Environmental Economics

Peak oil (demand)

From the WSJ (Oil Demand Expected to Peak This Decade as EVs Boom): 

Rising demand for crude oil is set to slow to a trickle within five years and peak before the end of the decade, as electric-vehicle uptake surges and developed nations rapidly transition to cleaner sources of energy, according to a prominent energy forecaster.

The International Energy Agency, a group funded by some of the world’s largest oil consumers, expects demand for transport fuels derived from oil such as gasoline will be the first to peak before starting a steady decline—hastened by a sharp uptick in EVs and a long-lasting shift to remote working spurred on by the Covid-19 pandemic.

Rapidly growing Asian economies will continue to prop up the global appetite for oil in the coming years, and demand for jet fuel, naphtha and other oil products with industrial uses will continue to tick higher, the IEA said in a report released Wednesday. But even in China, which has long been the powerhouse of global oil demand, the appetite for crude will slow markedly before the end of the decade. India will surpass China as the main driver of oil growth as soon as 2027, the IEA said.

The forecast, which the IEA made in an annual report that considers oil demand as far away as 2028, isn’t the first time the Paris-based group has laid out a timeline predicting a zenith for oil. But it envisages a far more rapid shift away from fossil fuels than previously expected—a shift that has been sharply accelerated by the Covid-19 pandemic and the energy crisis that followed Russia’s invasion of Ukraine.

Joe Manchin: “If I can’t go home and explain it to the people West Virginia, I can’t vote for it. I just can’t. I’ve tried everything humanly possible. I can’t get there,”

OPEC+ teaches us that demand curves are downward sloping

From the NYTimes (In Surprise, OPEC Plus Announces Cut in Oil Production):

Saudi Arabia, Russia and their oil-producing allies announced on Sunday that they would cut production by more than 1.2 million barrels of crude a day, or more than 1 percent of world supplies, in an apparent effort to increase prices.

Oil prices soared as markets opened Sunday evening, with both the American and global oil benchmark prices rising by 7 percent. ...

“I really am surprised,” said Tom Kloza, the global head of energy analysis at the Oil Price Information Service. Mr. Kloza said he expected that the Brent global oil price benchmark, which has been hovering at $75 to $80 a barrel in recent weeks, would climb above $80. On Sunday evening, the price of Brent crude surged to $85.48 a barrel. West Texas Intermediate, the American benchmark, rose to $81.04.

Various energy experts estimated the eventual cut differently. Helima Croft, head of global commodity strategy at RBC Capital Markets, said that the voluntary cuts on paper amounted to more than 1.6 million barrels a day but, she added, the “real effect could be around 700,000 barrels a day.”

The global oil market is roughly 102 million barrels a day.

What more can you ask from a Monday?

Some bad economics at the Department of Energy

From E&E News (DOE: Major LNG project ‘would not increase’ CO2) from June 2022: 

A proposed liquefied natural gas project in Alaska would not raise greenhouse gas emissions, according to a new federal environmental review that assumes LNG exports elsewhere will continue to meet demand even if the planned pipeline and terminal aren’t built. ...

The Department of Energy’s draft SEIS includes a life-cycle analysis of the greenhouse gas emissions tied to the project’s LNG exports. It finds that “exporting [liquefied natural gas] from the North Slope would not increase GHG emissions when providing the same services to society,” as the No Action Alternative, a scenario where the Alaska LNG project is not developed.

If you don't believe E&E news then here is the screenshot:

So, as asserted earlier, this isn't how markets work. In the no action alternative supply and demand don't move and there is no change in price or quantity of liquidfied national gas (LNG). With a new LNG facility the supply curve shifts to the right and the quantity of LNG increases (and price falls):

If there is no climate impact from the increase in LNG supply as the DOE report claims then either (1) buyers want the same amount no matter the price (i.e., the demand curve is vertical) or, (2) in the no action scenario, someone else magically increases the supply of LNG. Here is how the EPA puts the second scenario in their comment letter: 

Hat tip: Patrick Walsh in response to this post: link.  

The NYT's Willow article allows issue advocates to alternately assume perfectly elastic demand and supply

The decision to allow mining in Alaska is controversial (Biden Administration Expected to Move Ahead on a Major Oil Project in Alaska): 

In one of its most consequential climate decisions, the Biden administration is planning to greenlight an enormous $8 billion oil drilling project in the North Slope of Alaska, according to two people familiar with the decision.

Alaska lawmakers and oil executives have put intense pressure on the White House to approve the project, citing President Biden’s own calls for the industry to increase production amid volatile gas prices.

But the proposal to drill for oil has also galvanized young voters and climate activists, many of whom helped elect Mr. Biden and who would view the decision as a betrayal of the president’s promise that he would pivot the nation away from fossil fuels.

On one side is the "environmental activist" worried about a "carbon bomb" (in fairness to issue advocates, this is not a quote from an activist): 

Still, Willow would be the largest new oil development in the United States, expected to pump out 600 million barrels of crude over 30 years. Burning all that oil could release nearly 280 million metric tons of carbon emissions into the atmosphere. On an annual basis, that would translate into 9.2 million metric tons of carbon pollution, equal to adding nearly two million cars to the roads each year. ...

Environmental activists, who have labeled the project a “carbon bomb” have argued that the project would deepen America’s dependence on oil and gas at a time when the International Energy Agency said nations must stop permitting such projects to avert the most catastrophic impacts of climate change.

Increasing the amount of oil produced would increase the supply of oil if we consider new mines as firms entering the industry. But, the only way that the amount of oil produced would increase the amount consumed by the same amount (the "carbon bomb" scenario) is if the demand for oil is perfectly elastic. In the picture below the additional mining shifts (rotates) the supply of oil from S to S' and buyers in the market snap it up at the existing price. The increased quantity of oil consumed is equal to the increased supply at the market price (both arrows are the same size). 

But, if the demand for oil is sensitive to price (note: it is) then the amount consumed (the bottom arrow) will be less than the supply increase (the upper arrow): 

On the other side is the energy industry making even less sense: 

Kevin Book, managing director of Clearview Energy Partners, a research firm, ... argued that the emissions linked to burning oil drilled from the Willow project would not have been eliminated if Mr. Biden had rejected the project, but simply generated elsewhere.

This quote assumes that there is some demand increase, the source of which I don't know, and a perfectly elastic supply from existing miners. 

If the supply curve is upward sloping (it is) then the increase in consumption would be less than the demand increase. I'm not going to dignify this scenario by drawing this out because I'm not sure where the demand increase is coming from. As far as I can tell, if there is no oil from the Willow project nothing changes in the oil market. 

Happy to be corrected, what have I missed?

Hotelling's switch point just got later

Hotelling's Rule is a theory of nonrenewable natural resources that says that prices of such resources will rise at the rise of interest over time (all else equal). When there is a backstop fuel, think renewables like wind and solar, the "switch point" is when society switches from nonrenewables to renewables because the price of renewables is lower. I've posted the video from my 2000 level class that discusses the switch point below. Of course, it is out of context so a masochist will want to start at 10-1. 

All that is background to this story from the WSJ: BP’s CEO Plays Down Renewables Push as Returns Lag. Here is the gist: 

BP Chief Executive Bernard Looney plans to dial back elements of the oil giant’s high-profile push into renewable energy, according to people familiar with recent discussions.

Mr. Looney has said he is disappointed in the returns from some of the oil giant’s renewable investments and plans to pursue a narrower green-energy strategy, the people said. He has told some people close to the company that BP needs to do more to convince shareholders of its strategy to maximize profits in areas where it has a competitive advantage, including its legacy oil-and-gas operations.

In some of the conversations, Mr. Looney has said he plans to place less emphasis on so-called ESG goals—a catchall term for environmental, social and governance—to help clarify that those aren’t distracting the company from its ability to deliver profits, the people said.

Mr. Looney, the people said, is casting the moves as a modest short-term course correction rather than a major strategic pivot for the 114-year-old company.

The article continues will details but it sure looks like this is some evidence that Hotelling's switch point is moving further into the future. 

Have you ever known that person that has a ton of great ideas but never gets them done? That's the renewable energy industry

From the WSJ (Investors Plow Into Renewables, but Projects Aren’t Getting Built): 

Even as developers plan an unprecedented number of grid-scale wind and solar installations, project construction is plummeting across the U.S.

Despite billions of dollars in federal tax credits up for grabs and investors eager to fund clean energy projects, the pace of development has ground to a crawl and many renewables plans face an uncertain path to completion. Supply-chain snags, long waits to connect to the grid and challenging regulatory and political environments across the country are contributing to the slowdown, analysts and companies say.

New wind installations plunged 77.5% in the third quarter of 2022 versus the same period the year before, according to S&P Global Market Intelligence. New utility-scale solar installations likely fell 40% in 2022 compared with 2021, according to a report from the Solar Energy Industries Association and research firm Wood Mackenzie.

The decline belies enormous demand for renewable projects. The industry is ready to launch a would-be building spree after last year’s spending and climate law, the Inflation Reduction Act, extended and increased tax credits for wind and solar projects and introduced new incentives for green hydrogen and battery storage for the electric grid. The success of the IRA, the Biden administration’s climate targets and many state decarbonization plans hinge on adding massive amounts of renewable energy into the grid.

One problem is that the industry can't find parts:

Efforts to create a domestic solar supply chain to meet U.S. project demand are expected to take a few years. Meanwhile, panel imports, 80% of which come from Chinese and other Asian makers, have slowed following U.S. legislation aimed at cracking down on labor abuses in China. Several thousand shipping containers of solar panels have been detained by U.S. Customs near ports such as Los Angeles, according to some estimates.

Another problem is that they can't get connected to the grid:

A bigger unknown is the time and cost to get new batteries or solar or wind farms connected to the grid, as grid operators and interconnecting utilities must study the projects’ likely impact on the power system and any needed network upgrades before signing off on them. ...

Grid operators have been overwhelmed by requests, and several are trying to overhaul their processes. There were around 8,100 projects in line in the U.S. in 2021, up from 5,600 in 2020, each requiring a technical review. Interconnection wait times rose to about 3.7 years for projects delivered between 2011 and 2021, up from around 2.1 years for projects built in the decade prior, according to a study last year by Lawrence Berkeley National Laboratory.

And finally, you knew there had to be a NIMBY problem:

Just 23% of the power-generation projects seeking grid connection from 2000 to 2016 were ultimately built. Completion rates were even lower for wind, at 20%, and solar at 16%. Around 19 gigawatts of wind and more than 60 gigawatts of solar were withdrawn from interconnection processes in 2020 and 2021, according to the national lab.

The certainty of securing local permits also varies market by market, even within the same state, along with the willingness of a community to welcome large renewable energy projects, Mr. Rand said.

I'm sure that the U.S. Congress is busy trying to figure all this out, so no worries.

Follow the bouncing ball of ethanol policy

I'm just going to leave this here. I have no idea where to start...

 POET announced today it will idle production at its bioprocessing facility in Cloverdale, IN due to recent decisions by the Administration regarding SREs. The process to idle the plant will take several weeks, after which the plant will cease processing of over 30 million bushels of corn annually and hundreds of local jobs will be impacted.

POET has reduced production at half of its biorefineries, with the largest drops taking place in Iowa and Ohio. As a result, numerous jobs will be consolidated across POET’s 28 biorefineries and corn processing will drop by an additional 100 million bushels across Iowa, Ohio, Michigan, Indiana, Minnesota, South Dakota, and Missouri.

“The Renewable Fuel Standard was designed to increase the use of clean, renewable biofuels and generate grain demand for farmers. Our industry invested billions of dollars based on the belief that oil could not restrict access to the market and EPA would stand behind the intent of the Renewable Fuel Standard. Unfortunately, the oil industry is manipulating the EPA and is now using the RFS to destroy demand for biofuels, reducing the price of commodities and gutting rural economies in the process,” said POET Chairman and CEO, Jeff Broin.

The RFS authorizes small refinery exemptions for refiners that (1) process less than 75,000 barrels of petroleum a day and (2) demonstrate “disproportionate economic hardship.” Over the past two years, the EPA has issued waivers to refineries owned by ExxonMobil, Chevron, and other large oil companies—none of which are small and none of which have economic hardship. 

EPA’s mismanagement of SREs has created an artificial cap on domestic demand for ethanol and driven RIN values to near-zero, which weakens the incentive for retailers to offer higher blends. Oil is making billions of dollars, yet still using EPA to stop biofuels growth by handing out hardship waivers to some of the wealthiest companies in the world, in contradiction with President Trump’s public comments. So far, the EPA has cut biofuels demand by 4 billion gallons and reduced demand for corn by 1.4 billion bushels, causing severe damage in rural America. 

“POET made strategic decisions to support President Trump’s goal of boosting the farm economy. However, these goals are contradicted by bailouts to oil companies. The result is pain for Midwest farmers and the reduction of hundreds of jobs and hundreds of millions of dollars of economic activity across Indiana.” said POET President and COO, Jeff Lautt

The recent announcement of 31 new waivers comes in steep contrast to the President’s roll out of year-round E15 earlier this summer. The SREs are wiping out any near-term growth potential for year-round E15 and challenging the President’s promises made to family farmers and rural communities. The President now has the opportunity to show his leadership on this issue and turnaround the rural economy. 

“My long term fear isn’t for the biofuels industry, it’s for rural America. POET can continue to produce ethanol with cheap grain, but we don’t want to lose our family farmers. The EPA has robbed rural America, and it’s time for farmers across the Heartland to fight for their future” said POET Chairman and CEO Jeff Broin.

Quote of the Day: Freedom Fries the Redux

Ladies and gentleman, an actual press release from the Department of Energy (with EMPHASIS ADDED): 

“Increasing export capacity from the Freeport LNG project is critical to spreading freedom gas throughout the world by giving America’s allies a diverse and affordable source of clean energy. Further, more exports of U.S. LNG to the world means more U.S. jobs and more domestic economic growth and cleaner air here at home and around the globe,” said U.S. Under Secretary of Energy Mark W. Menezes, who highlighted the approval at the Clean Energy Ministerial in Vancouver, Canada. “There’s no doubt today’s announcement furthers this Administration’s commitment to promoting energy security and diversity worldwide.”

“Approval of additional LNG exports from Freeport LNG furthers this Administration’s commitment to promoting American energy, American jobs, and the American economy. Further, increased supplies of U.S. natural gas on the world market are critical to advancing clean energy and the energy security of our allies around the globe. With the U.S. in another year of record-setting natural gas production, I am pleased that the Department of Energy is doing what it can to promote an efficient regulatory system that allows for molecules of U.S. freedom to be exported to the world,” said Assistant Secretary for Fossil Energy Steven Winberg, who signed the export order and was also in attendance at the Clean Energy Ministerial.

I was going to make a joke about spreading molecules of gas wherever I go, but then I thought that might be beneath me.

Daily Demand and Supply: Bill Nye Explains the Law of Demand...and Carbon Pricing, MFers.

Warning:  NSFW (Unless you work at a University and part of your job is to watch stuff like this and post it on a blog).

The highlights of this have been around all week, but most of the clips are just Bill Nye the Science Guy saying "motherf***ers.   But this segment on Last Week Tonight really does a nice job of simply explaining how Carbon Pricing works.  If you don't want to watch the whole thing, just fastforward to the 9:27 mark or so, and sit back and enjoy.

Bill Nye explains the Law of Demand from 10:21 to 10:37.

Now if I can just figure out how to use this in class without trigger warnings.

It's time to stop wondering when the renewable switch will occur and start asking how do we manage the transition

CNN:

The renewable energy sector is projected to generate more electricity than coal during the month of April, according to a recent report published by the Institute for Energy Economics and Financial Analysis. That's never happened before.

Technological change, government policies, and changing consumer preferences have all but guaranteed the switch from fossil fuels to renewables.  To me, the economics of the switch are less interesting (people prefer cheaper techonologies...duh!), than the question of how we manage the economic transition. How do we retrain the workforce in communities reliant on traditional forms of energy production?  How do we transition the infrastructure in those communities?  How do we tackle tough questions like whether coal reliant communities should be rejuvenated?  How do we manage the inevitable pressures of additional income inequities due to the transition?

There are a lot of questions economists need to think about.

When the renewable switch will occur isn't one of them.