Ebb Tide

Monday 9 September 2019

The growth rate of EV sales is slowing. Light duty vehicle markets from India to China to Europe are falling hard, and that is finally starting to pull down the growth rate of EV sales. This is also happening in the US (where total LDV sales are falling more gently) and in the key EV market of California. Systemically, while this will extend downward pressure on global gasoline demand, the next rebound in global growth will now wash over a smaller-than-potential fleet of EV.

(UPS electric delivery truck on Parry Street, Vauxhall, Borough of Lambeth, London. March 2019, via Google Earth)

In India, a decline in vehicle sales is reminiscent of the sharp break which began last summer in China. India’s LDV sales through July fell by 12% year-over-year, and are forecast to finish 2019 down 10%. In Europe, where government bond yields have gone deeply negative as the continent tips into recession, LDV sales fell 8% in 1H 2019. On a country-by-country basis, however, some of the declines were far steeper—in France and Spain especially. From a market perspective, the STOXX Europe 600 Automobiles and Parts Index is trying to bounce, as it fishes around for a bottom. But again, all signs point to a lower low before the next recovery.

How are these declines impacting plug-ins? In the UK, sales of EV+PHEV are up just 4.6% through August. In the United States, where plug-in sales rose a whopping 80% last year, 2019 sales are up, at best, 7% through August and even with expected seasonal strength in Q4 may reach only reach 15% growth this year. China EV sales are still looking pretty strong, however, decelerating from 62% growth in 2018 to 40% growth in 2019. Given that it’s the most important EV market in the world, that is surely good news. However, in California, EV sales are set to advance just 20% this year after 60% growth last year. California’s total LDV market is on pace to fall by 5.25% this year, and its gasoline consumption is falling notably, now down 2.6% through May, after a decline of 1.5% for all of 2018.

This dynamic once again answers a long-standing question: does a lowering of the economic growth rate suppress fossil fuel demand, while at the same time taking a bite out of clean energy deployment? Yes, absolutely. Eventually, however, there is an offset: lower interest rates, typically seen around the trough of global GDP growth and which tend to linger, are an elixir to clean energy. The rebound in global energy consumption, when it comes, will therefore initially disappoint as existing vehicle fleets, and power generation, take new growth as currently configured. However, as seen in the 2010-2018 period, low interest rates and even cheaper clean energy technology will make for a heady, if not frothy landscape for EV once we get past the year 2020. Until then, the first wave of EV is about to ebb.

A not-very-good essay on the cost of energy transition was unwisely published by The New Yorker this week. In the course of its argument, the author, Jonathan Franzen, revealed he understands neither growth rates nor investment returns. Accordingly, while Franzen may be an accomplished novelist, he is not the right candidate to address the costs and benefits of a Green New Deal. In this one paragraph, Franzen sums up the breadth of his ignorance—and joins the rest of the culture in being unable to distinguish between a trillion dollar program to buy everyone, say, a lifetime supply of chocolate and the same trillion dollars spent on useful infrastructure that both enhances GDP, and creates energy efficiencies.

Here is my question: how is it possible that in a society which places notable emphasis on undergraduate education in economics, and which also sends thousands of candidates each year to business school, we cannot have a rational, adult conversation about investment returns? Franzen’s zero-sum analysis is deeply embarrassing, but it is often the same ruse deployed elsewhere by educated professionals who should know better. Every claim I make, by contrast, in this January Op-Ed on the cost of energy transition gets truer by the day, for example, as wind, solar, and storage prices continue to fall past key thresholds. I must emphasize: these are not even my ideas. I am not the author or creator of the fact that old infrastructure, and old fossil fuel systems, now increasingly run at an economic loss. These are now just facts. Facts that drive the investment decisions of asset owners, many of whom who care not one whit about climate, or green new deals, but are interested only in the bottom line.

The largest dam removal project in US history, along the Klamath River, will begin in early 2022. The asset owner, utility company PacifiCorp, was facing an uneconomic re-licensure to keep the current hydro assets running and made the decision to create that generation through other means. My coverage of the project, and the national trend toward dam removal and related ecosystem revivals, has just published in Atlantic Media’s Route Fifty.

The downturn in US oil and gas sector employment has begun. Picking up on the theme discussed last month in The Gregor Letter, the outlook for fossil fuels continues to dim, especially as the final engines of growth for oil demand are China and India. The chart below comes from Ben Casselman of the New York Times.

A shorthand way to think about the future sensitivity of the US oil and gas sector to price is to simply accept that marginal changes in demand now come entirely from outside the US. Fluctuations in LNG exports, petroleum product exports, and domestic oil and gas production are no longer tied at all to domestic consumption—because US oil consumption is basically flat. When the US coal industry lost China, starting in 2014, there was no prospect of domestic growth to save it. That’s basically where the US oil and gas sector sits today.

Gregor Macdonald, editor of The Gregor Letter, and Gregor.us

The Gregor Letter is a companion to TerraJoule Publishing, whose current release is Oil Fall. If you've not had a chance to read the Oil Fall series, the single title just published in December and you are strongly encouraged to read it. Just hit the picture below.

Power Signals

Tuesday 27 August 2019

The Gregor Letter is on a lighter schedule here at the end of summer. But there are a couple of readings worth mentioning before I return in September. Until then, I’ll be away from my desk and spending as much time as possible here in Portland, on my bike. —GM

Mark Lewis and the team at BNP Paribas have written up a wonderful report covering wind and solar’s competitive edge, against oil. Wells, Wires, and Wheels (opens to PDF) analyzes how much transportation energy a theoretical $100 billion, put to work today, would ultimately generate by following either the oil path, or the wind and solar path. A particularly nice observation contained therein is that today’s oil extraction and delivery infrastructure partly shields us from the embedded losses in that system, through the advantages of incumbency. But this advantage too is starting to erode. Overall, I see the report as a companion to the Oil Fall series: a different set of authors have come up with a different set of framings, many of them clever, but the target is the same.

Old energy infrastructure and the fossil fuel systems they support increasingly run at a loss. That’s the message of Oil Fall, the BNP Paribas report, and it’s also the message coming through directly from power generation asset owners. Next month, I’ve got reported pieces coming out that peer into the financial details of both the Klamath River Dam Removal project, and also the Northern Indiana Public Service Company’s decision to shutter all of its existing coal assets, replacing them with a combination of wind, solar, and storage. In both cases—and this is crucial to understand—the cost to shutdown existing assets is not only lower than the cost to keep them running, but, the utilities in each case will be able to replace the asset closures with new infrastructure while still delivering savings to customers.

The bullshit detector rang loudly earlier this month, when Mark Mills of the Manhattan Institute published a ridiculous Op-Ed in the WSJ, claiming a steep and onerous call on natural resources to build out clean energy. No one credible anywhere claims that rapid deployment of wind, solar, and battery storage does not represent a new call on resources. Rather, it’s simply that price is a reasonably good proxy for why that new call on resources is significantly lower than trying to maintain investment in the existing fossil fuel system. What Mills doesn’t address (because, of course) is that electricity from wind and solar is generated at extremely low operational costs after a one time capital investment. The industry term, levelized cost of energy (LCOE), does more than an adequate job of making these comparisons. Because the Op-Ed is behind a paywall, I found an internet copy for you to read, below. But don’t feel obligated to waste your time doing so, unless for entertainment purposes only. A final point: Mills willfully represents, and perhaps genuinely doesn’t understand, the term renewable.

Utilities have come through a rough decade, but what if they are ready to lead again in the energy sector? Liam Denning and Nathaniel Bullard of Bloomberg, here in 2019, have considered the signal coming through from the woeful underperformance of oil and gas equities, and discerned that growth prospects now look better in the power sector. Recall that wind and solar began their ascent in Europe—not this decade, but in the previous—and this initially slammed the European utility sector bogged down as it was with nuclear, gas, and coal assets. But a decade of change both in the EU and the US now sees most utilities adopting, owning, and operating new power assets led by wind, solar, and storage. This strikes me as a classic first you get hurt, then you get mad story.

Gregor Macdonald, editor of The Gregor Letter, and Gregor.us

The Gregor Letter is a companion to TerraJoule Publishing, whose current release is Oil Fall. If you've not had a chance to read the Oil Fall series, the single title just published in December and you are strongly encouraged to read it. Just hit the picture below.

The China Bid

Monday 12 August 2019

Weakening industrial activity and rising food price inflation are currently plaguing China, and that’s extremely concerning for the global economy. China is a country that has grown far above trend for several decades and typically this pressages a secular slowdown to a more normal rate of growth. Worryingly, however, this inevitable maturation appears to be unfolding into the face of a cyclical slowdown too—as flagged by the deep slump in China’s auto market starting last year—and to make matters worse, a third layer of deceleration: the trade war. The time has come therefore to talk about China, and the impact its slowdown could have on energy markets, deflation, and the US economy.

For twenty years now China has provided the bid in global resource markets, and every corn farmer, oil producer, copper miner, and coal extractor has feasted on China’s demand strength as the rest of the world, the OECD mostly, has gone quiet. But it’s not just cement making, steelmaking, and winemaking businesses that have been able to survive, if not thrive, as China’s industrial revolution pressed onward. Much of the European high-end industrial sector too has managed through a terrible decade of domestic growth by supplying all the sophisticated engineering and power equipment China required to complete its development of cities, tunnels, airports, and rail networks.

Apparently, however, the world simply forgot how necessary The China Bid had become. Massive, widespread, and globally dominating it was perhaps easy to take for granted but even the investment and money management business came to rely on China’s long expansion. Indeed, it was well accepted—especially after the great recession—that aging populations in the West would, through their investment choices, have to borrow growth from China and the rest of the Non-OECD to earn a rate of return.

What appears to be happening now is that the China bid is being withdrawn. Here, I use the word withdrawn not to mean an evaporation but rather a steady weakening. There is still a bid, but it’s a bid for less volume. And, in the nature of market bidding this withdrawal has not a small but rather profound effect on price. Which brings us to energy, and the US economy.

As you’ve likely observed, the US oil and gas industry has worked itself up to ramming speed. Over the past decade, oil production alone has soared from a low of 5 million barrels a day (mbpd) to over 12 mbpd. The EIA expects oil production to move above 13 mbpd next year. In addition, the US has expanded its industrial base around this growth—not merely in service of the extraction of raw oil and gas—but also through a newly beefed up LNG and petrochemical export complex. To put it plainly, the US oil and gas industry has got itself into perfect position to exploit an extended phase of higher global growth, all funded by new units of fossil fuel. You can see the problem that would develop, however, if that phase were not to materialize.

This Spring, global interest rate markets sent the first warning that global growth was about to slow. As usual, the rate decline was initially doubted and denied. Presently, as rates have moved even lower—with many domains now seeing negative interest rates—the move has been reacted to with anger and bargaining. You have already guessed what comes next: depression, and acceptance. But we are not there yet.

Recessions and stock market crashes are often preceded by investment bubbles. The behavioral reaction to the bursting of those bubbles, typically, becomes the cause of the recession. The China situation strikes me as something different altogether. For, it may be less the case the global economy has been marching along through a bubble (contra the view of those who see bubbles everywhere), and more the case that China, whose industrial revolution came very late in the 20th century, was a singular, one-time growth event that’s now ebbing, and won’t be repeated. And here, ebbing may not be strong enough a word. If so, then a large deflationary wave has started to wash over the global economy, and it will not be countered effectively by interest rate cuts from Western central banks. Indeed, given the very low rate of growth already established in the OECD, there is no domain anywhere on the planet that can counter China’s transition to a late phase, mature level of growth.

Let’s consider some recent developments:

The oil and gas services index, the OSX, never recovered after the 2014 oil price crash and recently has fallen to lifetime lows, as expressed by OIH the Van Eck Oil Services ETF.

In addition, the ETF which best tracks the Standard and Poor’s US oil and gas exploration and production sector, XOP, has also fallen to lifetime lows. This seems important, and here’s why: both OIH and XOP have significantly undercut even their lows seen in 2009, during the great recession.

Globally, Germany and the United Kingdom, and Europe more generally, appear to be entering recession. Germany’s ten year government bond trades at a negative rate of interest. And, the European auto sector has been hit hard by the China slowdown. Meanwhile, the entire European banking sector is groaning, or rather, shrinking under the pressure of negative interest rates and withering economic strength.

As so often is the case, disturbances in the rest of the world take time to arrive in the US. This routinely gives the false impression to US based investors that the US economy is impervious to such shocks. But, we are only six months out from the first concerning appearance of the global deflationary wave, and already the US Federal Reserve has pivoted entirely from previously expected rate hikes to a series of expected rate cuts. It would appear the transmission mechanism from China to Europe and now the US is not so slow after all.

I spent some time this weekend reading a 2015 report from the Dallas Federal Reserve covering the effects of the 2014 oil price crash on the Texas economy. Brief takeaways: Texas today is a far more diversified economy, obviously, compared to its former self in the 1980’s when a devastating oil bust took down the housing market and a bunch of banks. The alternate view, however, is that oil production has grown quickly and to a very high level in Texas, even in the wake of the 2014 price crash. Indeed, after pulling the most recent data you can see that Texas, unsurprisingly, remains the key driver of the nation’s oil production growth. (See chart below). When you add the petrochemical industry, and also exports of LNG, the fossil-fuel energy industry of Texas is quite substantial. (Wind power is also a newly substantial industry in Texas, and that’s important to acknowledge). If a useful signal is being sent by share prices in this sector, OIH and XOP, then a China-driven oil bust will hit the Texas economy with notable force.

So how is China’s economy doing, right now? Early indications show that its auto market slumped for the 13 month in a row, in July. According to CAAM, the China Association of Auto Manufacturers, the total market is now down -11.4% through the first seven months of the year, compared to 2018. The weakness is even taking a small bite out of EV sales which, although strong, may “only” grow by 42% this year. In addition to broadening industrial weakness, food price inflation—which has its genesis in the recent cull of its hog population in the wake of swine fever—has started to appear. This hits Chinese consumers at both ends; and, frankly reminds me of some of the pressures that landed on US consumers in 2005-2007 when energy prices rose as house prices started to fall. To put it mildly, the Chinese consumer is going to be quite constrained for a while, and this will greatly impact the country’s demand for road fuel.

Just to remind: oil consumption peaked nearly 15 years ago in the OECD. And really, since 2010, the Non-OECD as led by China has been in total control of global oil demand. Normalization of China’s economic growth to align with that of all previously maturing countries will eventually be absorbed into the smooth running of the global economy. The problem is that the world came to rely on China’s high and unsustainable rate of growth, and transitioning from one domain to the other, right now, will be painful—and not just for the oil and gas industry.

The IEA oil forecast has been on the defensive all year, falling well behind a major deceleration in demand growth. The Gregor Letter forecasted in February that the consensus view of 1.4 mbpd of growth was far too high for 2019, and that risk pointed to growth at half that level, of just 0.7 mbpd. On Friday, IEA lowered its forecast again, to 1.1 mbpd. Again, that’s not enough. The chart below, from Friday’s Oil Market Report, shows how the mistake is repeatedly made, as the agency can't let go of a rebound-thesis for which there is no evidence or probability. Here, I’ve put the first five months in a red box (for which the data is now available), showing the outright declines in the OECD, and the very weak growth in the Non-OECD.

Now: consider the IEA forecast for the final 7 months of the year in light of the darkening outlook for the global economy. Why would you do that? Why wouldn’t you build in the very serious problems in China and Europe into your outlook? I must say, the IEA’s analysis has been absolutely terrible the past two years on every topic from wind and solar growth, and now, oil demand. It’s almost a certainty now that oil demand growth will come in below 1.0 mbpd this year. And price risk remains very much to the downside.

Gregor Macdonald, editor of The Gregor Letter, and Gregor.us

The Gregor Letter is a companion to TerraJoule Publishing, whose current release is Oil Fall. If you've not had a chance to read the Oil Fall series, the single title just published in December and you are strongly encouraged to read it. Just hit the picture below.

Energy Intensity

Monday 29 July 2019

Los Angeles aims to humanize its river, restoring portions to nature and adding a continuous bike path in advance of the 2028 Olympics. One of the most unique infrastructure projects in the country right now, the project—currently in the planning and design stage, and set to begin by 2023—will transform communities from the San Fernando Valley to Long Beach. But doing so will require filling a labyrinthine eight-mile gap running past industrial drylands, and the river’s cement-hardened channel. For Atlantic Media I interviewed local architects and wrote about the project’s ultimate prospect: the activation of a new ecosystem, and, one that excavates a bit of LA history.

Los Angeles River looking south, from the First Street Bridge

A great plains electricity cooperative set the renewables industry on fire this week, with a massive hybrid proposal composed of wind, solar, and storage. The Western Farmer’s Electric Cooperative of Oklahoma announced a 700 MW triple-hybrid project that would deploy 250 MW of wind, 250 MW of solar, and 200 MW of energy storage. Until recently, the cost of energy storage was not following the same rapid cost declines as wind and solar but that has begun to change. Bloomberg New Energy Finance reported earlier this year that lithium ion battery costs have finally started to plunge, falling 35% from 1H 2018 to 1H 2019. Increasingly, storage is being paired with new wind and solar projects, and most agree this will become standard practice as a way to protect, or enhance, the income stream from clean generation.

Coal’s prospects are worsening from an already poor position, if that was possible. This decade has seen a massive retirement wave of over 55 GW of US coal capacity. Most assumed that heady pace would eventually slow, but 2018 saw the second highest volume of coal retired of any year this decade. Worse for coal is that renewables are falling so far in price that it now makes sense to shutter coal, amortize the losses, and roll those up into wind, solar, and storage projects while still delivering savings to rate payers. I wrote about the US coal outlook this month for Petroleum Economist.

Elsewhere in the world, coal’s final hope to latch on to remaining growth has mostly centered on India. Alas, there too coal’s prospects have dimmed suddenly. Just 24 months ago, many large coal projects were still looking likely to go forward, but in my second piece this month for Petroleum Economist, I report that coal cancellations are now the established trend in India. The axe in coal is now coming from the financial sector, which unsurprisingly sees all proposals as inevitable money-losing ventures. Globally, despite last year’s strong uptick in Chinese coal consumption in the power sector, the 2013 peak of global coal consumption is firmly in place. The only remaining risk to oscillating strength in coal use is the current inventory of spare capacity, which could conceivably slow efforts to see global coal consumption enter rapid decline.

Combined wind and solar provided 10.6% of US electricity through the first five months of 2019. Data comes from EIA (Washington) in the latest Electric Power Monthly. By next year, or 2021 at the latest, the world’s major regions will all have crossed the 10% share level of wind and solar in electricity generation. That’s a big deal, and very encouraging.

We should pay attention to the declining energy intensity of the global economy. For a number of years it was reasonable to doubt declining energy intensity; especially during the peak of offshoring as Western economies shifted industrial production to the Non-OECD. But the electrification supertrend, in which the marginal unit of GDP is more likely to be created via power, rather than oil for example, is starting to accelerate.

The Gregor Letter intends to cover this topic on a repeated basis. And in this week’s letter, I thought I’d offer a simple primer, as seen through the lens of changes taking place in California. The intent here is to foster your own thinking on the subject, and to make repeated passes over time until it’s more fully absorbed in your outlook.

First, let’s consider a very uncomplicated trend taking place in California: the declining sales of internal combustion engine (ICE) vehicles. Oil Fall warned that by the time global car markets were set to recover next year, it would be too late for ICE vehicles to grow again, beset as they would be by affordable electric vehicles. And here, we have a very rudimentary portrait of declining oil intensity. California’s transportation system will continue to perform the kind of work it does today, but with fewer oil inputs, as the shift to EV unfolds.

While “using less oil” is simple enough for everyone to grasp, less understood are the systemic changes also taking place in California as fossil fuel combustion represents a declining share of the state’s total energy consumption. It’s not just oil consumption growth that is now constrained; it’s coal and natural gas too that have lost their grip on growth. When fossil fuel combustion is steadily removed from any system, waste heat goes into decline, and with it, energy intensity.

Notice, for example, how wind and solar have not only advanced to the 20% share of California electricity, but how all other sources—mostly natural gas in this case—are being pushed out of the system. Last year, combined wind and solar produced 53.6 TWh in a system that used 252.7 TWh in total.

Now let’s put these concepts together. You can probably intuit that an electric car driving a mile in Los Angeles is running cleaner than an EV running a mile in, say, Columbus, Ohio. Why? Because Ohio has very little electricity not generated by fossil fuels. But what’s harder to absorb is how much more energy-efficient an EV will run in Los Angeles—how significantly less energy intense that EV will run—compared to an EV on the streets of Columbus.

Remember, the engine in the Columbus EV uses electricity just as efficiently as the engine of the Los Angeles EV. If we were comparing two identical Tesla Model 3’s, for example, we would have in each case the same engine. The difference is in the two systems used to produce that electricity for each EV. In Los Angeles, every bit of electricity that did not have to come from the excavation, extraction, transport, refining, or burning of fossil fuels is used far more efficiently, with less waste heat (loss), than the electricity delivered to an EV in Ohio.

How much more efficiently? Helpfully, The Argonne National Laboratory, a partnership between the Department of Energy and the University of Chicago, publishes a study of whole system transportation efficiency that it updates each year, called GREET. Let’s consider the following two figures:

2,468 btu/mile.

2,028 btu/mile.

The first figure represents a whole-system accounting of the energy required to run an electric vehicle for one mile, on average, in the United States outside of California. This accounting looks at all the energy required to drill, extract, lift, ship, pipe, and burn coal or natural gas and other energy sources, necessary to “fill” that EV with electricity. The accounting also includes the expenditure of that electricity in the engine to drive that EV one mile. It’s called a “Well-to-Wheel” accounting.

The second figure performs that exact same calculation. This time, for an EV running one mile in California. As you can see, the California EV requires 17.8% less energy, in this whole system accounting, to run one mile. Why? Because California now derives over 20% of its electricity from sources that require no excavation, no transport, no shipping, no piping, and most important of all—no combustion.

An EV on the streets of Columbus is a machine that exists within a larger system of energy extraction, delivery, and combustion. Same too with the EV in Los Angeles. But they are two systems now different enough to produce significantly different energy intensity outcomes, even when driving the exact same EV model one mile down the road. Just to put an exclamation point on this lesson, now consider the next two figures:

1,191 btu/mile.

1,191 btu/mile.

This is not a trick. The first figure indicates how much electricity the engine in the Columbus EV uses to drive one mile, and the second figure the engine the Los Angeles EV uses to drive one mile. Sure, you knew that. And yet, it’s helpful to see it written out. Here, Argonne Lab has used not the Well-to-Wheel accounting, but rather the “Pump-to-Wheel” accounting. All this tells you is that a Model 3 or Chevy Bolt sold and run in Ohio uses the same amount of energy to move one mile, as its counterpart in Los Angeles, as long as you restrict your accounting to the level of the engine.

Now comes the kicker. Let’s consider a final figure:

5,511 btu/mile.

That’s how much energy an ICE vehicle uses in a Well-to-Wheel accounting, representing of course all the systemic energy expended to extract oil, ship oil, refine oil into gasoline, and to burn that gasoline in an ICE engine while driving a single mile.

Global energy density has been in gentle decline for decades. This 2016 update from EIA Washington gives some sense of the long-term decline. But the decline of energy intensity is now set to advance more rapidly. Consider: every item mentioned in today’s newsletter is, at bottom, about declining energy intensity. For a long time, we perfected machines to better utilize fossil fuel combustion. But the big mover today is technology that allows us to entirely push combustion out of the system.

—Gregor Macdonald, editor of The Gregor Letter, and Gregor.us

The Gregor Letter is a companion to TerraJoule Publishing, whose current release is Oil Fall. If you've not had a chance to read the Oil Fall series, the single title just published in December and you are strongly encouraged to read it. Just hit the picture below.

In a Golden State

Monday 15 July 2019

Data reporting for China’s vehicle market has now completed for 1H 2019, confirming that a major economic slowdown is underway. Despite heavy seller discounting in June, China’s total market remains down -12.4% compared to 1H 2018, as ICE cars crumble and EV sales continue to soar. EV are on course to take 7.4% of the market this year, and more than 10% next year.

Sales of Oil Fall have picked up again in the wake of the mid-year update. The Gregor Letter also has enjoyed another wave of new subscribers. You are encouraged to review both Oil Fall at Mid Year, and the single book itself, Oil Fall.

The EIA lowered its 2019 global oil demand for the sixth straight month. But 1.1 mbpd of global growth is still too optimistic. Why? because data now shows 1H 2019 demand growth is running at half those levels. OPEC is also currently forecasting 1.1 mbpd growth while IEA, the laggard agency, has lowered its own forecast to 1.2 from 1.4 mbpd. The Gregor Letter forecast, released in February, is maintained however: full year growth will come in below 1.0 mpbd, and is likely to be as low as just 0.7 mbpd for the year. It’s particularly frustrating to see IEA, in its just released July report, acknowledge that 1H 2019 demand growth has now come in at a significantly lower level than IEA had forecasted, just 0.56 mbpd, while stubbornly clinging to their view full year growth will still hit 1.2 mbpd. Sorry, but it’s frankly embarrassing to be calling for a massive acceleration of global demand growth in 2H 2019, requiring demand to average 1.64 mbpd over the next 6 months, in the face of a major economic slowdown that’s clearly affecting Asian demand. The kicker: EIA has now also had to revise down its estimate of last year’s demand growth, writing “oil demand growth for 2018 was therefore revised down to 1.1 mb/d, the lowest figure since 2011.”

Gasoline taxes are on the rise in the United States. This summer has seen a number of states, from Ohio to Illinois, significantly increase petrol taxes for the first time in many years while in other states like California, staged increases continue. In most cases, the tax increases come after a long period of road infrastructure underinvestment. I wrote about the impending increases in June for Petroleum Economist.

Why didn’t OPEC cuts work? Oil prices did not respond positively to the maintenance of multi-year production constraints, announced by OPEC (and Russia) at the end of June. Worse, when OPEC released its monthly oil market report late last week, the downward revisions to the call on OPEC in 2020 are now forecasted to be 1.34 mbpd lower than this year. The demand growth slowdown—combined with prices that are low enough to cause concern but high enough to maintain US shale production—has escaped OPEC’s grasp. Like a central bank, OPEC is behind the curve.

One explanation: OPEC supply cuts worked better in the second half the 20th century, when the rate of oil adoption was both higher and more durable. Post-war oil demand growth was highly correlated with economic development in the West, with each new unit of GDP growth far more dependent on new units of oil consumption. But around the start the new millennium, OECD demand growth began to peak. While Asia and the non-OECD are now the sole growth centers for oil, it’s not really sufficient as half the world is past peak demand. Counterintuitively, OPEC should increase supply and drive oil prices down towards $40 in an effort to locate better demand. The current approach has not worked for years, and will undermine itself every day oil prices remain at current levels.

David Ricardo had an insight in the 19th century, now being ignored in the 21st century. When countries trade with each other, the efficiency gains to trade allow production advantages to be shared across newly created common markets. But Ricardo’s greater insight is that optimization of local resources leads not only to higher worker wages in both trading partners, but an expansion in the size of total addressable markets. Gains to trade are therefore dynamic. Accordingly, if you start gumming up the works of those trade relationships, you may find you’ve now disrupted gains across the entire ecosystem.

Two reports this week helpfully explain how negative impacts to the Chinese economy are rippling outwards, as uncertainty and disruption has landed on worker purchasing power in China. The first, by John Kemp at Reuters, explains how hits to growth elsewhere will eventually work their way through “the dense network of trades and investment links across Europe and Asia.” The second piece, at Bloomberg, explains why you shouldn’t celebrate the closure of Chinese factories, and the impact this has on worker wages. “Nobody’s investing, nobody’s buying. The trade war is causing people to stop investment because they don’t know where to put the money.”

In my opinion, the hits to China’s economy are driving a new deflationary wave across the global economy, pulling interest rates, trade volumes, commodity prices, and industrial growth downward. Crucially, interest-rate cuts in the OECD will eventually, if not quickly, be disproven as a cure.

California is America’s edge economy. Recent data confirms the Golden State’s inexorable march towards electric vehicles, wind and solar, and battery storage.

Vehicle sales in California fell by a hefty -5.3% in Q1 2019 compared to Q1 2018, exceeding the national decline. As highlighted in the last letter, EV are therefore on course to reach over 11% of market share this year.

As important, Q1 gasoline demand data have now completed and show the continuation of a meaningful decline at -1.52%, matching the decline of full year 2018. It is not a coincidence that sales of ICE vehicles and gasoline demand peaked in the same year, 2016, at 2.013 million units and 15.58 billion gallons respectively. ICE sales this year are on course to fall to 1.685 million units, and gasoline consumed at 15.11 billion gallons. And that’s during a three year period when California population will have grown by at least 350,000.

Let's do some math. Using the same metrics offered up and explained in Oil Fall, California sold 157,659 EV last year (pure BEV+PHEV) thus placing a new annual call on state electricity supply of 0.631 TWh. (157,659 * 4000 kWh = 630,636,000 kWh/1,000,000,000 = 0.631 TWh). Question: how much new electricity did California create during the same period, exclusively from new wind and solar? Answer: 5.87 TWh, about 9 X new demand from EV.

For fun, let’s make the matching demands between new EV and new power supply even steeper. As of last year, California had a cumulative fleet of EV on its road estimated at 506,000 units. That represents an estimated annual call on electricity of 2.025 TWh. Again, California in a single year created nearly three times that amount of demand, just from new wind and solar alone. The Oil Fall thesis stands: all new electricity demand from EV in California will be met, and met easily, by the deployment of new wind and solar. Even when annual sales start reaching half a million, or 25% of the total market. And, higher.

These very simple calculations also illustrate how woefully out of step the public remains on the extraordinary energy advantage of EV, and, the threat this poses to oil’s monopoly on transportation. Remember, the relevant metric is not how much existing oil demand is replaced by EV, but how much future oil demand growth is blunted, pinched, or killed entirely by the rollout EV.

Below is a chart showing the comparison between the new demand for electricity created each year by California EV sales, and, the marginal growth of new power from wind and solar alone. The common unit of account here is the TWh—the terawatt hour.

California’s growth of new electricity from wind and solar is currently in a slowdown, as the first great wave of utility scale solar deployment, which started in 2012, is now behind us. The next wave, which relies on expansion of existing facilities, greater deployment of commercial rooftop solar, and a fresh round of utility grade projects, is now getting underway.

The point is that even next year, when California EV sales could reach as high as 400,000 new units, new on-road EV would represent (at best) 1.6 TWh of new electricity demand. But new electricity supply, from new wind and solar deployed next year, will easily cover this new demand.

California’s energy transition is now in a kind of golden state, with a base of fresh wind and solar supply that has run well ahead of state electricity demand growth. As Oil Fall explains, electricity from wind and solar has now broken free and is entering the transportation system.

US utility scale battery storage is set for fast growth in the years ahead, with California in the lead. It’s critical however, to understand that storage will be deployed in several ways, attacking the problem of intermittent electricity from several angles, in addition to new fixed-site storage. Readers are encouraged to review the January 2019 letter, Something About Storage to understand better that fleets of electric cars (and other devices, including water heaters) will be increasingly marshaled into the role of storage.

According to the EIA, solid annual growth in 2019 and 2020 will be followed by a disruptive high growth year in 2021, followed by a resumption of much lower growth in years 2022 and 2023. We shall see. As wind and solar costs continue to fall, that makes the cost of whole-system projects fall entirely, even if cost decline rates for storage are lagging. Moreover, utilities from Arizona to Florida are deciding that not only does it not make sense to build new natural gas generation, but in some cases it now makes sense to build storage, instead of new wind and solar. Why? Because everyone else is already busy deploying new wind and solar: so why not be a market-maker in electricity supply via storage-capacity versatility, in addition to being an electricity generator? In order to have exposure to everything coming in the grid ecosystem, utilities have discovered there’s not only a new profit center to exploit around storage, but storage itself is the gateway to surviving a very disruptive transition.

The public continues to fret about the buildout of charging infrastructure for EV. But really, is there anything more trivial than the buildout of charging capacity? Installation of charging stations is about as technically challenging as the deployment of ATM machines. Every existing petrol station, shopping mall, library, school, and workplace will want to install charging stations; will install charging stations; and are installing charging stations. C’mon people. Among the universe of high hurdles that face energy transition, this just doesn’t rate. You can keep up with the progress of US charging station growth by taking the weekly newsletter update from the Department of Energy’s Vehicle Technologies Office.

—Gregor Macdonald, editor of The Gregor Letter, and Gregor.us

The Gregor Letter is a companion to TerraJoule Publishing, whose current release is Oil Fall. If you've not had a chance to read the Oil Fall series, the single title just published in December and you are strongly encouraged to read it. Just hit the picture below.

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