Short the (Expensive) Horses: The numbers behind fossil fuel’s decline

For all the strengths of the incumbent thermal fossil fuel system, mainly its energy density and transportability, it is not an inherently scalable technology – and it is vulnerable to one that is.

I’ve given talks in the past where I carry with me a 70-page tightly-printed list, and it shows 2000 auto companies. … But of those 2000 companies, three basically survive

So how do you pick three winners out of 2000? ..It’s easy when you look back, but it’s not so easy looking forward. So you could have been dead right on the fact that the auto industry— in fact, you probably couldn’t have predicted how big of an impact it would have. But …if you’d bought companies across the board you wouldn’t have made any money, because the economic characteristics of that business were not easy to define.

I’ve always said the easier thing to do is figure out who loses.

And what you really should have done in 1905 or so, when you saw what was going to happen with the auto is you should have gone short horses. There were 20 million horses in 1900 and there’s about 4 million horses now.

So it’s easy to figure out the losers, you know the loser is the horse.”

Warren Buffet, 2001

“China will grow gray before it grows rich”

Gabriel Collins, Baker Institute Working Paper, 2016

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The P = NP Problem  

or, Why you are best to short generally than long specifically at a time of technology transition

Warren Buffet, in the quote above, possibly highlights a universal mathematical
truth in regard to picking specific stocks: they suffer from the P = NP problem.

The linguistic summary of what this means is short, but daunting: “every computational problem whose solution can be verified in polynomial time, can be solved in polynomial time”.

A more accessible summary may perhaps be: “verifying a solution to complex computational problems often just takes simple multiplication: actually solving the problem requires the systemic trying out of lots of candidates”.

And back to numbers again: take a computational problem that has 100 elements (N=100) – for example 100 target firms in a new market. If just computing one financial metric, eg highest return on sales last year, could provide a cast-iron forecast of future success, the computational time would be simply proportional to N, and maybe take a second to calculate.

Suppose the task were more elaborate with a few more metrics, and proportional to say N3, the calculation would take a while longer, at 3 hours.

But if the task is actually not polynomial, but exponential (2N), as many interesting problems in the real world are, where you have to also consider company supply chains, government policies, competitor action, technology breakthroughs, management stability and so on – then the task would take 400 quintillion years. Which is not eternity, but it is a very good approximation of it.

Mathematicians assume therefore that P is not equal to NP, that is, most difficult or real-world calculations or forecasts have to use work-arounds, or smart rules of thumb, as Buffet suggests. This is because they can’t be solved directly in polynomial (human-scale) time – they literally take forever. Some research even suggests that this is why markets are never truly efficient.

In 1905, confronting the impact of the automotive era, that short-hand method of predicting a market outcome was “shorting horses”, as a new technology came of age. Although impossible to predict the precise long-term winners of the new technology, it was at least possible to bet against a clearly waning technology en masse.

A few high level numbers such as new technology growth rates and old technology demand decline could serve as good pointers to the future, and investors could bundle individual firms into a general bet against the long-established stock prices.

Of course, as Buffett also points out, you have to be at least on the money on timing too – going short when everyone is bailing out won’t make you rich either.

That brings us to the following analogous question: is it time to bet against the “horses” of the established fossil fuel energy system, as they are replaced by new energy technologies (solar, wind and EV engineering) – or is the smarter bet to hold them long?

Focus on Aggregate Marginal Change

We can use the P/NP idea to aim for a relevant simplification of complexity wherever possible.

At a time of industrial transition, as argued in this blog several times and very persuasively here, a focus on high-level marginal change in the energy sector may be more insightful than trying to discern the direction from a dense, inter-woven analysis of multiple metrics, issues and trends.

Aggregate Marginal Change and the Power Sector

We start with some EU power sector charts below as an example.

source: and dollarsperbbl

The first chart shows how the rise of solar and wind energy generation, in just a few years, has pushed these technologies ahead of hydro and coal, and equal with nuclear excluding France.

The second chart shows how the energy generation mix has shifted over time, with solar and wind filling the gap offered by declining shares of coal, nuclear  and gas generation.

source:  and dollarsperbbl

Similar examples of this rapid change are shown here for the US, with wind power alone over-taking hydro last year (capacity ratios to net generation is similar for these two technologies), and in China where new wind/solar generating power additions are currently able to meet total demand requirement increases.


All this leads to an important observation: it seems likely today’s incremental growth of power demand in all major economies – the EU, US and China – can be met by new technology deployment. Which suggests global incremental demand can therefore be absorbed by these technologies too.

At this point, debates often get bogged down in issues regarding subsidies, political preferences, issues such as intermittency and so on. But that may not offer a solution in “polynomial” time – it will tend to lead us, exponentially, into a whole host of complex, uncertain and subjective issues.

To avoid this we need a good simplifying, robust, and relevant work-around.

So, to verify that solar / wind can absorb all new global energy demand – we should be able to use a straightforward, high-level calculation.

Total global electricity consumption is currently ca 24,000TWh and growth rates are estimated to be about 1.5%pa for the next few years – this equates to approximately 360TWh pa incremental electrical power requirements.

Note – this highlights the critical point of timing: the rapid rise in solar / wind technology is coinciding with a decline in overall energy demand growth.

In the prior century, global energy growth averaged about 3% pa, meaning the incumbent fossil fuel energy system had to grow rapidly to accommodate it – hydro and nuclear, for various reasons, could not offer more than niche support.

Current energy growth rates, however, are closer to the 1-1.5% pa range as energy intensive investment phases give way to a less intense consumption era.

And so, as we enter this new energy era there is already almost 800GW of solar and wind technology deployed, with capacity growing at about 15-20%pa near-term.

That means each year, at least in the medium-term, some 120-160GW of new solar / wind capacity may be added, or about 300-400TWh of new generating capability.

With the global consumption increase calculated to be 360TWh pa this means wind and solar can provide nearly all future electricity power growth requirements. In combination with another 50-100TWh pa steady year-on-year growth from hydro and nuclear, no further new fossil fuel capacity is required, at the aggregate level.

source – dollarsperbbl, IEA, Trusted Sources – note, supply data at mid-point of range

Implications for fossil fuels: For gas and coal, the remaining strategies are managed decline via lower pricing, internal competition or resistance via policy support.

Each may be successful, for a time, in certain regions, but the overall trend is clear – the fossil fuel power sector will enter secular decline. What this means for individual actors, state or private, will be varied, but the thermal fuel sector is entering a long-term recession.

For coal, the market has already reacted.

As for gas, as long as it can step in to substitute coal, it will have growth opportunities.

But overall energy competition in the power sector will now be intense, with constant pressure on prices and the widespread disruption of the industry structure.

The complexity and particular issues within individual markets will continue – but the backdrop of new technologies able to absorb all new (declining) incremental demand will endure as a feature of the 21st energy landscape.

Aggregate Marginal Change and the Oil Sector

Oil inhabits a different energy sector, dominating the transport market. This is a major strength but a large dependency.

Much current analysis focuses on the impact of EV technology on oil demand, and implementation of Paris COP21 NDC accords to restrict emissions. This is because gasoline and diesel consumption account for over 55% of oil demand and growth. US gasoline consumption alone was about 9.5mb/d in 2016 accounting for almost 12% global crude demand by itself.

The near-term movement in gasoline and diesel demand will therefore shape the overall crude oil picture, as other barrel products are either far lower in absolute demand (aviation kerosene) or in secular decline (residual fuel oil).

The Carbontracker / Grantham analyses above, based on several scenarios,  suggest oil demand peaks in 2020, but clearly EV technology penetration and climate policy implementation progress remain uncertain. However, these may not be the key determinants of transport fuel demand.

A focus on high-level marginal change may again be useful.

BP has provided a simplified model of overall gasoline demand to 2035 in the following paper, relying on only 3 inputs for marginal change: km travelled per vehicle (VMT) assuming doubling of the fleet, fuel efficiency improvements based on historical trends and the impact of EVs assuming various growth rates.

Their chart, based on a high growth rate for EVs scenario, is reproduced below.

Gasoline Demand Projection, 2014-35

Source – BP

An alternative version of this chart is shown here, altering only one assumption: instead of VMT growing per vehicle by 0.25% pa in the BP case, it is assumed to fall by 0.25% pa. This already removes over 4mb/d from the BP estimate, and brings peak fuel demand toward 2024-25.

Gasoline Demand Projection, 2014-35 (VMT Modified)

Source: BP, and dollarsperbbl modified as noted

As noted previously, a reduction in VMT per vehicle is more likely than a continual increase. This is because the global VMT figure used by BP is skewed toward US travel behaviour, which is a high outlier based on global averages.

In fact, even US travel miles are declining over time, and the more heavily urbanized developing economies, with far lower road km per capita are unlikely to adopt similar patterns.

Hence it’s more likely that global VMT per vehicle averages will fall over time, not rise. This is a critical base assumption that BP does not model or analyse in the report, and it has a major impact on the calculation as shown.

This declining VMT model also brings gasoline growth below 250kb/d by 2019 – an important metric: as noted gasoline tends to generate about 30% of net oil demand increase, so if its growth drops below 250kb/d pa, overall oil demand growth will likely fall below a symbolic 1mb/d pa, signaling an imminent peak.

Note – Diesel demand is unlikely to take up the slack – in fact it may do the reverse. Its previous highest growth and second highest consumption market, China, has moved into decline over the past three years as energy intensive growth has plateaued, and its consumption growth in the EU has also fallen back.

All of this highlights the fine line oil demand treads as energy intensive growth plateaus, and efficiency gains couple with new vehicle technology to reduce future unit consumption.

These assumptions can be summarized using the average annual estimated change in demand from the three key components: VMT with fleet growth, but declining travel per vehicle, increases demand by 0.9mb/d pa, but Fuel Efficiency technologies  and EV penetration combine to reduce it by just over 1.05mb/d pa.


source BP, dollarsperbbl analysis as noted

Note EV impact is low initially, but it tips the balance to early peak oil working alongside and boosting fuel efficiency. It also accelerates in impact overt time, pulling down oil demand noticeably after 2020, as EV growth is expected to show signs of exponential activity. (In this chart the fuel efficiency block uses BP’s assumptions based on historic trends – it makes no provision for new technologies, widespread hybridisation, autonomous vehicles and so on.)

The world is rarely linear, but the summary highlights the two key forces at play – fuel efficiency plus hybridization technologies, coupled with the advent of EVs act as a brake on the growth of gasoline demand from fleet growth (and hence overall oil demand).

Overall, the risks to oil demand growth are on the downside. Fuel efficiency technologies, EV penetration, urbanization and car utilization rates will all tend toward lower unit fuel consumption against base models, and hence quicker demand decline.

Even if fuel efficiency policies are loosened in key countries such as the US, the other factors are likely to keep the trends at or above current rates. The key point is the fragile nature of continued demand  growth, set among a number of emerging and strengthening fuel reduction technology initiatives.

As noted, a simultaneous secular decline in diesel demand may also cause weaker oil demand growth than anticipated.

The timeline to major change aligns with the recent bottom-up analyses – suggesting a transition to structural demand decline around 2020.

As a leading indicator, the low growth metric of <250kb/d for gasoline and diesel demand growth in the next year or so will reinforce there is a pending peak.

Two further factors – the reaction of the incumbents and the sustainability of the new technology

The Reaction of the Horses

Of course, the incumbent fossil fuel industry could still react in a way that could mitigate the impact of increasing alternative supply at a time of secular demand reduction.

However, that will almost certainly not be the industry response.

It has a deep pro-cyclical culture based on an expectation of enduring upward demand, and continues to set out strategies of improved efficiency and increased production levels (see here and here and here). There are many other examples, eg here.

In addition, even with temporary production constraints imposed by OPEC and non-OPEC firms, the rise of US shale productivity and the global backlog of vast prior investment from 2010-2015 indicates that oil and gas supply will likely remain high and increasing through 2020. The industry body IEA have referred to this phenomenon, correctly, as “relentless supply”.

In sum, the incumbents have the assets, cashflow, culture and central sustaining scenarios to propel increased investment even if it meets or exceeds historic and future demand growth for both the power and transport sectors.

Despite clear price signals, this will not deter the incumbents from continuing to spend against declining demand – this increases the vulnerability of the most complex and inflexible participants, mainly the international private firms and those loaded with expensive-to-extract portfolios, eg oil sands or ultra deep-water.

The Sustainability of the New Technologies

Are the new technologies sustainable threats to the incumbent system? After all, nuclear and hydro also grew quickly, only to diminish and settle into energy niches.

For all the strengths of the incumbent thermal fossil fuel system, mainly its energy density and transportability, it is not an inherently scalable technology – and it is vulnerable to one that is.

Fossil fuel extraction, production and combustion is based on large-scale, centralized technology which has diminishing economies of scale, and negative learning curves. This means the costs of fuel production increase steadily over time, and rapidly outside the low-cost oil and gas reservoirs of the Middle East, Russia and the US.

In contrast, solar, wind, and the engineering behind EVs are scalable, universal technologies.

They also avoid the major hazards of fossil fuel combustion: urban air quality erosion, general climate disruption and the energy security issues associated with the concentrated endowment of hydrocarbons in just a few locations.

Up to date analysis of the economic return on investment (EROI) of solar from Trusted Sources, for example, indicates that it is now a more efficient energy technology than global oil and gas and nuclear. EROI is a controversial concept, but the analysis chimes with the emergence of wind and solar as significant providers of global energy generation.

The costs of wind and solar, and EV technologies have decreased significantly as they have scaled: since 2010 they have all reduced by over 60-70%, and continue to decline, such is the power of experience curves and a deep market for new energy products.

This marks them out from the current fossil fuel system (and nuclear and hydro) which are effective, but ultimately inflexible energy systems.

The scalable, global technological character of solar, wind and EV engineering makes them a dispersed, learning and innovative energy phenomenon – which suggests that weaknesses of energy density and dispatchability will be overcome, promptly, by relentless scale innovation and technological advances such as storage and demand management.

Short the Horses – The Post-Industrial Barrel cedes to Dispersed Technology

We come back to the P/NP issue, and the question posed. Is it time to short the fossil fuel incumbents,  or hold them long and remain skeptical about change?

The aggregate marginal demand analysis suggests that the new, scalable and learning technologies of wind, solar and EV engineering can provide enough economic and effective energy at the commercial and consumer scale to displace incremental fossil fuel requirements.

This rapid rise of new energy capability coincides with the decline of overall energy demand as most major economies move from the intense investment stage to a consumer-based consumption era. This latter development is maybe best captured for both power and transport demand in this chart of China’s demand transformation.

 chart source from this Baker Institute  working paper.

As the oil barrel is increasingly determined by consumer behaviour rather than industrial investment, and transport becomes more electrified and connected – the car as device – so the nature of energy provision will change.

New global, dispersed, scalable technologies and engineering can now take up the slack in world incremental energy demand – either directly by provision, or indirectly by accelerating demand decline via efficiencies.

They can also provide further advantages such as lower environmental and health impact, increased energy security and continued cost improvements that are likely to accelerate their adoption.

The 20th century thermal energy barrel is now being superseded by a range of high-quality energy conversion technologies, along with engineering solutions based on scalable innovations.

The incumbent fossil-fuel system is deeply-embedded and, perhaps counter-intuitively, will react by increasing the supply of thermal energy, exacerbating an energy surplus. This will hasten a major industry restructuring, possibly by or before 2020.

The P/NP idea suggests we should now avoid trying to pick the individual winners of the new technology: for example between Tesla, Goldwind, Vestas, FirstSolar, BYD and so on.

There are too many issues, policies, technologies, and reactions to transition that will occur to be sure of how an individual player will ultimately perform.

But the nature of the new technologies and the reaction of the incumbents at the aggregate level reinforce the business wisdom, and the mathematical theory that governs it:

Short the Horses – or to be a little bit more precise – short the expensive ones, now.

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My thanks to Kingsmill Bond of Trusted Sources for the original idea of marginal global change in the electricity sector (see links above) and the notion of shorting horses in this context.

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China’s Electric Conversion – The Energy Transition is Accelerating

China is taking a leadership role in solar and wind deployment for electricity generation: this will accelerate the global energy transition from the thermal system. By 2020 solar and wind could supply over 50% of China’s marginal electricity demand, and non-fossil fuels all 100%. 

China’s energy sector is undergoing a major transformation, and doing it quickly.

It is aiming to move swiftly to a new generation of energy technology, replacing its dependence on thermal fossil fuels.

As argued before in this post, this is primarily due to energy security and urban population health issues – in other words, a deep necessity.

It will also provide ancillary benefits: reduced CO2 emissions, and improved manufacturing export capabilities – strengthening political and economic leadership.

Taken together, these factors are propelling and sustaining China’s energy conversion.

Given China’s central importance to global energy demand, this swift conversion will impact the world energy industry significantly and quickly. It will also transform the way energy is managed in the 21st century.

A New Revolution

As a priority, China needs to reduce its dependency on – imported – fossil fuels, and develop local energy production.

Therefore its latest Five Year Plan (FYP), summarised here,  focuses on (restrained) investment in capacity growth of the indigenous coal sector, coupled with the rapid introduction of new technological energy sources, primarily wind and solar. Natural gas, hydro and nuclear energies form secondary components of the plan.

The charts below mostly take the FYP at its word. However, given the vagaries of government statistics, which are often subject to revisions, a few assumptions have had to be made.

The calculations assume that coal capacity growth will not hit the imposed cap of 1100GW – only reaching 1050GW. Given that most coal-fired plants are currently only reaching 50% capacity, leading to numerous project cancellations, this seems reasonable.

Solar and wind are expected, however, to reach the top-end of forecasts at a combined 360GW. And overall electricity demand is assumed to grow at 1.5% pa in the period, even though recent data has been volatile.

China Capacity Increases – 2016-20 est based on 13 FYP


The charts tell a simple but surprising story. Solar and wind will provide the largest amounts of capacity addition between now and 2020 – some 134GW. That is the equivalent in capacity terms of 70 medium-sized nuclear facilities.(In fact, actual nuclear growth is some 20GW in the same time-frame, which neatly showcases the superior scalability and flexibility of wind and solar energy technologies).

If achieved, these goals would mean by 2020 China will have more wind and solar capacity than the EU and US have today combined.

By 2020 solar and wind will also provide over 18% of China’s power capacity, and 8% of power supply. At the same time coal reduces in capacity on a percentage basis to 52% from two thirds today.

But here’s the real message – it’s a strategy delivered: by 2020, only months away, the two main pillars of China’s future power generation are a managed and capped thermal coal sector, and a rapidly expanding solar and wind complex – together accounting for 70% of installed capacity.

And whilst solar / wind will account for 8% of China’s total generating power by 2020, it’s the fast growth rate to that level, and beyond, that will be hugely disruptive.

As the chart below shows, assuming total electricity demand growth of 1.5% pa, wind / solar technologies will account for over 50% of China’s new incremental power generation between now and 2020, and in fact non-fossil fuels supply 100% of the total  – removing the requirements for any new thermal supply.

This renders the new coal (and possibly gas) capacities potentially redundant, adding to a chronic under-utilisation issue that is gradually being addressed. Who said change was easy?


An IEA chart from 2016 plots similar data – showing how China – and indeed the world at large – has a coming energy paradox: a surfeit of economic energy technology for the limited demand available.

A Path Less Chosen

China has chosen to use this reality to force a new energy path dependency: maintain a long-term base of locally-sourced coal, but pivot heavily toward locally-manufactured energy via solar and wind for long-term future growth.

On the current growth trajectory, over 20% of its power generation could be supplied by solar and wind by 2030, and over 50% by non-fossil fuel sources. The impact in terms of lowering global carbon emissions will be immense.

Capture and Conversion Overhauls Combustion

China’s energy transformation has ramifications well beyond China.

For a long time, China was the poster child of the future demand for thermal fuels – coal, oil and gas.

Not now.

Unable to be a world leader in the extraction of thermal fuels due to lack of endowment, China is now instead becoming the world leader in manufactured energy – solar and wind.

That creates a far more positive outlook for the investment picture of these technologies, and a much more negative one for fossil fuels.

By 2020, all the major economic blocs in the world – the US, EU and China – will have made more or less equal and significant investments in power capacity and generating capabilities for manufactured energy via wind and solar. India is likely to follow suit.

To be more precise, by 2020 these three blocs will have spent over $2 trilion on wind and solar in the preceding 15years, and by that time wind and solar will account for 20% of global installed power capacity, and 10% of global generating capability.

Compound annual growth rates will likely also still be in double digits, and given the nature of manufactured technologies, the levelised cost of producing electricity per dollar will be lower for wind and solar than for thermal fuels and power plants.

Local energy capture and conversion via scalable PV and turbines will thus have begun, in earnest, to replace the incumbent global electricity supply chain process of extraction, transportation and combustion of coal and gas.

Marginal Change Changes Everything

Kingsmill Bond of Trusted Sources has maintained for several years now for energy transitions we need to focus on marginal change, not total system change.

The Chinese example highlights this – by 2020 solar / wind will provide 8% of electricity supply, but over 50% of marginal demand, squeezing out thermal fuel requirements.

Clearly that will be hugely disruptive – the Chinese coal and steel industry is contemplating over 2 million job losses. But the overall energy sector is looking ahead to over 13 million potential jobs for the incoming solar / wind manufacturing industry.

This is a global phenomenon.

The two charts below from Kingsmill’s work – History is Bunk – highlight the scale of change for electrical power markets. Global electricity demand is growing at about 1-1.5%pa, meaning the world needs about 300TWh of new supply per year.

Solar and wind, even at the lower edges of 15-20% growth, can provide almost all of that, even before hydro and nuclear are included – and fossil fuels even considered.

So don’t be seduced by “gradual transition curves” of total system change – there will be chaos on the ground as a new energy system attempts to supplant the century-old incumbent thermal one.

Kingsmill’s conclusion is stark: using the simple metrics of total power growth versus supply from solar and wind, demand for fossil fuels falls to zero by 2019-20. Peak demand for these fuels has been reached, and they enter long-term decline.

The reality will of course be more complex and subject to policy actions, local market reactions and so on.

But the maths is the maths.

Our world now has more effective and economic energy supply technologies than it has demand for the energy they can produce.

Adoption, Integration, Dependency – Solving Intermittency

Each of the major energy-consuming regions arrives at this energy cross-roads from different directions.

This can be seen in the triptych of charts below from BNEF, analyzing solar and wind investment over the past 10-12 years (they account for over 80% of the renewables data shown).

In the useful framing of Gregor Macdonald he notes this new manufactured technology is entering an adoption phase, whilst the incumbent fossil fuel industry is in its dependency phase, where deep legacy infrastructure and processes may slow the uptake of the new entrant. He also notes that manufactured solar and wind tend to work off local supply chains and deployment, making them more robust than the complex international supply chains required by the thermal fuel industry.

Wind and solar, in all regions, have clearly moved into an adoption phase. In the EU, they are also in the post-adoption and more challenging integration phase with the incumbent thermal technology. This is slowing progress as pricing and capacity utilization issues start to become complex.

But for the reasons we have discussed, China has obviously the most focused and confident investment profile in solar and wind, and will continue with the pace of investment, and thus establish itself as a leader of the new energy technology.

Kingsmill Bond covers the rationale is detail here, but in brief, propelled by the necessity to carve a new energy pathway, the country already supplies about 50% of the world’s wind turbines and 70% of its PV solar panels. It has a deep manufacturing capability and culture suited to the new energy requirements, and it can learn by doing via installation and grid deployment in its own vast territory. In a word, it has Momentum in this arena.

As China deploys these technologies at break-neck speed, they will have to quickly find solutions for solar and wind’s supposed great weakness – intermittency integration with the thermal grid.

China has encountered these issues already, and has had to curtail wind energy grid connections for example, resulting in unutilized capacity of installed equipment. In fact its FYP13 specifically attempts to address this by setting curtailment targets of 5%, down from 15% experienced today.

So it is likely, due to the necessity behind its huge investment, that China will also find solutions quickly regarding storage, high voltage transmission, dynamic modeling, pricing and so on.

When it does, these solutions will be available to all future solar / wind energy installers – likely offering the new path dependency to India and other growth markets.

In addition, it can potentially sell the solutions to mature grid operators in the EU and US.

In short – the integration “intermittency problem” is not going to be some fundamental flaw; it is going to be merely a complicated engineering problem with a transformative solution, comparable to finding a far lighter lithium-ion battery for EVs, or, further back, large-scale extreme low-temperature pressurization for global gas shipments.

In this way, China’s deep investment in the solar and wind market will consolidate the technology’s efficiency, and provide solutions to current adoption issues, accelerating its wider deployment both in developing economies, and mature regions such as the EU facing integration issues.

Timing is Everything

It’s bad luck for the incumbent fossil fuel technology that at a period of declining overall demand, a more effective and attractive technology appears.

And in this case it is not just another thermal variant, but a new scalable, flexible and manufactured alternative whose costs decline quickly over time, and whose long-term environmental effects are far more benign.

It’s also worse luck that the largest manufacturing nation on earth is leading the deployment of this new technology through a potent mix of internal necessity, and the opportunity to on-sell its engineering solutions.

China’s rise to the top of the solar and wind investment league will therefore knock key non-OECD markets off the path dependency toward fossil fuels more rapidly then traditional forecasts expect. It’s likely India will follow suit for example, as it has almost the perfect geographical structure for solar efficiency.

The incumbent fossil fuel industry will now have to confront not a gradual, but a rapid transition to an alternative energy source.

To restate, by 2020 the growth in demand for fossil fuels in the global electricity market will be zero.

The necessity for them will have peaked.

How coal and gas then sort out this decline in demand amongst themselves will be complicated and disruptive; and how fossil fuel dependency clashes with solar and wind adoption also problematic.

But the reality remains: with China’s massive involvement in the manufactured energy market, solar and wind development and deployment will accelerate dramatically.



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US Gasoline Demand – A Prime Driver Reverses

US Gasoline Demand has slumped so far in 2017 – that could start to matter a lot, as it drives global oil demand

Oil demand growth remains heavily dependent on transportation fuel growth. About 60% of the oil barrel is made up gasoline and diesel fuel, both of which have historically been foundations of demand.

One level down, US gasoline is increasingly the most important component of overall global transport fuel demand, not least as China’s energy use starts to decouple from GDP (gasoline growth in China in 2016 was only 3%, less than half of the US’s gasoline growth in absolute terms).

Although the US accounts for only 30% of the world’s passenger cars, it consumes 45% of global gasoline, some 9.2m b/d, of a 20 mb/d total.

This is due to two simple facts as the chart below shows: US car owners drive much further per year than anyone else –at 13,000 miles that’s 50% more in fact. And US cars are less fuel efficient on average than rest of world vehicles – about 35% less.

source – dollarsperbbl data, IEA, US federal transport

Over the past few years vehicle miles driven have increased by about 2% yoy , whilst fuel efficiency has remained flat as the US preference has passed to SUVs rather than light vehicles. This means that the increased mileage has more or less passed straight through to more barrels consumed – some 180,000 b/d on average per annum since 2015.

A robust economy and becalmed gasoline price as low as $1.90 gallon during 2016 supported this trend. Given global oil demand increased about 1.5 mb/d in 2016, then US gasoline demand increases alone accounted for about 12% of its growth.

US gasoline demand is therefore important –  it accounts for the majority of marginal global gasoline consumption, and supports overall oil demand.

US Gasoline Demand Evaporates

But over the past two months, this gasoline engine of global oil demand has started to weaken considerably.

Current reports of demand show it down around 450,000 b/d from previous trends, with buying at levels not seen since 2002.

OPEC and US oil – stimulating supply, diminishing demand

Of course this slump in demand coincides suspiciously with the agreement in November with OPEC and non-OPEC states to restrain oil production in a bid to increase prices.

This has partly worked by keeping the oil price range-bound at $50-55/bbl, yet it is has also sent US and other national gasoline prices up  from the $2/gallon range to near $2.50.

Conventional analysis – see here and chart below from the US EIA – suggests that fuel consumption is relatively price inelastic in the short-term – that is, most folk tend to keep on driving the same miles, and buying the same level of gasoline even when prices hike by nearly 20% as they have done.

These studies suggest that the response is about 5% elastic, – that is for every 20% price increase, demand will drop by 1%. If so, then even OPEC’s price hike should only hit sales by about 90,000 b/d, not the 400-500,000 b/d seen in January and February.

However, other recent work has suggested that consumers are much more price sensitive than previously thought, with maybe 25-30% reaction to price rises that then stick. Price rises above $2 and then $2.50/gallon may be quite symbolic and trigger consumer responses. This would suggest a demand decline of eventually 450-500,000 b/d.

Demand Reduction Models in Résponse to 20% Price Rise

source: dollarsperbbl model

OPEC’s actions might therefore have the perverse effect of stimulating US shale supply, whilst at the same time diminishing US gasoline oil demand  – an ironic double-whammy for the cartel that would clearly act as a curb on oil price.

Glitch, Blip or Trend?

First – we ought to wait for another few weeks’ data to ensure that glitches or some very short-term phenomenon isn’t to blame.

If not, there are several possible types of causes ranging from short-term reactions, to more systemic movements.

Buyer’s remorse – the surge in purchases of SUVs and the use of highly leveraged financing to do so will start to make the family car a significant part of household budgets when insurance, loans, running and fuelling costs are combined. The latest price move of gasoline would add about $265/pa to the average household budget, or about $10-15 each fill up, which would be noticeable.

EVs and Sailing ships – the surge in new car purchases, however, do take a lot of older gas-guzzlers off the road, and perhaps quicker than forecast. Whilst SUVs are fuel-hungry, newer models are less so than their 10 year-old counterparts . So, whilst its unlikely that EVs have any direct impact on fuel consumption yet, their presence may be starting to cause many drivers, and manufacturers, to be a bit more fuel-conscious than before in a sailing ship effect on gasoline-powered cars.

Behavioural Elasticity has increased – Maybe the increased elasticity arguments hold water. The chart below shows historical response gasoline price hikes in the US. Clearly a longer-term trend linked to demographics , urbanization and driving patterns might be at work behind the numbers too. Even geo-political awareness may contribute – every increase of 50 cents/gallon passes over another $60bn per year to producing states, mainly OPEC. The price increase might crytsallise several of these behavioural factors together.

Of course, to state it again, the data may just be incorrect – as Goldman Sachs believe.

The size of the change is acute, and does suggest that a shorter-term action may be the cause. However, there may be a combination of near-term price sensitivity intertwined with longer-range shifts in vehicle technology and driving patterns. The next few weeks will reveal more.

Whatever the case, any impact on US gasoline demand this year, perhaps causing trend growth of 100-200,000 b/d to transform into a reduction of say 250,000 b/d, would force the oil market into having to find that net 350-450,000 b/d demand from elsewhere.

And that seems unlikely given the trends in Europe and China toward more conservative fuel policies, and non-gasoline technologies.

With global oil demand growing weakly, a reversal of this type in a prime driver of consumption will provide more weight to the notion of a looming peak in demand.

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Dead on Arrival: How to Underestimate EV Demand

As the auto industry enters version 2.0, forecasting future sales of EVs is a crucial piece of work. But most projections, especially from the oil industry, use the wrong curve, and so underestimate demand.

The Missing S Curve

Here’s a funny thing.

Most analysis of technological innovation refers to a chart like this at some point.

It’s referred to often as the “S curve” effect, as the curve resembles a shallow S.

Throughout history, many critical inventions – electricity, the automobile, colour TVs, refrigerators, mobile phones – have followed this type of curve. Never exactly, but often pretty close.

This is no accident. Technically, the S curve belongs to a maths category called the logistic function, or slightly more accessibly “resource-limited exponential growth.”

Its genesis is in modeling population growth, where steady, and then rapid expansion has to ultimately give way to much slower growth, as support resources become scarcer and scarcer. Its equation (which is shown in the notes only, not here) has a limiting factor that makes growth slow as it reaches its natural saturation point or “carrying capacity”.

Intuitively, such a function makes sense when modelling or forecasting rapid technological growth: at some point, when the technology manages to reach a critical mass, it starts to show rapid, explosive (exponential) growth. But, as limits such as market share or manufacturing capacity then slow development, the innovations revert to the S curve, with the growth phase petering out to a plateau, or decline if replaced by a future innovation.

The S curve thus provides mathematical compactness to the well-known Roger’s curve of innovation diffusion – with Early Adopters and Early Majorities and so on – defining probabilistic accumulation with a peak value.

So how do most analysts model the future of new innovations? Do they use the maths of an S curve?

No, the funny thing is, they almost always use a J curve, based on simple exponential growth’s J-like appearance, also known as compound annual growth rates (CAGR). See here from BNEF

The compound growth curve is a simple, one-dimensional cousin of the S curve, showing unrestrained exponential growth, but with no in-built limits on how far the curve may rise, or with any of the S curve continuous change structure.

Underestimating Demand

A comparison of S curve and J curve is shown below, based on 1-10 units of time (weeks, quarters, years etc), with an arbitrary limiting value of 100.

There are similarities of course, but its clear that beyond a narrow timeframe, the J curve will abandon control and increase without limit.

So note the following key principle from the very humble charts above:

  • The aggregate sum under the S curve is 550 units – e.g. of demand
  • The aggregate sum under the J curve is 275 units, or 50% less
  • At the midpoint, 5, demand is 50 units for the S curve but only 10 for the J curve

They arrive at the same destination, buts it’s a very different journey, especially if you are depending on the total demand numbers. J curves will almost always underestimate the early stage demand, and often the total demand too for these reasons.

This is more than semantics and mathematical esoterica.

By their nature, exponential curves tend to focus on back-end loaded growth (slow to start and then very rapid).

Not only does this not mimic empirical reality – it almost always underestimates early and total demand. The real-life S curve tends to show steady then rapid growth quite early on in its development. So the amount of demand is greater (the area under the curve in mathematical jargon).

This means that the volatile nature of the J curve can tend to miss actual demand by some distance.

So – why by-pass the known outcome of the S curve, and opt for simple exponential growth charts?

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The First Law of Thermodynamics – Energy Is Becoming a Buyer’s Market

Energy cannot be created or destroyed, but can be altered from one state to another (1).

Oil Supply Dwarfs Demand – Official

“There is an abundance of oil: known resources today dwarf the world’s likely consumption of oil out to 2050 and beyond.” Spencer Dale, BP Chief Economist, from BP Energy Outlook, Jan 2017.

Here is a chart from BP in their latest annual Energy Outlook, that confirms as predicted, the oil age will not end due to lack of oil.


A key finding in BP’s Energy Outlook, that is discussed at length, is the fact that whilst proven world oil reserves have been growing at a rate of about 3% pa for the last 30 years, oil demand has slowed to under 1% in the past decade.

These Proven Reserves, technically and economically viable today, have also concentrated into three areas: OPEC, Russia and the US, three of the lowest cost regions for oil extraction and production in the world.

At the same time, oil demand has started to weaken considerably, and tend toward plateau, or even peak.

So, in BP’s straightforward analysis, looking out even beyond 2050, cumulative demand amounts only to half of today’s viably recoverable oil reserves.

Technology investment has done its part in providing enough resources – the industry players now have to figure out how to manage their exits.

We now enter oil’s long end game of managing deteriorating demand, and abundant supply.

Deteriorating Demand – Peak Gasoline

There is a detailed debate in the Outlook regarding transport fuel demand, as this is a key element of future oil consumption. It centres on EV penetration,  but in reality it’s the changing global structure of transportation that is more important.

Peak transport oil demand is imminent because the growth areas of oil consumption such as China and India, show very different characteristics to the current OECD transport picture, dominated by US consumption.

The US consumes almost 50% of global gasoline but with just 30% of its cars because it is a major outlier in terms of very high annual travelled miles and low fuel efficiency.

Global VMT per capita                  Vehicle fuel efficiency


Sources –     Australian Department of Infrastructure global review and  IEA, WEO 2016,

Future growth will therefore be shaped more by the way China, India and the EU use their vehicles.

As other studies have shown, they are likely to drive less, and be more fuel efficient.

BP looks at various downsides for fuel demand due to EVs or the emergence of mobility services such as autonomous vehicles – but the simple maths of the RoW usage patterns dominating future global demand suggest the following demand curve.


dollarsperbbl estimate: Based on following annual projections –  Global ICE fleet 900 million, 14,800 VMT per vehicle with -1%, pa decline.  fuel efficiency 8.5l/100km and decrease -2.4%, global fleet growth of 2%pa and annual scrappage of 4.5%, EV growth rates leading to 10% total fleet 2030, 20% by 2035 (35% of annual sales). 

This indicates fuel peak demand by 2019-20,  and the shape of the demand curve is in line with BP’s Electric Revolution scenario, which also includes ride sharing, and autonomous vehicle usage, not considered in detail in the above.

A near-term shallow peak followed by accelerating decline: the key message is obvious – to a good approximation we are at Peak Fuel demand.

A key point to note is that the shallow peak is a brute consequence of more compressed global driving distances and overall fuel efficiency, so-called automobility – and not reliant on EV demand; EV demand does kick in later, and creates the accelerated decline. But the saturated driving patterns cause the current demand squeeze.

To reiterate, whatever the future brings in terms of EVs, autonomous driving and mobility as a service, it certainly will not deliver another 250 million US-style vehicle drivers with high fuel consumption internal combustion engines, and large annual travel distances. That is the core difference, and why peak oil demand draws closer.

In terms of overall transportation, BP also looks to trucks for more consumption, but these are just as susceptible to the efficiency, electrification and travel trends as for cars. In addition, the major growth economies of Asia are moving into consumer-led growth rather than industrial and construction-led growth, reducing energy intensity.

As gasoline and diesel fuel make up around 65% of the total crude oil barrel, this plateau of fuel demand drives the total crude picture suggesting peak demand in imminent, in the 2019-20 timeframe – in contrast to the BP business-as-usual projections that has continued growth for the next two decades, but aligned with their downside scenarios.

The Abundance of Oil
However, in the shadow of BP’s statement about the “abundance of oil”, this milestone of a rapidly approaching peak in oil demand is almost a footnote,

Whether oil peaks now or sits becalmed for a decade, the aggregate demand requirement will fall within a relatively narrow aggregate range of 600-700 billion barrels out to 2035.

Either way, demand is “dwarfed” by the accessible reserves of up to 2.5 trillion barrels we have at our disposal, amounting to 3-4 times the requirement to 2035.

So, lost in the whole debate regarding the precision of when peak oil demand might occur is the oversized fact that after decades of pursuing greater than 100% reserves replacements and production increases at the cost of several trillion dollars, the national and international oil companies, along with newer players in the vast tight oil deposits of the US, have created a massive stockpile of accessible and economic oil resources, the majority of which will likely not be required.

Highlighting this, BP is questioning the industry orthodoxy – a reliance on smooth upward projections of demand, and constrained supply – that has caused most players to pursue these vast investments in exploration, reserves replacement and production.

And this orthodoxy has seen returns on equity shrink to below 2-3%.

The overall result – a massive over-abundance of stones oil.

BP is now calling this dislocation and suggesting a new set of strategies will be needed.

But for now, the central projections of BP’s Outlook clearly suggest they themselves will continue with the standard model.

So as of today, despite reserves dwarfing demand, the industry continues to add aggressively to the reserves base.

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