade.
For example, we could review the recently completed portrait of California’s gasoline consumption. Coming off a peak, California’s petrol consumption fell from 15.58 billion gallons in 2017 to 15.52 billion gallons in 2018, but fell harder last year to 15.21 billion gallons—a decline of nearly 2%. Along with the previously discussed decline in electricity demand also we might conjecture that economic growth had already slowed in the Golden State last year. This could be due to multiple factors—everything from the ongoing drag from the trade war, to Californians fleeing high priced housing markets for other states. (To my readers outside the US: the cyclicality of outward migration from California is nothing new, and has been going on for decades, as wealth creation and overpriced living costs nearly always trigger a kind of profit-taking, if you will, near cycle tops.)
The 2017 peak in gasoline consumption is also very much a product of policy, as I laid out in the original edition of Oil Fall. Accordingly, without the current discontinuity from the pandemic, we might have expected California gasoline consumption to fall again this year, as EV market share of auto sales was due rise above 10%. All California needed was a policy push, one it started to apply several years ago.
The problem is that a pandemic is not a policy push. Where will California gasoline consumption go this year? Well, you can rip out 20% from last year’s level, for starters. The state is likely to be effectively shut during most of Q2 2020, which could take consumption down by half. Distribute that loss over the year, while using 2019 consumption as a baseline, and already we are down 1.9 billion gallons—or about 12.5%. Now add a recovery in the 2H of the year, but, at depressed levels, and that removes another 1.15 billion gallons.
Perhaps my Q2 estimate is too severe. After all, data showed that US national gasoline consumption dropped by about 30% in the most recent week. So, why would I price in a 50% drop for California in the quarter? Well, many states in the US are still not on a full lockdown. California is, and will remain so. Also, perhaps my Q3 and Q4 estimates are too high. Perhaps a stronger rebound is in store. Nevertheless, my estimate of gasoline consumption by quarter would look like this, roughly, in billion gallons:
Q1: 3.8 | Q2: 1.9 | Q3: 3.3 | Q4: 3.3
This would sum to about 12.3 billion gallons consumed in 2020, or, a 20% loss. Notably, when you see the quarters laid out, a total 20% decline for the year suddenly looks quite reasonable.
Meanwhile, current estimates of global consumption are coalescing around a 20% loss of consumption just for this quarter (or worse), but, with little visibility on the second half of the year. Let’s pause here and state the obvious: the ability to start gauging the depth of the current shock is coming into view. What remains almost entirely unknown is the duration.
Cautiously, however, we should consider a new possibility: that the pandemic has indeed brought forward the peak of global oil demand. This would not be a jagged Matterhorn peak; not one that ushers in an era of oil demand declines. Rather, it might be similar to the 2013 peak of global coal demand, one that gave way instead to a plateau. Should this happen, the empty quarter—with all its shock and fury—will birth at least 3-5 quarters of subdued and difficult global growth. Just enough time for cities to continue adopting electric buses and road-congestion charges, and just enough time for the auto industry to roll out more affordable electric vehicles. Air travel in particular strikes me as one of the last sectors that is likely to recover. While I am dubious as to other speculations—for example, how a period of remote work and less travel may ignite new preferences for society to stay closer to home—we should be aware that going local is likely to describe a shift in how we live until definitive testing programs come into being, or a vaccine is put into production.
Humans have an equally strong inclination for restoration, and setting most things—perhaps not all things—back to their original position. That is why more typical recessionary effects should be at the forefront of our minds, rather than trying to price in new behavior through the hampered view of our foxholes. Deleveraging, hoarding, and an increase in savings are the kinds of trends that can prolong the duration of any recovery. We should be prepared for those effects, and expect them. Indeed, those outcomes alone are enough, given the five year deceleration in global oil demand growth, to justify wondering whether peak oil—the demand version—has finally arrived.
—Gregor Macdonald, editor of The Gregor Letter, and Gregor.us
All photos by Gregor Macdonald: 1. Empty departure lounge, San Francisco International Terminal, March 2020. 2. BMW iSeries, Portland Oregon, 2018.
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 single title just published in December and you are strongly encouraged to read it. Just hit the picture below.