The End of Dependence

With the rapid growth of new energy sources, but sustained hyper-investment in fossil fuels we are entering a world of sudden energy over-supply.

In other words, the emerging landscape is a world of natural energy surplus created by technological innovations, clashing with an incumbent system of largely state-governed energy supply.

The current OPEC-plus production cuts are therefore not a temporary phase or cycle, but the structure of the fossil-fuel end-game beginning to appear, as power in the energy market switches from industrial producers to global consumers.

The End of Dependence

We have examined for several years how new energy technologies are hardening into a wider energy transition.

Wind, solar, batteries, storage, electrical distribution and lately hydrogen are all amassing at accelerating pace into a sprawling, scalable alternative energy system, eating up marginal energy growth and changing our concept of what energy delivery looks like.

In this brief post, perched on the peak of 2018 and looking toward the lands of 2019 and beyond, we try to make sense of where the world’s energy system lies today, where it is moving.

It’s a very rapid tour of what we see as recent major events, foremost trends, and a prediction of how the landscape ahead might shift.

This is an outline – details will follow in future posts.

But sometimes it’s good to catch breath, and survey the grand view.

Because the new energy system is changing fast, creating significant reactions in incumbent one.

So in 2019 we predict a peak in our dependency on the current fossil fuel system, as our energy choices start to proliferate.

System Change

Fundamental technical and operational milestones were hit during 2018 – these were big enough to signal system-wide shifts in new energy growth.

As important, significant policy and analytic trends emerged, as the new energy system continued to accrue more and more sophisticated industry forums and commentators.

Nature also intervened throughout the year.

Key Numerical and Technical Milestones in 2018

Internal combustion car sales peaked – perhaps forever

Global car sales declined in 2018, suggesting the global peak of ICE sales was 2017 (or earlier).

Meanwhile global EV sales growth was over 70%, to 2.1 million units or 2.5% of the total – the 5 millionth EV hit the road (there were only 1 million three years ago.)

As a result EV marginal sales growth was > 100% of total light vehicle sales growth, and in two of the world’s largest markets EV sales grew to tipping point levels: 5% in China and 10% in California.

The result? Global ICE annual sales will now almost certainly not be able to retain the levels of 2017 ever again. That number was about 94m, for the record.

Relatedly, US and Chinese gasoline consumption combined declined, strongly suggestive of an imminent global peak in this iconic, yet decaying energy source

In power, solar deployment was over 100GW in a single year for the first time, whilst 2018 was the tenth year in a row when wind/solar investment exceeded $250bn. As perspective, total global solar capacity was 100GW just six years ago: it is now over five times that amount.

As energy moves to manufacturing mode, away from the extraction method, with deployment comes pricing drops as learning curves kick-in.

Thus, as wind and solar were the fastest growing new energy sources in the US and China and elsewhere, wind/solar levelised costs of electricity fell below the marginal operating costs of thermal plants for the first time. They continue to fall in latest auctions.

This means wind and solar are not only cheaper to employ than other alternatives, such as nuclear where large new plants cost about $9bn a piece (leading to this decisive shift in the UK), but cheaper than continuing to run existing coal or gas plants. Which is what happened here in the US, despite ideological support.

New Energy Analysis and Policy Strengthening

Carbontracker continues to develop strong intellectual scaffolding for the transition to work off: a particularly influential paper was released to debunk many of the myths that surround the energy transition: a powerful polemic against tropes and clichés about intermittency, subsidies and a confidence booster for renewables investors.

IRENA championed the notion of the Just Transition and the good news about renewables job creation. They continue to help guide the transition’s policy-making agenda – examples of this have been seen recently at work in Spain, and Germany, and in the US state of Colorado.

International forums such as COP24 continued to challenge energy orthodoxy and champion the Paris Agreement, culminating with the emergence of the Green New Deal movement in the US.

Both technology and policy were also strengthened by the intervention of Nature: as the IPCC issued its latest analysis and concerns for planetary climate change, extreme weather events continued. In California, forest fires claimed over 100 human lives and countless animal ones, along with the corporate demise of power utility PG&E.

Meanwhile, global CO2 levels increased to 410ppm, about 50% above pre-industrial levels, and CO2 emissions broke a flattening trend as they grew by over 2%. 

Climate disruption literally overhangs the energy transition landscape.

Incumbent Reaction: State-controlled supply retains control

Suddenly, the oil market looks very simple again. For all the words written about environmental stress and carbon impact the numbers suggest change has been resisted.

Too often analysis looks at OPEC’s market share of oil production (45%): but given that the OPEC states consume relatively little oil, combined with Russia, the newly expanded OPEC commands > 80% of world export volumes.

This is no change from 10 years ago as it happens: what has changed is the structure of oil imports.

The newly-expanded OPEC-plus grouping commands about 38 million barrels per day (b/d) of exports, but with the US / Canada becoming essentially a net-zero importer, the rest of the world, led by China, India and the EU imports about 34 million b/d of that export volume.

Ten years ago, the export numbers were about the same, the US was the largest oil importing country: now it is that rest of world grouping.

Note: net oil exports / imports, million barrels/day: source BP, dollarsperbbl

This means almost all of today’s oil exports are still controlled by state-owned, or quasi-state-owned companies operating as part of a giant and openly-colluding cartel to fix consumer prices and sustain state revenues.

Hence as global demand growth declines, and US and non-OPEC production growth continues upwards (despite many prophecies of doom), OPEC-plus has restrained exports to force higher pricing.

This is a non-linear system, as OPEC has noticed: a small decline in supply, whether managed or via happenstance as in Iran and Venezuela, leads to quite robust moves in oil prices. Such maths provides better revenues for limited operational impact.

Even as the energy world transitions, this managed system of fossil fuel supply looks set to continue, feeding continued production increases and vast levels of capital asset accumulation.

As can be seen by the actions of the international oil and gas majors (IOCs).


Whilst energy worlds collide, the IOCs have reverted to a business-as-usual, BAU, footing (as we foresaw).

Protected by the OPEC-plus cocoon, they have resumed the trajectory of the pre-2014, $100+ / barrel business model.

Capex is back to pre-2014 levels, but with fully 97% related to oil and gas assets, despite overstuffed headlines of marginal efforts in EV charging, or solar or wind (note – these efforts are simply diversification by any other name, a big no-no from an investor strategy point of view).

Additionally, IOC hurdle rates have been kept at prior levels, around 10-13% IRR to achieve sanction for postponed oil and gas projects such as LNG Canada, and share buy-backs and dividends have been restarted as cash-flows improve after the oil price rebound.

Even in the downturn IOC production was maintained or grew, but now new robust targets for growth have been announced, and end-of-life extensions are replacing decommissioning efforts.

All of this is intellectually sustained by the IEA and other in-house forecasters generating models of prolonged fossil fuel dominance out into the 2050s and beyond.

Inured to climate change issues, IOCs have retreated into ideological rather than technological defense by proclaiming efforts on the marginal emission efforts of their own plant, and overstating efforts in CCS, CO2 tax reform and other green energy initiatives (see capex numbers above, with less than 3% of actual capex diverted to non oil and gas ventures, despite high investment in column inches).

This has culminated in a growing comfort-narrative that suggests there is actually no real transition underway, only wind / solar and electricity adding to the world’s growing energy needs, continuously base-loaded by fossil fuels.

In fact there may be some truth to this general point – but with ramifications that are not so comfortable, as we’ll see.

Three Predictions for 2019 and Beyond – The End of Energy Dependence

With that assessment of key events and trends behind us, we are in place to offer three key – and inter-linked – energy transition predictions for 2019.

1  – Energy market power flips from producers to consumers

The sudden move to EVs, precipitated by Tesla, but now championed by the OEM giant VW and global manufacturing behemoth, China, flips the global transportation power structure into the hands of billions of car-driving consumers.

Soon, each one of these mobile consumers will be able to choose from a diversity of fuels, locations and devices that offer not gasoline or diesel, but electricity.

The monolithic option of fluid and outlet, plus psychodrama of OPEC that impacts daily routines via fuel cost hikes, is at a stroke – gone.

Private and public transport energy consumers can now select how they wish to power themselves – the century-old gasoline monopoly has been felled. And close behind the diesel monopoly of EU light vehicles and heavy transport will follow.

This is a big deal.

Whilst gasoline plus diesel account for 50% of crude oil demand, they command most – over 75% – of the growth.

Some diesel grades, and jet fuel, will continue to increase in the absolute – but as noted in the Carbontracker myth analysis this does not compensate for the relatively swift decline of the oil barrel’s two main fractions.

Equally, the scalable and fast-growing manufactured efficiency of wind and solar is upending the power-market.

At the macro-scale, the combined 150GW capacity growth pa is forcing out nuclear, and the need for new gas and coal plants.

But the changes at the micro-level are equally profound: the scalability of wind and solar from the kilowatt to gigawatt, a million times difference, means that individuals as well communities, corporations and cities can now decide on more and more bespoke energy preferences, at precisely negotiated rates.

The RE100 group for example already ranks 14th in the world if it were a stand-alone country in terms of electricity purchased (slide 45).

Transport and power consumers at all scales from individual to community, corporate and city-size now have energy choices, freed from centralized fossil fuel dependencies.

2 The fossil-fuel market will become even more state-governed, and higher-priced

OPEC / OPEC-plus market dominance is only likely to increase: with only 5-6 states controlling the majority of global exports.

In a world of uncertain and waning energy demand growth, and with new energies emerging quickly, these national states will increasingly act to govern and manage the price of oil. The IEA estimates over 70% of future oil and gas capex willl be managed and governed by state-owned entities.

The current OPEC-plus production cuts and discipline are not a temporary phase or cycle, but the structure of the fossil-fuel end-game beginning to appear.

With the US energy-independent and inward-looking, and IOCs reliant on OPEC control, only large national consumers such as China and India will look to counteract this shift. These two large consumers will pivot heavily to alternative energies – home-grown coal and renewables, as they have started to do.

For smaller consumers, they may either adopt new energy strategies or remain price-takers in an increasingly managed market of high hydrocarbon prices.

There is no sailing-ship effect in the oil and gas industry – it does not have the means to compete with the new energy system on costs or technological innovation.

It will only be able to compete via exploitation of historic dependencies and by generating narratives of endless demand growth and fossil-fuel resilience.

This is not a unknown situation: in many industries and technologies consumers who cling to older technologies – for whatever reasons, often ideological – eventually get gouged by the producers who recognize this laggard group will pay excessive rents.

Thus OPEC will aim for a declining market – forced by the wider move to electricity – amongst a long-term dependent sub-set of nations willing to retain fossil-fuels at set prices.

This is not sustainable, of course, as it allows other high-cost producers to endure – so eventually this supply surplus will have a reckoning.

Leading to the final prediction.

3  – 2019: Peak Dependence

Implicit in the idea of there never having been an energy transition is that any new energies tend to get absorbed by overall demand, so every new entrant is accommodated.

That tends to overlook two crucial points: first, historically energy demand growth has been far higher than today as it passed through its intense heavy phase – typically 3% per annum globally in the second half of the 20th century versus 1% now – and by definition sources of supply (mostly fossil fuels) have been constrained, allowing room for all.

Thus the theory rests on historic contingency, not some deeper “law” of energy transitions.

This makes it vulnerable.

Second, even marginal energy supply-demand changes can have dramatic effects on markets and companies: there does not have to be a bulk energy substitution of solar or wind for coal, for example, to create severe disruption.

Marginal shifts will more than suffice. That said, a bulk transition is a growing possibility too, which will make the current situation less of a transition and more of a transformation.

If the first two predictions are correct – rapid growth of new energy sources but sustained hyper-investment in incumbent fossil fuels – then we are entering a world of sudden energy over-supply.

In other words, the emerging landscape is a world of natural energy surplus created by technological innovations, clashing with an incumbent system of state-governed energy supply.

Global energy demand growth of 1% pa is now suddenly confronted by the sudden emergence of new energy sources growing at 15-20% pa, and new zero-carbon technologies such as EVs growing at over 50% pa: traditional carbon-based energy solids and fluids suddenly competing with universally available electrons and photons for a limited wedge of new energy demand.

In other words, a world of rapidly-increasing energy options is meeting a world of a single-source energy supply, and this leap in energy diversity and surplus moves energy control from state-sponsored industrial producers, to global consumers.

Perhaps in 2019 this will only play out at the margins, or be managed by events and thoughtful policy shifts.

However – this energy oversupply looks an increasingly unstable structure.

Led by China, the new energy system will continue to invest in efficiency, innovation, choice and universal access, whilst the incumbent one will cling hard to vested interests via a model of OPEC control and IOC protected growth.

Looking down at the 2019 terrain, a tectonic shift seems underway as the world suddenly has to accommodate an energy surplus from two competing systems, whilst demand cannot sustain both.

Using Carbontracker’s handy energy surplus chart, if we assume wind/solar growth rates of 15-20% (today’s trend) and 1% demand growth for energy overall (today’s trend), this transition may begin late this year or next. Perhaps it may take longer – globally – as shown, but in several countries and regions such as the EU, these transitions are already underway, forcing out incumbents and restructuring markets.

Source: Carbontracker

Despite counter-narratives from incumbents, a real energy transition will soon have to begin, driven by the forces of energy surplus, improving economics and numerous technology innovations – and above all rapidly-expanding consumer energy  choices.


Meanwhile, brooding over the landscape below,


CO2 levels will continue to increase, unsustainably, unless there is a sharp move to zero carbon fuels – we believe (see here) this is more feasible than often described.

Best that that is the case.

Because Nature does not negotiate, and she does not care.

And as the Scottish poet has it, she may just be “nursing her wrath, to keep it warm.”

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