Don’t Expect Oil To Follow Coal’s Decline
BEIJING, CHINA – NOVEMBER 15: Chinese women wear masks as haze from smog caused by air pollution hangs over the Forbidden City on November 15, 2015 in Beijing, China. As a result of industry, the use of coal, and automobile emissions, the air quality in China’s capital and other major cities is often many times worse than standards set by the World Health Organization. (Photo by Kevin Frayer/Getty Images)
It was probably a decade ago that I started to seriously believe that global growth in coal consumption couldn’t continue much longer. And while the years 2000 through 2010 showed impressive growth in global coal consumption — up 53% over the course of the decade — there was a lot of negative environmental baggage that was accumulating. Coal-induced smog in places like China and India made the air hazardous to breathe in some places. Further, coal consumption was the world’s single largest contributor to greenhouse gas emissions.
Before going further, allow me a small digression to explain the reason for that. When fossil fuels are burned, the energy from them is primarily derived from the hydrogen and the carbon contained within them (hence the term hydrocarbon combining “hydro” and “carbon”). When carbon burns, it produces carbon dioxide. When hydrogen burns, it produces water. Coal contains a higher percentage of carbon than does oil, which contains a higher percentage of carbon than does natural gas. Thus, according to the Energy Information Administration (EIA), coal emits 2.2 pounds of carbon dioxide per kilowatt-hour (kWh) of power produced, versus 1.6 pounds for fuel oil and 1.2 pounds for natural gas. In other words, power can be produced from natural gas at just over half the carbon dioxide footprint of coal.
Why on earth then do we consume coal? Because we don’t usually make decisions for environmental reasons, we make them for economic reasons that are often short-sighted. Coal has been the cheapest source of power for a very long time, so economic decisions in coal’s favor were made despite the environmental concerns. This is especially true in developing countries. Over the past decade, developed countries have reduced coal consumption by nearly 20%, while developing countries have increased coal consumption by nearly 50%. This is amply illustrated by comparing U.S. coal consumption to that of India, which surpassed the U.S. in coal consumption for the first time ever last year:
Of course none of this is meant to absolve developed countries of their historical greenhouse gas emissions. It is a fact that these countries developed using coal, that coal was used to power the Industrial Revolution, and only now are they scaling that back. Coal has historically been the fuel of choice for developing countries due to its low cost (again, presuming we ignore environmental externalities). But most of the carbon dioxide that humans have added to the atmosphere in the past 200 years came from countries that are now considered to be developed.
In any case as most countries develop they initially place a higher emphasis on economic growth than negative environmental concerns, and as a result the world has seen upward growth in coal consumption for decades:
But the slowdown and decline in coal consumption over the past five years isn’t because the world suddenly became enlightened. True, agreements have been passed and environmental regulations have been tightened, but mostly in places where coal consumption was already in decline. What actually happened is that natural gas took a serious bite out of coal consumption in the power production sector in the U.S., and that factor alone is responsible for most of the global decline. Renewables did make a contribution as well, but as I showed in a previous article the biggest impact came from increased natural gas consumption.
That brings me to petroleum, and whether we can expect oil consumption patterns to follow that of coal. First, here is what global oil consumption has looked like for the past 50 years:
In the 32 years since 1984, global crude oil demand has increased by 36 million barrels per day (bpd) – an average annual increase of 1.1 million bpd per year. Year-over-year crude oil demand declined in only 3 of those 32 years, and in each case bounced back to the historical growth rate very quickly. Further, the average annual increase since 2010 has been well above the historical average at more than 1.5 million bpd per year.
These annual increases in crude oil demand are far more consistent than those of coal, and I believe that’s primarily because of one factor: There are many more ways to replace coal than there are to replace oil. To produce power, we can use natural gas, nuclear power, hydroelectric power, and rapidly growing renewables like wind and solar power. These different sources of power production are all compatible with our existing grid. While there are many ways to run our transportation system, most either aren’t consistent with current global transportation infrastructure (e.g., compressed natural gas, propane), or they aren’t hugely scalable (e.g., biofuels) or economically competitive with oil.
When I make this argument, the biggest protests come from electric vehicle (EV) enthusiasts, who assure me that the EV will be the death of oil. I have addressed this issue here in the past, but let me summarize. What these arguments inevitably fail to take into account is the underlying growth in global oil consumption, and the reasons for that growth. While EV sales are increasing rapidly, they are still being outpaced by a wide margin by growth of conventional automobile sales. Indeed, from 2014 to 2015 in the U.S., new car sales of conventional internal combustion vehicles increased from 16.5 million to 17.5 million. Yet EV sales in the U.S. actually decreased from 122,438 to 116,099. In other words, they have a very long way to go to even dent the growth in conventional new car sales, much less make an actual reduction in the conventional vehicle fleet.
A recent Bloomberg article assumed that an incredible 60% annual growth rate in EVs could globally displace 2 million bpd by 2023, and that could crash oil prices. The only problem is that even in the unlikely event that EVs did displace 2 million bpd of petroleum demand by 2023, then global crude oil demand may only be five million bpd higher than it is today instead of seven. The Bloomberg analysis assumed demand would be 2 million bpd lower than today, again ignoring underlying growth (and the reasons for that growth, which are increases in population and more people driving).
In a secondary case in which the Bloomberg author assumed 45% annual growth (which is still high, but consistent with last year’s global EV growth rate), the 2 million bpd impact didn’t occur until 2028. That’s another 5 years of demand growth for oil, but also importantly another 5 years of depletion of existing oil fields. Oil demand won’t continue to grow forever, because ultimately depletion will catch up and force prices much higher. In that case, what will happen in the next decade isn’t the price crash that Bloomberg predicted, it’s the exact opposite.
I do expect EVs to eventually reduce our oil consumption, but it’s going to take a lot longer than proponents think. All you have to do to see this is make an assumption for EV growth rates and do the math. But don’t ignore the fact that petroleum demand is growing as the population increases and more cars are hitting the roads. EV growth has to take into account this moving target. Do the math and you will you see why I am skeptical that we are on the cusp of an EV-driven decline in oil demand. By the time EV sales grow enough to actually reduce oil demand, global oil consumption will be at a higher level than it is today, and prices are likely to be much higher, not lower than they are today.
(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)
Robert Rapier’s Most Popular
Robert Rapier has over 20 years of experience in the energy industry as an engineer and an investor. Follow him on Twitter @rrapier.