The age of fossil-fuel abundance is dead

The age of fossil-fuelabundance is dead (published in the Economist)

FOR MUCH of the past half-decade, the operative word in the energy sector was “abundance”. An industry that had long sought to ration the production of fossil fuels to keep prices high suddenly found itself swamped with oversupply, as America’s shale boom lowered the price of oil around the world and clean-energy sources, such as wind and solar, competed with other fuels used for power generation, such as coal and natural gas. In recent weeks, however, it is a shortage of energy, rather than an abundance of it, that has caught the world’s attention. On the surface, its manifestations are mostly unconnected. Britain’s miffed motorists are suffering from a shortage of lorry drivers to deliver petrol. Power cuts in parts of China partly stem from the country’s attempts to curb emissions. Dwindling coal stocks at power stations in India are linked to a surge in the price of imports of the commodity.

Yet an underlying factor is expected to make scarcity even worse in the next few years: a slump in investment in oil wells, natural-gas hubs and coal mines. This is partly a hangover from the period of abundance, with years of overinvestment giving rise to more capital discipline. It is also the result of growing pressures to decarbonise. This year the investment shortfall is one of the main reasons prices of all three energy commodities have soared. Oil crossed $81 a barrel after the Organisation of the Petroleum Exporting Countries (OPEC), and allies such as Russia who are part of the OPEC+ alliance, resisted calls to increase output at a meeting on October 4th. The potentially inflationary upheaval will not be good for a world that still gets most of its energy from fossil fuels. But it may at least accelerate the shift to greener—and cheaper—sources of energy. Start with oil, an industry that needs constant re-investment just to stand still. A rule of thumb is that oil companies are supposed to allocate about four-fifths of their capital expenditure each year just to stopping their level of reserves from being depleted. Yet annual industry capex has fallen from $750bn in 2014 (when oil prices exceeded $100 a barrel) to an estimated $350bn this year, reckons Saad Rahim of Trafigura, a large commodity trader. Goldman Sachs, a bank, says that over the same period, the number of years’ worth of current production held in reserves in some of the world’s biggest projects has fallen from 50 to about 25. A supply crunch was temporarily averted last year because the covid-19 pandemic clobbered oil demand. But once the world economy started to recover, it was only a matter of time before a squeeze started to emerge. The industry would usually respond to robust demand and higher prices by investing to drill more oil. But that is harder in an era of decarbonisation. For a start, big private-sector oil companies, such as ExxonMobil and Royal Dutch Shell, are being pressed by investors to treat oil and gas investments like week-old fish. That is either because their shareholders reckon that demand for oil will eventually peak, making long-term projects uneconomic, or because they prefer to hold stakes in companies that support the transition to clean energy. Even though prices are rising, investment in oil seems unlikely to pick up. The Economist looked at capital-spending forecasts for the world’s 250 biggest commodity producers in 2022 compared with 2019. Whereas miners and agricultural firms predict big increases in capex, energy investment is expected to fall by a further 9%. Oil firms are instead giving excess cash back to shareholders. Another factor inhibiting oil investment is the behaviour of OPEC+ countries. The half-decade of relatively low prices during the “age of abundance”, which reached its nadir with a price collapse at the start of the pandemic, gutted state coffers. That cut funding for investment. As prices recover, governments’ priority is not to expand oil-production capacity but to shore up national budgets. Moreover, state-run producers are cautious, worried that a new flare-up of covid-19 cases could hit demand again. And as Oswald Clint of Bernstein, an investment firm, puts it, many are wondering “Why not just ride this high price for a while?” In any case, even if the rally were eventually to inspire investment, it would take several years to meaningfully raise output. Lower investment in oil has a spillover effect on the output of natural gas, which is often a by-product of drilling for crude. Added to that is a dearth of liquefied natural gas (LNG) terminals for shipping gas from places where it remains relatively easy to access (America) to those where it is scarcer (Asia and Europe). Given the long time it takes to build facilities, the lack of spare terminal capacity in America is expected to last at least until 2025. Investment in thermal coal is weakest of all. Even in China and India, which have big pipelines of new coal-fired power plants, the mood has swung against the dirtiest fossil fuel. Yet with China potentially heading into a cold winter and India struggling with supplies, it may be in the throes of its last hurrah. All this places fossil-fuel producers in something of a bind. A slump in investment could enable some oil, gas and coal investors to make out like bandits. But the longer prices stay high, the more likely it becomes that the transition to clean energy ultimately buries the fossil-fuel industry. Consumers, in the meantime, must brace for more shortages. The age of abundance is dead.

We're in the state we are now because governments haven't invested enough in renewable science. We saw this problem coming from 10,000 miles away yet still we're unprepared. Governments always sacrifice the long term for short term political gain, it's just how our incentives are stacked up.

We're in the state we are now because governments haven't invested enough in renewable science. We saw this problem coming from 10,000 miles away yet still we're unprepared. Governments always sacrifice the long term for short term political gain, it's just how our incentives are stacked up.

We're in the state we are now because governments haven't invested enough in renewable science. We saw this problem coming from 10,000 miles away yet still we're unprepared. Governments always sacrifice the long term for short term political gain, it's just how our incentives are stacked up.

If something becomes scarce but demand stays the same then the price goes up which encourages people to research into alternatives where they wouldn't otherwise.

Such as...?
Either way, not entirely true. Take oil, its so called scarcity only encouraged people into looking at more novel ways of getting to what was left as opposed to much else, namely fracking.

I don't see what the problem is either way, it's up to the market to handle via the price mechanism.

I am not totally happy with the idea that it all comes down to governments. Governments in all countries apart from dictatorships are elected and only stay elected as long as they keep their electorate happy. Dictatorships are more interested in money and power. The sort of changes governments need to make would make most of us pretty miserable and we would likely unelect those people in favour of the likes of climate change deniers like Trump.

Ultimately it comes down to us as individuals. Are we prepared to sacrifice your foreign holiday every year? Are you prepared to eat less meat? Are we prepared to reduce the amount of car journeys we make? Are we prepared to turn the thermostat down and stop using our wood burners? There seems to be a perception that governments can invest their way out of this crisis whilst we all continue as normal. The reality is we all need to make small but significant changes.

You do know the market isnt some all powerful god that can solve any and all problems via the click of a metaphorical thumb right? Its as insane an idea as saying the market is free.

Sure individuals play a role but it's a problem of bad incentives.

We know that people by and large follow the incentives. To take one of your examples, right now people get all the benefit of eating meat, but they don't pay for the externalities (namely the animal suffering and the global pollution). If they had to share the suffering of the animal, or if the pollution somehow accrued inside their home, I don't think they'd want to eat as much meat. In my mind, that's a false economy - it's only viable because other people are paying for it, and it will just lead to disaster if the externalities are left to accumulate.

I also think it's not fair for the general public to need to be informed about every issue. Requiring the public to know how their clothes are made, what happens to their straws after they're thrown away, the effects of microplastics in the oceans, the existential risks of AI/CRISPR/insert emerging technology here - it's a ridiculous barrier of entry to being a good person. And besides, that's exactly what governments are for - to do the work and make the best decision to protect the public's interests.

The reality is that right now we can't even expect people to distinguish real information from misinformation because of social media algorithms disconnecting them from reality. I think most people are good people (at least insofar as they don't outright not care about the consequences of their actions), but it takes a moral hero to avoid causing harm. We need to change the incentive structure so that being good becomes the default.

But focusing on the individuals may be the wrong approach in general. There may always be a demand to damage the planet, because people want things, and we might not be able to change that. But we can regulate companies. I don't know the truth of it, but it's sometimes said that companies are responsible for 80% of emissions. If we place limitations on companies (for example by taxing emissions their true cost to the planet), those limitations would be passed onto consumers.

This has been a long way of saying, yes people need to make changes, but it's unrealistic to expect changes without changing the incentive structure.

We're in the state we are now because governments haven't invested enough in renewable science. We saw this problem coming from 10,000 miles away yet still we're unprepared. Governments always sacrifice the long term for short term political gain, it's just how our incentives are stacked up.

Cant argue with that, one of the downsides to our current political system in that it creates the perverse incentive to maximise the short term over long term goals. I am mildly surprised that something like HS2 managed to get the greenlight, although, i wouldnt be surprised if that was more because when it goes pear shaped itll be someone elses problem

Renewable or not i stand by id prefer to see more money diverted to fusion power, at present (and this is from america so its undoubtedly worse in Britain) they spend more money subsiding peanuts than research into this technology that'll, more or less, completely solve our energy problems, not to mention the lack of waste from it.
Although, if someone can find a renewable form of energy generation that can be used to provide base load that would be more than a little handy. As i said, the current ones are simply useless for it. Solar being a particularly bad one in that it provides power when its not really needed and we have no particularly useful means of storing it - aside from something like pumped hydro but most of Britain is unsuitable for such programmes. Shame really.

Currently I don’t we need more resources diverted to nuclear fusion. The private sector is expanding research capacity and like it or not we need to wait and see if the ITER model works. If this works then it should be commercially viable to replicate at scale.

It is, however, the best shot at unlimited power we have, renewables not even coming close to it in terms of efficiency - or simply providing skilled jobs and export potential for that matter.
Say what you will about the private sector notionally leading innovation but its always limited without government backing behind it, it being fairly risk averse in general. Plus, technology like this tends to come out of government contracts and labs as opposed to random companies. That is tosay, we shouldbe giving it a nice push in the right direction instead of wasting money on PV cells and such nonsense.

This is not a view I can agree with given that it is only in the auction in 2019 that offshore wind reached grid parity and no other renewable comes close (solar may not be far away but is not auction-able until December). The consumer should no more have paid the price for renewables in years past (the result of building before reaching grid parity) than they should be paying for the foolish reliance on imports now.

Currently I don’t we need more resources diverted to nuclear fusion. The private sector is expanding research capacity and like it or not we need to wait and see if the ITER model works. If this works then it should be commercially viable to replicate at scale.

Indeed and I am a massive fan of fusion however the current issue as I understand it is that we already have proof of concept and need to wait for the completion of the next phase (running it for a few years). Currently we seem to be at a phase where building a second ITER (unless we can radically cut build time of other models) would be a redundant and we just have to wait for phase 2 so to speak to succeed or fail, its just taking years to build. The cost of building a second commercial demonstrator would also be prohibitive in the tens of billions albeit I'm all for research grants and tax deductions.

While solar in the UK will only ever be viable over the summer (we can actually generate net power for about 6 months) it should still be something we invest in on a small scale and import from locations like southern Spain or Morroco where it's viable all year simply because it's such a stable, cheap source of power.

My personal leanings actually go towards geothermal though. We have temperatures hot enough within 2km to build at least some electricity capacity in the souh west and near the England-Scotland border and in the rest of the country temperatures are hot enough to provide 100% of heating even if electricity would be coming from something else. Much like oil we should over time also be able to extract deeper (where more veins suitable for electricity production will be available) at grid parity. Likewise we should complete the connector to Iceland.

Essentially what I'd like to see is a connector from Morroco-Spain-UK-Iceland that would with battery storage provide solar/offshore wind/geothermal below grid parity through the year. If needs be you can add France or bypass Spain. That allows us to get to 2050 when as alluded to commercial fusion can become dominant.

I don't disagree with what you say, of course if we expect renewables to be used in the market, they have to be economically sound. What I wrote before was specifically about investment in the science - investment is what has allowed them to become economically viable (at least to the degree that they've so far achieved it). The problem is that it's very late - we had a lot of advanced warning about the problem, but our investments were insufficient to make a timely transition.