The Clock Ticks Down on Gas Powered Cars

You are probably thinking recent, aspirational announcements by Britain, Germany, India, and China to eventually phase out the sale of gas-powered cars is the kind of shock to the system that will rouse the global auto industry into action. The industry is of course already on high alert to the threat from EV, shared transport, and autonomous mobility. So, phase out targets that don’t arrive until 2030, 2035, or even 2040 provide more than enough time for the industry to adjust. Instead, automakers face a more immediate problem, already bearing down in 2017: sales growth of ICE vehicles (internal combustion engine) may have already peaked.

If ICE vehicles never return to sales growth, then automakers must now confront the task of managing gas-powered vehicles as a legacy business, while finding their role in the new, broader area of mobility. How is it possible that ICE vehicles are already a legacy business? Because ICE sales growth in the US, for example, is expected to fall for 2-3 years starting this year. More crucially, by the year 2020, electric vehicle models will be falling into the price affordability window. If gas-powered cars are already losing market share to EV starting this year (EV sales are growing from a tiny base, ICE sales are falling from a large one) then how will ICE sales growth mount a recovery in 2-3 years time?

The tiny, almost hard-to-detect market share growth of EV is reminiscent of the buildout of wind and solar power and how market share growth of fossil fuel in electricity generation was halted. Ten years ago, combined wind+solar stood at just 0.84% share of total US power generation. In the first half of this year, that share reached a full 9.00%. (the forecast for the full year is ~8.57%). But in an overall system that has been running with zero demand growth, at about 4000 TWh per year, the entry of wind+solar has been a zero-sum game. What are the useful lessons here for the auto industry?

Neither the auto, nor the solar and wind industries, are digital businesses. The deployment rates for wind and solar, therefore, are directly applicable to the encroaching advance of electric vehicles. These are slower-moving, capital intensive endeavors and reaching the first 1% of market share—for wind+solar, or EV—requires heavy lifting. Indeed, EV sales are finally expected to cross the 1% sales share in 2017, as EV are expected to sell 214,000 units in an overall market that is falling from 17.47 million units last year to 16.84 million total sales this year.

The forecast depicted above, for total market light duty vehicle sales (LDV), uses only the most modest decline from this year’s auto-industry analyst forecast of 16.84 million sales in 2017, and 16.75 million sales in 2018, to 16.5 million sales in both 2019 and 2020.

The progression of EV sales from 2016 through 2020, however, is quite reminiscent of wind and solar’s advance in a comparable period from 2007 through 2011. Both technologies required five years to climb from just below 1% to over 3.5% of sales share.

Current consensus is that autonomous vehicles (AV) are a near term threat and EV are a current, but slow moving threat to the auto industry. Neither of these views is likely correct. Full AV is likely much farther away from a deployment threshold that would threaten market share of personal auto ownership. EV, however, now present a credible risk that by 2020 numerous models will fall into an affordability window that combines price, range, and lifetime maintenance and fuel costs. In some US states like California, we have already reached the point where a basic model Bolt or Leaf is a comparable choice to an ICE car. What chance do ICE now have, in the US at least, to return to growth?

–Gregor Macdonald

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Photo by author: Lobby of Guardian Building, Detroit, May 2017.

Balance Point: The US Cruises Towards (Net) Energy Independence

The US is now exporting so much crude oil, petroleum products, coal, and natural gas (both by pipeline and LNG), that the country’s net energy dependency has now fallen below 10% of its total consumption, in the first five months of 2017. The trend towards (net) energy independence is a retort to the historic assumption of US vulnerability in fulfilling its energy needs.

In just the past ten years, the country’s energy deficit—its net imported energy as a percent of total consumption—has fallen from 30% in 2006 to this year’s average of 9.2%. With further export growth of natural gas a certainty; a sustained lack of growth in US domestic energy consumption; and soaring production from new wind, solar, natural gas and oil; it’s now possible to ask the following question: when does the US reach its balance point, when all imports are matched by exports?

To express this net dependency in terms of data, the US consumed a total of 40.236 quadrillion btu (quads) of energy through May of this year; imported a total of 10.805 quads; but exported a total of 7.098 quads of energy during the same period. In the balance sheet calculation, we take the difference of the export and import figures (10.805 – 7.098 = 3.707), and divide the result by total consumption (3.707/40.236 = 9.2%) to produce the net dependency percentage.

Many will point out that underneath this calculation lies a continuing dependency on imported oil. That’s true. But even here, the trend is pretty clear: with US consumption of oil currently still below levels of the year 2000, the country is expected to achieve new, all time highs of domestic oil production near 10 mbpd next year, according to EIA forecasts. US oil production is bolting higher. US oil consumption is not.

The US Energy Information Agency (EIA) is already forecasting that US oil consumption will enter decline starting in the year 2020. That also happens to be the year that the price of Electric Vehicles (EV) will start to arrive in the affordability window, competing more directly with gas-powered cars. The steady upward march of fuel efficiency in light duty vehicles, and, modern building codes—delivering a new round of efficiency gains—are also playing a role.

All that’s required for the US to reach the balance point in energy is the continuation of current trends: exporting surpluses of rising natural gas production; dialing back the growth of oil consumption; increasing oil production; adoption of EV at the margin of the automobile market; and last but not least: soaring new electricity supply from US sourced wind and solar.

To the extent that new electricity supply from wind and solar is already making its way into transportation, through EV, the US now possesses the formula to attack transportation demand at the margin using domestically sourced energy. It’s a certainty that EV charging will take advantage of wind power surpluses (at night for example, in states like Texas) and eventually solar surpluses mid-day, in states like California. The US is going to reach its balance point easily by the year 2025, if not sooner. Indeed, by 2025, the US may have already turned net energy exporter.

–Gregor Macdonald

(This post is adapted and updated from the August 1, 2017 Newsletter)

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US Fossil Fuel Consumption Has Peaked, and Will Never Return

US fossil fuel consumption from coal, oil, and natural gas peaked ten years ago in 2007 at 85.927 quadrillion btu, and is unlikely to ever return. There are a number of trends underneath that peak that are worth mentioning. Briefly, coal has been in superdecline; oil consumption is back to levels last seen in the late 1990’s; and natural gas, bucking the trend, has made an enormous consumption advance. And then of course, there is the revolution taking place in wind and solar. Last year, 2016, total fossil fuel consumption came in at 78.569 quadrillion btu, despite, over the past decade, a US population advance of 25 million people. As most analysts now understand, the US will easily meet its Paris goals regardless of policy because economics have now taken over. US emissions have entered long term decline. Indeed, if you think US fossil fuel consumption hasn’t peaked, and is going to start rising again to make new all time highs, you’d be obligated to explain why. Or better, how.

Let’s run through the underlying trends in the three main fossil fuels, and then take a final look at the most updated trends in wind and solar power.

Coal. A terrible thing happened to coal over the past decade. First, natural gas undercut coal in price. Then, wind and solar started to undercut coal in price. Finally, it just so happened that these changing economics took place right as a large tranche of the US coal fleet came into the end of its lifecycle. Had much of the US coal fleet come to retirement, say, in the 1990’s, the country would be saddled with a much younger, harder-to-dislodge fleet. Accordingly, US coal consumption–which is upticking a little bit from low levels this year–is in superdecline. Unfortunately for coal, there is no way to claw back its lost competitiveness in a world where wind and solar power are becoming the cheapest forms of new electricity. So if you are going to make a case that future US fossil fuel consumption will recover to a new peak, you won’t get help from coal.

Oil. Why did US consumption of oil stop growing? And when did it stop growing? As suggested previously on the blog, US oil consumption can be broken into roughly two distinct eras. The first was the adoption era in which the economy, population, and oil-based industry grew uninterrupted until the late 1970’s. Since then, US oil consumption has not grown, but rather, oscillated. This should be more accurately called the dependency era. As such, the last 30-40 years have been a time of complacency and risk for the global oil industry because the US has been, for all that time, a dependable market for oil but not a growth market for oil. That technology has finally found a way to start eating at the margins of this dependency presents a very dangerous moment for oil producers. There is risk that as the acceleration of EV adoption really takes off, that US oil consumption could enter decline as early as 2020. Many will disagree. But of those who disagree: would you be willing to explain how US oil consumption will break out of its dependency phase, and enter a new growth phase, something it’s failed to do for decades?

Natural Gas. How did we eat away at so much coal consumption, while shifting more of the economy over to the platform of electricity? Here’s how: natural gas. The US is producing more NG, exporting more NG, and using more of its own NG. Natural gas production in Pennsylvania is up more than 10X. In North America, there is so much economically recoverable natural gas it’s frankly scary. Importantly, the US is installing a brand new fleet of natural gas fired power generation and in contrast to the end-of-life coal fleet, this fleet is young. The future looks great for natural gas growth: with the exception of one problem…discussed below.

Wind+Solar. Not only will US consumption of all fossil fuels fail to advance to new heights on the back of natural gas alone, but, natural gas itself will soon succumb to wind and solar power. Combined wind and solar will eat away, and then destroy the market share growth of natural gas, in the same way natural gas forced coal into zero growth, and then decline. As of 2016, combined Wind+Solar had already reached 6.9% of the total electricity market. By next year, combined Wind+Solar will cross a 10% share for the first time. And by 2020, that share will reach 14%. You can also spot one, notable phenomenon in the chart below: the total system demand for electricity is flatlining. Ergo, one energy source’s gain is another energy source’s loss.

Will electricity consumption continue to flatline? As you look at the chart of total electricity generation once more, consider the following: increasingly, US electricity output will follow the course of transportation demand as EV for both personal, industrial, and municipal use are deployed. Perhaps electricity generation will rise again–in fact, it probably will, starting next decade. As EV take market share from oil, however, wind and solar will increasingly supply the marginal growth of energy demand from EV. Perhaps someone would like to make the case that transportation demand crossing over to the electrical grid will be so swift, that the US will once again, at least briefly, have to call on fossil fuel resources. Maybe that happens for a short time. But how much lower will total US consumption of fossil fuels be at that time? The building blocks to a US energy system in which wind and solar are increasingly meeting marginal demand growth are easy to put together. The building blocks to a sustained recovery in total fossil fuel consumption are, by contrast, hard to find.

–Gregor Macdonald

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US Oil Demand Picture Offers Nothing to Either Oil Industry or Climate Community

US petroleum consumption grew by 0.95% last year, highlighting the current drag on global oil demand growth. For years, weaker OECD demand growth was masked by strong demand in Non-OECD regions. But since the year 2010, a new pattern of demand has slowly emerged, and it’s the primary reason why oil prices have found an equilibrium, at much lower levels.

There’s no question, however, that US oil demand has stabilized since the great recession. Economic recovery and booming auto sales have been balanced by slower population growth, migration back to the cities, and the rise of transportation alternatives—rail especially. Seen this way, the portrait of US oil demand is one of a standoff. The country has pursued “some” of the measures needed to constrain further oil demand growth, but not enough to push demand into outright decline.

One bright spot is that the oil intensity of the US is, in fact, in well articulated decline. This was a given during the country’s deindustrialization period from 1980-2000. Accordingly, pointing out America’s falling per capita or oil/GDP, during those two decades, was not particularly instructive. However, that per capita oil consumption has fallen since the year 2000 does merit attention. | see: US Per Capita Oil Consumption – Million btu 2000-2016.

Unfortunately, the US today offers no encouragement to the oil industry, which needs higher demand growth, or the climate community, which wants to see outright oil use declines. This blog has discussed frequently the failure to distinguish between growth and dependency in energy analysis, and the unhelpful intermixing of the two phenomenon. The US has been stuck in long-term dependency on oil, and continues to pursue, at best, tweaks at the margin of policy and infrastructure. But today’s level of oil demand was first reached 40 years ago, in 1977. So it’s pointless, for example, to hover over the weekly or monthly data-noise in US oil consumption, hoping to find growth.

The global oil industry claims confidence in another 25 years of demand growth. But, internally, its likely the industry is paying more attention than they’ll admit to the risk that oil demand growth falls towards zero. If we group US policy and technology trends together—and add in population trends—the US doesn’t represent a growth center for oil. But the US today does represent, surprisingly, a center for slow progress. Oil dependency, without meaningful oil consumption declines, remains the default position.

–Gregor Macdonald

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Trump Pulls a Crazy Ivan on US Energy and the EPA

US energy production from all sources rose under President Obama by the largest amount in forty years. Coal production, whose fate has long been in the hands of Chinese demand, fell. But oil production and natural gas production soared so high they helped lift US output above its long term oscillation around 70 quadrillion btu, to above 85 trillion btu. Much of this surplus production was liberated too, by the Obama administration. Crude oil and increasing volumes of LNG now set sail from American shores. Because the US now utilizes so much of its own natural gas, and wind and solar, the net dependency on foreign imported energy has fallen also, dramatically, from 24% when Obama took office to 12% last year. In short, the march towards American energy self-reliance is fully underway.

But not according to Donald Trump, who’s about to pull a Crazy Ivan by gutting EPA regulations so that US energy production can finally be set free, from the punishing, punitive constraints of the Obama Administration! | see: US Total Production of Energy from all sources in Quadrillion btu 1950-2016 (2009-2016 in red).

Real Talk: During the Obama Administration, natural gas production in one state alone, Pennsylvania, rose by nearly 20x, from 2009 through 2016. Today, Pennsylvania would be a top world natural gas producer if it were a standalone country. Under the Obama administration, over 15 bcf/day of natural gas exports by LNG were approved, creating a new export industry for the US. And that doesn’t include pipeline exports of natural gas that have risen strongly to Mexico. Context: the US consumes about 75 bcf/day of natural gas on average, so unfolding LNG exports are not small, but major. Total petroleum exports of crude and products, meanwhile, rose from 2 million barrels a day (mbpd) to 5 mbpd. And last year, Texas of all places produced wind power equal to 15% of the state’s electricity sales. California, using a combination of wind power and lots of solar hit a similar number, at 16%.

The US today is a spinning carnival of energy production. So what problem is Donald Trump trying to solve? How will rolling back the Clean Power Plan, lifting restrictions on coal leasing, or allowing oil and gas drilling on federal lands help the economy?

None of this will help the economy. These regulations, undone, will unleash more costs to society, than gains. Indeed, any gains will flow only to energy corporations who are already contending with energy supply surpluses. It’s doubtful Trump’s executive order would yield any sustainable employment gains either. At best, the changes will narrowly enhance corporate profitability.

The Trump Administration demonstrates a strong preference for social-signaling policy, that’s poorly designed to operate in any realm other than the fevered cognition of his followers. It’s not likely Trump himself has any grasp of today’s energy landscape in America. The entire point of this latest EPA directive is simply to say: look at me, I’m pulling a Crazy Ivan on the environmentalists, fishtailing my way through the regulations, and I’m having a blast.

–Gregor Macdonald

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Building Blocks to a World of Flat Emissions

Unsurprisingly, global emissions have flattened for a third year in a row. The fortunate outcome is composed of the following building blocks: the peak of emissions in the OECD in 2007;  the termination of a twenty-five year phase of heavy industrialization in China and its ability to convert coal growth to zero; and, the accelerated deployment of wind and solar.

Peering closely at the year-over-year changes in new electricity generation helps us understand better how global economic expansion can be pressing forward, without pushing emissions higher. In 2015, for example, nearly all of the marginal growth in global power generation was provided by 187 TWh of new wind and solar. In the years prior, combined wind and solar took minority shares of new generation, at 158 TWh in 2013 and 121 TWh in 2014—but the majority of new electricity ex-wind+solar was provided by natural gas. This trend, where natural gas replaces retiring coal, is set to continue through the end of the decade. But combined wind and solar will eventually go to work also, on natural gas: in 2016 and this year, 2017, they are already expected to take half of new power generation.

Climate scientists will remind you, however, that emissions actually need to enter outright decline. When might that happen? Well, emissions have to flatten first before they can decline. One way to answer this question is with another: when will 100% of marginal growth in global power generation be taken up by wind and solar (or other low carbon additions, like nuclear)?  If you look ahead to the rough schedule of global coal retirements, natural gas additions, and the shift in marginal growth in wind and solar—in China, the US, and especially India—a reasonable guess is sometime after the year 2020.

But that still leaves the problem of emissions growth from oil.

As natural gas kills coal, it creates an emissions-saving gain. But those emissions-saving gains will eventually tail off. An actual decline in emissions after 2020 will be reliant not only on wind and solar dominance of powergrid growth, but a concurrent marginal transition of transportation growth, typically oil-based, towards electricity.

–Gregor Macdonald

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The Oil Demand Downshift

The International Energy Agency in Paris (IEA) released its oil outlook this week, Oil 2017, warning that demand may begin to outpace supply by 2020 if the global oil industry doesn’t start investing again.

But what if the oil industry is right to not invest? The most important data point in the IEA’s report was their forecast for oil demand growth: 1.2%, on average, over the next 5 years. If that forecast turns out to be accurate—and I think it will—then the next five years will see the same sluggish demand growth as the past five. And on a longer timeline, it represents a major downshift from the kind of demand growth the industry used to enjoy. | see: Compound Annual Growth Rate of Global Oil Demand During Five Year Periods 1985-2015 | Forecast 2016-2020.

The transition from an era when oil demand growth tended towards 2.00% to a time when it tends towards 1.00% is the driver behind the most lively argument in the oil sector today: peak oil demand. Just about every oil-focused energy analyst is trying to model when policy, urban demographic shifts, and the rollout of electric vehicles will take oil demand growth down to zero.

So what are the risks? Right now, you would have to locate the greatest upside risk to global oil demand in Asia—in particular, overall economic growth in China and India. While it would not be possible for China or India to replicate the 20th C experience with the automobile seen in the West, oil adoption is still underway in Asia. But downside risks to oil demand are real too. Indeed, if we bundle the lower operating costs of EV with their higher price, the discount that currently supports ICE vehicle sales is fading rapidly. Risk is growing that EV sales will take off, accelerate, and start to dominate many markets in a disruptive trajectory.

But there’s a larger point to be made in these equations. Oil demand growth at this lower bound has already put the price of oil, and the industry, in a vulnerable position. Remember what happened to the coal industry. After supersizing itself to the greatest heights of demand ever, between 2000 and 2013, global demand growth for coal turned flat. And now the coal industry in tatters.

The global oil industry doesn’t need to reach peak demand growth to run into severe problems. Once demand growth falls below 1.00% and stays there, the price of oil is going to find a new lower band as well, and it’s likely $10 away from current prices to the downside.

–Gregor Macdonald

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Car Clarities Begin to Appear: Bring on the EV

Many predictions are fielded, but few are chosen. With 2017 fully underway, it’s now possible to sober up a little about the future direction of cars.

First, Silicon Valley is not going to manufacture automobiles. Not EV, and not AV either. That the Valley would not enter the competitive, low-margin business of auto manufacturing was never a difficult forecast to make. That said, this excellent wrap-up of the current scene from John McElroy at Autoblog, The race for autonomous cars is over. Silicon Valley lost., succinctly makes a case for the the most rational, plausible outcome: the Valley will dominate the data around cars, leaving their production to those who know best. I’d only add an additional point of support to this conclusion: the example of Tesla is already serving as a teaching-story to the Valley. Musk’s success clarifies, interestingly, that there’s no need for technologists to follow or duplicate his auto-manufacturing pathway. This is especially true if you understand that Tesla is becoming a battery and energy storage company.

Second, it’s finally more widely understood that chatting about a future of Autonomous Vehicles is effortless, but creating that future will take time. Lots of time. Chris Mims over at the WSJ wrote a good update on the issue last September, Self-Driving Hype Doesn’t Reflect Reality. We are at the beginning, not the end point, of fully autonomous vehicle engineering. There is still a great deal of material to be worked out in mapping, vehicle negotiation of unmapped obstacles and hazards, and the short-cycle updating required to fully pair an AV to the built environment. And we will still have the Trolly Problem to confront when fully autonomous AV are ready to deploy. 

Finally, the EV are coming. Norway, (yes, a small country), is looking to ensure through tax incentives that EV will constitute 100% of new car sales by 2025. But Norway is already getting its EV on. In 2015, over 20% of new sales were EV. Meanwhile, in the large country category, China just announced that new entrants to Beijing’s taxi fleet would only be open to EV, starting this year. Also, Tesla has now done its first 1$ billion in sales, confirming China will be a major market for Musk’s company. Most important is that China is now consuming nearly half the total global sales of EV. For a country that still consumes half the world’s coal, that’s encouraging.

–Gregor Macdonald

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Not the Road Ahead

A broad claim made in favor of autonomous vehicles (AV) is that their eventual deployment will usher in a massive reduction in national vehicle fleets. It’s an appealing image: our cities emptied out of excess vehicle inventory, and lots of real estate and automobile infrastructure converted to human-centered uses.

In September of last year, the co-founder of Lyft, John Zimmer, wrote a long piece on Medium in which he laid out this very vision. The Road Ahead has the familiar appeal which prosaic, silicon valley forecasts are very good at producing. Autonomous vehicles will quickly become widespread, and account for the majority of Lyft rides in five years. By 2025, private car ownership will all but end in major cities. There’s no question that AV are coming (though not nearly as quickly as many forecast). And I agree that both EV and AV will find their high adoption rates first, in global cities. But something about Zimmer’s precision struck me as too confident. And in particular, his accounting for the number of citizens that would shed car ownership. The idea that cheap and available AV would only usher in car-shedding struck me as one-sided.

This week, in a detailed report on the rise of TNC (Transport Network Companies) in New York City, we have a better picture of the neglected side of the AV rollout equation. According to Unsustainable, a detailed ridership and impact study conducted by Schaller Consulting, the success of Uber, Lyft, Via, Gett, and Juno in the five boroughs has uncovered demand not from riders looking to shed car ownership, but from transit users looking to take a cheap car ride. According to Schaller, the marginal growth among competing transport options in New York City began to tilt slowly towards TNC in 2014, and then really accelerated in 2015. So much so, that marginal growth in bus and subway ridership slowed considerably. And by 2016, TNC were trouncing, at the margin, both buses and subways.

| see: Figure 12. Changes in ridership by mode, 2015 to 2016.


I agree that AV penetration will impact the inventory of existing cars. But readily available and affordable AV will also impact the inventory of users who don’t own cars. You could argue that New York City contains the largest population of car-less users in the country. But you would also have to allow that latent demand for car services can be found in all cities; and if prices for TNC fall—regardless if fleets are AV, EV, or still have drivers—the impact of those falling prices will uncover growth in this latent demand. It’s already happening, in New York City.

The advent of AV and EV will offer significant gains to society and well being. But the claim that urban congestion will be solved by AV in revolutionary fashion needs to account for the phenomenon of induced demand, and cannot rely on one-sided arguments that concentrate only the size of existing vehicle fleets.

–Gregor Macdonald

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Troubles Ahead for the Global Oil Sector

Global production of crude oil reached a new, all time high in November of 81.81 mbpd. That’s not good news. Especially at a time when the rate of demand growth for oil has downshifted from its historical 2% rate to something closer to 1%. More chilling still is that the price crash, which started in mid 2014 and took prices from a seemingly stable $100 level down to today, did not produce a supply response. No, instead, global oil production is up 4 mbpd (using the monthly data) since the start of 2014. That’s just grim for producers everywhere. Or rather, producers outside of low-cost OPEC.

Equally astonishing: according to the latest data, global crude oil production in 2016 will likely average right around 80.4 mbpd, a statistical match to 2015’s 80.5 mbpd. So even in 2016, the global oil complex was still making no response whatsoever to lower prices. Why haven’t lower prices driven supply lower?

The explanation is fairly straightforward: the rate of global oil demand growth is now slow enough that it can be adequately covered by the rate of newly developed oil brought to market. This equilibrium relieves both the futures market, and the oil extraction industry, of pressure.

In the latest issue of the TerraJoule newsletter, I discuss briefly The Hunt for Peak Oil Demand. Get the latest free, bi-monthly by signing up here: newsletter.

–Gregor Macdonald