OPEC Supply Cuts Will Accelerate Decline in Oil Demand

Guest blog by S. A. Shelley Imagine a future where your choices for purchasing a new car include numerous options for electric vehicles (EV’s) and internal combustion vehicles (ICV’s). But competing with the typical federal or state subsidies for the EV’s are hefty rebate checks from OPEC or Russia for purchasing a fossil fuel burning ICV. That may sound crazy, but in today’s age of large supplies of easily produced shale oil, inexpensive renewable energy options, and changing societal demographics, it’s only a matter of time before the current oil glut results (see EIA figure below) in stranded oil resources that are too expensive to produce for many of the suppliers, drastically reduced supply-side control from oil producers, and a critical need for oil suppliers such as OPEC to find creative ways to stimulate demand.

Source: EAI Dec 2016

If I were a manufacturer or operator of alternative energy components and systems, I would celebrate that OPEC and Russia have come to an agreement to restrict oil supply in order to drive up oil prices. This agreement is based on the traditional premise that reducing oil supply will result in higher oil prices. However, as oil prices go higher, the economic case for alternative energy just gets better. There is still a demand for oil as a feedstock for petrochemical industries and as a transportation fuel source, but technology has created the situation where industries and states can easily, quickly and economically find alternatives to oil. For example, using existing, commercially available technology, the cost of producing electricity with land based wind farms is now less than that produced by conventional fuels, including gas turbine facilities (see EIA figure, below).

Source: IEA 2015

High profile companies have been in the news recently as they switch to sources of green energy to power their businesses (see The world’s most influential companies, committed to 100% renewable power). But now we’re seeing some countries and states begin to undertake steps to drastically reduce oil consumption, and in some cases to eliminate it entirely.

Maps of 3 countries/states with aggressive renewable energy goals

Norway, a major producer and exporter of oil and gas, is also a major producer and consumer of hydropower. While Norway has been energy self-sufficient for some time, it is now moving to be green energy self-sufficient to the point that Norway is debating the need for ICV’s at all (see Norway Moves Towards Banning Gas-Burning Cars By 2025). The technology of electric vehicles is such that wholesale changes in transportation solutions are possible, and wealthy societies, such as Norway can adopt them wholeheartedly. As an interesting and possibly brilliant business move, commercial businesses in Norway, such as fast food establishments, are installing the infrastructure required to support an electric vehicle society (see Europe’s Charging Network Is Growing). What a clever way to entice people to visit for a 20 minute lunch! With malls and other businesses following suit, in Norway we won’t just see the collapse of oil demand, we’ll also see the closure of numerous petrol (gas) stations and a total retrenchment from a liquids based, centralized fuel supply system to a decentralized digital and smart power network.

Burlington, Vermont is also an interesting case. Though Vermont is not blessed with any significant conventional energy resources like Norway, Burlington, Vermont’s largest city, has achieved its goal of being powered 100% by renewable energy,  apart from vehicle traffic (see America’s First All-Renewable-Energy City). Burlington’s mix of energy supply to its grid covers almost all known forms of power – solar, hydro, wind, wood chip, etc. While federally, in the United States, there is still discussion and indecision as to what kind of energy policy and mix is best for the nation, cities like Burlington and states like Vermont are taking control over energy matters and quite successfully, too.

But of all the current states leading the push to implementing alternative and renewable energy, Jeju Island of Korea may be the most interesting case. Jeju Island has embarked on a monumental program to become an entirely carbon free and energy independent economy by 2030 (see South Korea’s Plan to Have World’s First Carbon-Free Island). Jeju Island is a fair size island with a highly educated population of about 600,000. The island is also the home to universities and industry researching and developing renewable energy technology. There are numerous test sites on the island and offshore used to test wind and ocean energy technologies. But it’s not just a big business or big government initiative; homeowners on Jeju Island are adding solar systems and micro-wind power, together with smart grid and energy storage technologies, to heat and light their homes. Jeju Islanders are using existing technology to become energy self-sufficient in an evolutionary, planned and cost effective manner. When 2030 arrives, Jeju Island will decoupled entirely from the environmental and geo-political drawbacks of the global oil and gas market.

Thus, if I were a cartel seeking to control prices, I would realize that curtailing oil supply is no longer sufficient to maintain market share of the broader energy market. I would start to worry about how to keep demand increasing, or at least stable. Places like Norway, Burlington and especially Jeju Island already show us how to cost effectively cut the dependence on oil and how to thrive with alternative and renewable energy. These places will only be copied by others. Eventually, when it becomes de rigueur to drive electric vehicles in China or India (see, for example, Govt aims to make India a 100% electric vehicle nation by 2030; here’s how), OPEC may need to resort to bombing electric vehicle fabricators just to stay afloat. Or maybe offering huge rebates to tempt consumers to continue to purchase fossil fuel burning transportation technology.

Editor’s note: S. A. Shelley is a principle of VL Offshore, a company that is a supporter of OWOE and which is committed to advancing offshore wind technology to the point that the LCoE for offshore wind will be comparable to the LCoE values for onshore wind.

Published by Our World of Energy

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