Get Into the Groove

Monday 18 November 2019

On a net basis, the United States has now achieved energy independence. Using a balance-sheet accounting approach, total US energy imports and consumption, set against US production and exports, now sums to (near) zero. The decline in net dependence on foreign imported energy began in earnest about ten years ago, as US consumption from all sources of energy started growing much more slowly, while at the same time a titanic ascent unfolded in US production of oil, gas, and renewables. Although the US is not yet oil independent—and still has to import a good portion of its crude oil—soaring US oil production and a newly muscular petrochemical complex means that net oil dependency, especially against US exports of petroleum products, has shrunk dramatically.

The United States, now the largest energy producer in the world, has enjoyed such a relentless expansion in domestically produced energy that incremental volumes of coal, natural gas, and finished petroleum products are now freed up for export. Using 2018 to illustrate, the US consumed 101.23 quads (quadrillion btu) of energy from all sources. However, net imports—derived from subtracting 21.21 quads of total exports from 24.83 quads of total imports, meant the US only relied 3.62 quads of (net) imported energy: about 3.57% of total consumption. This year, through the first seven months of 2019, the US is on course to reach zero net imported energy, as we are tracking well below 1% on this measure. By next year, the US energy balance sheet will move into surplus.

The supertrend has implications for US energy security, the US current account, and the strength of the US Dollar. Notably, it marks the end of a dominant postwar think-tank orientation in Washington, DC, which understandably followed the consensus view that the US lived under a high-risk regime of energy dependency. Today, the US like every other country still faces geo-political risk that could quickly affect the price of oil, of course. However, the September drone attacks on Saudi Arabia were illuminating. Price effects from that event lasted at best 2-3 weeks, before crude oil, gasoline, and share prices of Oil and Gas indexes returned to their pre-attack levels.

As they say, policy makers for various reasons are always fighting the last war. The vulnerability and associated economic decay around the oil shocks of the 1970’s unquestionably etched a groove into the policy complex for many decades. We should update our view of reality, and acknowledge that high-risk era is now over.

The International Energy Agency in Paris released its World Energy Outlook last week, and once again offered highly implausible projections for future solar growth. Like most analytical agencies, the IEA offers up several scenarios. In their case, a Stated Policies scenario that attempts to capture the effects of current global policy pledges, and, a Sustainable Development scenario, that looks at the high rate of decarbonization required to meet climate goals.

The IEA also offers a Current Policies scenario, a model that attempts to project solar growth under current trajectories—what is colloquially referred to as a business-as-usual (BAU) approach. But there is one problem with their accounting in the Current Policies scenario: it relies on cost estimates that remain incorrectly high, and makes little if any allowance for further cost declines. Worse, the IEA has been making such an error for years now—at least a decade—as actual, real world deployment of solar roars ahead under a current policy scenario of moderate governmental support but also tech-led cost declines. If your business-as-usual model doesn’t capture the manufacturing learning rate, well, then it’s not a current policies scenario of much use.

Accordingly, the IEA consistently boxes itself into a linear rate of annual solar growth. Yes, the IEA projects continued growth of global solar directionally speaking. But instead of honoring the fact that the solar market itself grows annually—with more gigawatts (GW) of solar capacity generally added each year than the year prior—the IEA persists in projecting a mostly fixed volume of new solar capacity to be added every year between now and 2040. Example? Last year, the world added about 131 GW of new solar capacity. The IEA in their Current Policies scenario roughly projects the world will add 139 GW of solar capacity from now through the year 2030, and through 2040. We could say: hey, that’s just wrong. But it’s better to say: that projection is of no utility, so there’s not much point in producing it.

Forecasting, or making projections under certain policy regimes, is hard. And because it’s hard that tends to give cover to all scenario-projections of any kind, in any domain. But let’s be honest: the quality of projections vary. Some are just bad. Bad on their face. Bad, on the day they’re released. For example, here is a brief sequence of the number of new gigawatts the world added each year starting in 2010:

2010: 12.7 GW | 2011: 31.4 GW | 2012: 35.7 GW | 2013: 38.3 GW | 2014: 58.9 GW | 2015: 62.8 GW | 2016: 67.6 GW | 2017: 125.1 GW | 2018: 131.1 GW.

The game of forecasting is less about achieving impossible perfection, and more about avoiding obvious mistakes. After observing the above growth sequence—and taking into consideration that solar deployment today draws strength from both legacy policy, but also dramatic cost declines—the projection you would want to avoid is one that flattens out the annual additions around 131 GW for every year to come for the next 12 or 22 years. And yet, that is not only what the IEA did this year, but has been doing every year. Inevitably, people are going to notice this mistake, and start to advertise it. Hence, the chart below, courtesy of London based Carbon Brief.

Important: this chart does not illustrate an IEA Current Policies projection of no solar growth. Rather, it illustrates that annual growth under such a projection will be linear, right around 120 GW each year until 2025, then falling (!) to an annual addition of about 115 GW per year until 2030; rising back to 120 GW per year until 2035, and then finally about 135 GW per year until 2040. Overall, the IEA “projects” that annual solar additions (often called “the market”) will average around 139 GW per year. You can call it wrong. You can call it unuseful. But regardless of how you characterize the projection, we already know today this projection offers a very low probability trajectory for global solar.

Will annual solar growth slow down eventually? Of course. That’s just a basic growth law, seen in the history of adoption. The S curve of growth will eventually come for solar. Perhaps that linear growth will finally arrive when the market reaches 400-500 GW per year. But, certainly not at the current 130 GW of new solar additions each year.

Oil Fall will receive a supplemental update sometime in late Q1 2020, and all purchasers of Oil Fall will receive the update for free. The three basic themes of the book—that EV will work symbiotically with new wind and solar; that China has just redirected global transport towards electrification; and that energy transition will largely pay for itself—have all received more data clarity over the past year. In particular, we’ve seen another year of notable cost declines in solar and wind; coal cancellations are accelerating across Asia as financing dries up; utilities in the OECD are also shuttering coal; and finally the global car market continues to decline. A theme that will receive significant attention is how energy transition is now breaking away from policy, as planners choose renewables and electric vehicles not to conform to climate goals, necessarily, but to save money.

We should have been paying more attention to the adoption of ebikes, and the ascent of micromobility. High-end custom framebuilder Firefly of Boston just announced their decision to offer an integrated e-motor package with every frame choice, marking a trend that’s already in full bloom. Increasingly, we are also seeing an optimization curve take place in ebike design, and the latest models continue to find a better allocation between battery size and frame weight.

Here is a chart from a presentation by New Zealander Oliver Bruce, showing that in Europe annual ebike sales have far outpaced electric car sales. As Bruce points out in his twitter feed, the hurdles to ebike ownership are low, requiring no registration fees or licenses. Additionally, while ebikes are not cheap, they do offer tremendous value at their price point.

While ebikes would not of course be able to replace 100% of trip-types taken by car, they clearly work for many other trips—especially one’s taken in global suburbs, and between suburbs and urban centers. The City of Portland, Oregon for example is about to update commercial building zoning requirements to include space for bike parking. Additionally, most urban planners today when guiding the buildout of new commuter rail (in cities like Los Angeles), or improving existing rail, continue to pursue a leveraging of train stops to create local hub-and-spoke networks. Which is to say, urban transit design today is all about filling network-gaps, and ebikes, along with regular bikes and other protected pedestrian or bike pathways, are all part of adding value to the investment made in urban transit networks.

The IEA dialed back its forecast for 2019 oil demand growth to 1 mbpd, having begun the year at 1.4 mbpd. The Gregor Letter forecast, published in February, called for an annual growth gain of as little as 0.7 mbpd. Meanwhile, OPEC has also reduced its demand forecast to 0.97 mbpd. And now the EIA, in their latest outlook, forecasts just a 0.75 mbpd increase—identical to the Gregor Letter forecast.

A mystery in the latest IEA Oil Market Report however is the strength of gasoline and diesel demand in China. Last year, combined gasoline and diesel/gasoil demand fell by nearly 1% but this year the IEA has those two fuels combined growing by 4.75%. This is surprising, and strange, to say the least. And here’s why:

China’s car market is currently on pace to fall by another 10% this year. Further, all other readings of China’s economy, from manufacturing indexes to GDP and especially coal demand and electricity production, indicate the economy is struggling even harder this year than last. Worse still is the food price inflation now feeding through as the ongoing cull to the pig population hits the meat sector very hard. That China petrol demand would be stronger in 2019 than in 2018 suggests revision-risk to this data is high. And when it comes to China, data revisions can often be significant.

One of the central indicators of far weaker global oil demand in 2019 comes from the refining complex, which the IEA takes time to highlight in its most recent report. Furthermore, the IEA notes that global gasoline demand in 2019 is on pace to rise just 1.2%, thus making China’s petrol demand forecast a high-growth outlier.

As readers will have noticed, all attempts to get the price of oil higher this year have failed. The reason is simple: sluggish demand growth is further weighed down by ample supply. The Gregor Letter forecasts that by the time all the data is revised and complete, 2019 oil demand growth will finalize below 1 mbpd, and those China petrol figures will be far lower too.

Note on the Gregor Letter publishing schedule: all efforts are made to produce the letter every other Monday. However, last month due to unexpected work commitments, it was simply not possible to publish an issue. This won’t happen often, but it will happen occasionally. Thanks as always for your readership.

Gregor Macdonald, editor of The Gregor Letter, and

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.