Energy Transition from Fossil to Clean

The International Energy Agency (IEA) believes that the current energy crisis could accelerate the world's transition away from oil and plans to present its recommendations to reduce demand in the near term.

The OPEC+ alliance's compliance with the oil output cut deal reached 137% in February, the production was 1.1 million barrels per day below the level allowed by the oil agreement, the International Energy Agency said in its report.

The IEA reported that in general, oil production of the 23 countries participating in the OPEC+ alliance increased by 350,000 barrels per day in February compared to January, to 44.14 million. However, about two-thirds of this amount came from Iran, Venezuela and Libya, which have no obligation to limit production under the oil deal.

The alliance's inability to produce at its quotas for a long time, mainly due to technical problems and other difficulties with production capacity, has already led to a sharp reduction in world reserves, the agency emphasized.

The International Energy Agency said it had lowered its forecast for global oil demand in 2022 by almost 1 million barrels per day due to high commodity prices and sanctions against Russia.

The agency explains that the increase in commodity prices and sanctions imposed against Russia are expected to significantly decelerate the growth of the global economy.

"As a result, we have revised down our forecast for world oil demand by 1.3 mb/d for 2Q22-4Q22, resulting in 950 kb/d slower growth for 2022 on average. Total demand is now projected at 99.7 mb/d in 2022, an increase of 2.1 mb/d from 2021," the report says.

The SEC has proposed that the companies it regulates start reporting what it calls “climate related risks.”?In addition to the speculative physical risks from supposed climate change, these risks include the very real damage that the so-called energy transition could cause.

“Transition risks” are specifically included the proposal. My impression is that the newly green SEC is thinking about the risk of not joyously joining the transition. But this is a real opportunity for American business and industry to detail how destructive this forced transition would be if it continues on its resent course.

Here is a short list of just some of the most destructive transition risks. They are far more real than the model-based climate change risks, so firms really should assess them.

Electric power blackouts.?The way State and utility planning is going massive, prolonged and frequent blackouts are almost inevitable. Reliable coal fired power is being phased out, replaced with intermittent wind and solar. In net zero states and at the federal level gas fired power is also planned for elimination.

In no case do these State and Federal plans include the enormous amount of energy storage needed to make wind and solar reliable. So as things stand the transition will lead to very unreliable power, which means destructive blackouts.

Blackouts hurt pretty much every business, but some much more than others. It would be good if each firm explained their specific risks. Not that there is much they can do about them in many cases, especially when they cause supply chain disruptions.

Electricity and natural gas shortages and price spikes.?The European energy crisis makes clear that horrendous price spikes are likely to precede blackouts. This is good news in a way because price spikes, while damaging, are not nearly as bad as blackouts and they can lead to remedial actions that prevent those looming blackouts.

The likelihood of price spikes increases with the fraction of wind and solar in the system. This growth requires a corresponding increase in both standby gas fired generation and the gas to fire it when wind and solar fail. There are a lot of low wind nights, and a significant number of low wind, cloudy weeks in most of the country.

We are talking about very large, long term natural gas storage. If the gas runs short the price explodes, which then drives up the price of juice as well. The European crisis was not caused by a lack of wind. It was caused by a lack of reserve gas.

Where wind and solar are essential, the gas and gas generation reserve has to cover the lowest possible output, which is a rare event. This very long term standby generating capacity and huge gas reserve is a major cost of depending on wind and solar power. No state or utility is planning on this cost.

Firms that depend heavily on a lot of gas or electricity are at major risk of transition induced price spikes. This is clearly happening in Europe right now.

General price spikes.?Major, protracted spikes in the price of natural gas, and especially in the price of electricity, are quickly translated into widespread product and service price increases. Given that a central feature of the energy transition is electrification, this will become increasingly the case.

Even firms that are not heavy users of electricity or natural gas need to consider how vulnerable their suppliers are, all the way back the supply chain.

Economic disruption.?Ironically the SEC proposal actually mentions in passing the significant potential for transition induced economic chaos. In an incredible footnote they point out that the transition could wreck the economy, saying this:

Between Covid-19 and the imperative to decarbonize, there’s a sense of urgency for the oil and gas industry to reshape that has never been seen before. The contrast between European and American oil majors’ approach to the energy transition couldn’t be clearer. On the surface, it appears they have very different views of what the future energy system will look like.

Based on stated intentions, European majors are all in on alternative energy and reducing their carbon footprint. They’ve made big promises, going so far as to take responsibility for eliminating or offsetting carbon emissions created when their customers burn oil and gas to net-zero. They’ve taken bold steps to reorganize their companies to succeed in alternative energy markets and are looking to make big investments in low-carbon energy. If they remain focused on these commitments, it’s hard to see them looking anything like what they do today.

For the most part, the U.S. majors are doubling down on their core businesses. They’ve promised and taken action to reduce the carbon-intensity of their operations but avoided commitment to reallocate capital or reorganize in a way that leads them toward being something other than oil and gas companies. Their investments in new energy technologies tend to focus on efficiency, decarbonization solutions and biofuels. Bold steps to move into more emerging and economically challenged energy solutions, like green hydrogen, are not a central focus. Company executives continue to question whether real disruption will occur soon in end-user behavior or energy infrastructure.