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.