Nov 16 2011

Oil Soars and Natural Gas Withers: But the Energy Singularity is Not Forthcoming

November 16, 2011

If you firmly believe higher oil prices will drive energy transition, and the adoption of alternative sources, then do (by all means) feel excited today. The price of West Texas Intermediate crude oil, which has sold for as much as a 25% discount to Brent oil over the past 9 months, has been slowly filling that gap recently. And, with the announcement today that a major pipeline would further relieve the surplus of WTI at Cushing (taking it away to the Gulf Coast), the discount has closed further. As of this morning, WTI soared to $102.00 as Brent has fallen closer to $110.00. Accordingly, the full impact of the higher global price of oil is now about to be visited upon North America. Is that bad news, or good news?

If you are a signatory to the new Natural Gas Revolution, you probably believe the extraordinary discount of North American NG to world oil prices suggests our economy’s on the verge of a grand switch, from oil to natural gas. Greentech investors, and solar and wind industries will also once again write a very happy ending, to their own stories. However, I am less convinced that any fast transition is imminent.

As much as I believe in market forces I’m also a believer in market failures. And, as much as I believe in the power of price I’m also a believer in policy failure. But most of all, I’m a believer in the stranded infrastructure that now composes our landscape, most of which was built after World War II. This vast stock of infrastructure is resistant to a transition that will either be easy, cheap, or rapid. Instead, as with past energy transitions, the US faces a much slower migration to alternative sources as it struggles to shed oil from its economy.

My colleague and friend, Chris Nelder, wrote specifically about this problem recently in his must-read piece, When should we pursue energy transition? He makes the important point that the power of price and the miracle of free markets will not sort this problem out. Why? Mostly because the energy surplus of the last 200 years has always “worked it out” for us. That won’t happen this time around.

Clearly, it makes no sense to wait until renewables are cheaper than fossil fuels before beginning transition, particularly if you’re talking about transportation fuels. To do so would be to gamble with the entire economy and risk severely negative outcomes, like fuel shortages, riots, and depression. Are we really willing to take such risks, simply because we prefer to believe that the free market will magically sort everything out, particularly when we know that our economic theory evolved in an age of energy surplus which is now behind us?

Recently a well known political columnist, David Brooks, has also embraced the miracle of the Natural Gas Revolution. While it’s certainly true that US natural gas production is back to all time historical highs, this suggests, to me at least, that the arc of this thesis is close to playing out. As greentech investors have also been forced to discover, the realities of change in the physical world are harsh. Energy transition is not a candidate for the type of change that propagates across a digital network, in Kurzweilian fashion. Atoms are harder than digits. The energy singularity is not forthcoming.

–Gregor

• Comments (4)
Author: Gregor Macdonald   Posted in: transition   Tagged:                    
  • Anonymous

    Gregor, is this one too simple?
    -Most every structure in america is connected to the grid, as a consumer of electricity;
    -The infrastructure is in place- no need for the new transmission grid that seems to be in vogue as a solution.
    -Put solar on every rooftop, mandate that utilities MUST buy, without net metering, every electron placed into grid. (Yes, there will be institutional resistance to this mandate)
    -Push the globe to a ‘new gold standard’: BTU’s (global cooperation allowing a single currency pegged to a ‘real’ resource is another major sticking point).

    The institutions with a ‘lock’ on production and distribution why scream bloody murder, and have so much to lose, but by decentralizing, making every building owner a provider of energy and business owner, we may see a creative renaissance of capitalism, individualism, independence, self-reliance– an awakening of a start to self-actalization

    This does not begin to address oil, nat gas, dino-fuels, and the need / demand for them, but might give some breathing room for electric-based alternatives to petroleum-related demand, especially in transportation. 

    If we all can watch our meters and become more conscious of our actions, and the consequences of choices, directly, it can’t hurt a thing, can it?

  • David Shipway

    Factor in the acceleration of climate change due to human emissions and the singularity, even though it’s a slo-mo one, is probably unstoppable sea level rise. That should take care of a large percentage of existing infrastructure, and create 2 billion refugees intent on moving uphill.

  • Anonymous

    To extend your point slightly beyond the oil price issue, “It’s the supply chains, stupid!”

    Currently, the system of product and service supply chains that serve the world are almost completely dependent on a petroleum-based transportation system and the infrastructure that supports this – an Infrastructure that, as you’ve pointed out, can’t be changed overnight or cheaply.

    Supply chains run on oil, money, and… other supply chains. A sufficiently large breakdown in any one of these can cause a cascade failure in all dependent supply chains. Potentially, that break may become permanent, at least within the perspective of a human lifetime.

  • http://kwiqly.blogspot.com/ James Ferguson @kWIQly

    A huge transition occurred in the UK when fuels shifted from Town Gas and oils to Natural Gas.  There was a commercial landgrab as fitters visited virtually every house in the nation in between 1966 and 1976 refer  http://en.wikipedia.org/wiki/British_Gas_plc

    Many of the possible benefits never emerged – but some did. As a child i heard Norway complaining bitterly about the Acid rain that denuded their forests.  This was mainly H2SO4 from sulphur particulates combustion by-products in heavy oils and town gas from Britain and was thankfully improved. Natural Gas is cleaner.

    What was often forgotten was that with cleaner burn technologies burners could be switched on and off much more reliably than historically, allowing massive potential economies. But with the event of cheap Natural Gas a huge opportunity to save energy was wasted. 

    In light of this it is interesting that Russia are reputed to be planning great changes to energy efficiency because if they do not burn natural gas they can pipe it to people who will.

    All this goes to show that abundance is a time for investment – its Biblically clear but often forgotten