Remembering competition
After peak-oil production and peak-oil demand, popular discussion now turns to “energy transition.” As with the earlier prophesies, the proper response to this one is, “Not so fast.”
The existence of energy transition cannot be denied. Energy markets are fluid. They change cyclically, structurally, and continuously. Within energy markets, shares for individual forms shift—sometimes gradually, sometimes swiftly. In that context, energy transition is nothing new.
Under current usage, however, the phrase means something more. It means replacement of hydrocarbon energy—coal, oil, and natural gas—with energy from renewable sources such as solar and wind. And current usage pushes the meaning a perilous step further by asserting when coal, oil, and natural gas all will begin irreversible decline. When, in this view, is soon.
A flawed approach
This approach has flaws. One of them is the annoying tendency of energy markets to defy prediction. Forecasts of peak oil supply were premature. Forecasts of peak oil demand have given way to expectations for a slowing of the growth rate as renewable energy gains share. And demand growth for natural gas probably will match that of renewables, partly because of the need by solar and wind for back-up generation, much of which will be fueled by gas.
Further clouding forecasts about imminent, extraordinary energy transition is political motivation. From the beginning, advocates of aggressive response to climate change have preempted argument by demanding overhaul of energy consumption and accommodating no discussion about urgency of the need, cost of remediation, or less-extreme policy options. To them, science is “settled” in asserting that climate change poses a grave and urgent threat, despite evidence to the contrary and availability of potential remedies not requiring an energy revolution. Declaration that an energy transition—under the newly expanded meaning of the phrase—impends, if it hasn’t already begun, fits this pattern.
Still, hydrocarbons do seem destined to give way to renewable energy in the overall energy market in coming years and decades. They already are doing so. And they will continue doing so to the extent they enjoy political support enabling them to overcome economic disadvantages of form. The standard assumption is that political support will remain in place or grow. But that belief ignores policy regimes, such as in the UK and Germany, where support has begun to crumble under pressure of cost. It also ignores a compelling feature of markets: competition.
Forecasts of an early transition to renewable energy at the expense of hydrocarbons tend to emphasize cost reductions of the former but not of the latter. Certainly, the costs of generating electricity from sunlight and wind are falling impressively. But the costs of energy from hydrocarbons are falling, too, while future supply blossoms as operators capture the resource potential of low-quality reservoirs.
Price shifts
Competition, now largely ignored, will influence the electrification of vehicles, a core variable in the speed and degree of energy transition. The addition of transport load will tend to raise end-use prices of electricity, and subsidies for solar and wind must be compensated. Meanwhile, trends strongly in progress will suppress retail gasoline prices if crude costs remain in check. Supplies of natural gas liquids increase with gas production. And production of light oil from low-permeability formations continues to grow. A likely consequence is a surfeit of raw material for the manufacture of gasoline and ethylene. In effect, natural gas and oil increasingly will compete with one another, at least indirectly, in transport and petrochemical markets. And the competition will moderate prices of finished products.
None of this means that the energy transition won’t proceed or that it should not. Transitions happen in markets—and should. But competition happens in markets, too. It’s integral to them. It keeps transitions from becoming disruptive to economies and painful to consumers. Analysis about the energy transition must never ignore or discount the effects of competition. And policy, above all, should ensure nothing gets in its way.