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Why the West should welcome cheap oil

Burn baby, burn. Credit: Getty

June 16, 2024 - 6:00pm

The International Energy Agency forecast this week that on current track, the world will be awash in cheap oil by 2030. That raises a tantalising prospect of renewed growth in moribund economies: cheap energy would lower production costs, bring down inflation and revitalise cost-constrained industries. It would also provide a fillip to emerging technologies, in particular artificial intelligence, which are ravenous consumers of it.

No small number of economists, sometimes described as techno-optimists, have been saying the world is on the cusp of an energy revolution — one which will power the next industrial revolution. Driving it is the rapid progress being made in renewable energy technology. The rapid improvement in its efficiency, and in particular of solar PV, means that it is now often the cheapest form available. Meanwhile, the expansion of Chinese capacity in the production of solar panels has lowered their price, making it much cheaper to install them.

Battery technology is showing similar progress, enabling EVs (electric vehicles) to drive greater distances on fewer charges and making the intermittency problem in renewable energy less of an obstacle to adoption. China’s aggressive support for its EV industry, coupled with its economic strategy of exporting its way out of its economic slump, has produced an excess global supply of cheap, high-quality EVs.

All of this could herald a sharp drop in demand for oil. Opec and the oil industry, however, beg to differ. The current slowdown in demand for EVs (electrical vehicles) in western markets, coupled with recent political turns against renewable energy and ESG investing, are giving oil companies sufficient confidence to ramp up their production plans. Meanwhile it’s expected that even as western countries reduce their oil and gas demand as their growth slows and they shift to renewable energy, the industrialisation of the developing world will ensure demand for fossil fuels would keep rising for decades.

However, recent developments throw that assumption into question. To prevent Chinese EVs and solar panels swamping their own producers, western countries have begun imposing tariffs on them. That will make them even less expensive, and thus more attractive, to developing countries looking to accelerate the expansion of their energy production. As China finds western markets increasingly closed off, it may be even more likely to concentrate on the development of new markets in the countries with which it has already partnered through its Belt and Road Initiative.

It was always assumed that the energy transition would first move through the developed world and then radiate outwards. But recent reports that Chinese demand for fossil fuels may already have peaked could herald a new development: that developing countries start to leapfrog the energy transition. In that case, the IEA projections may be borne out.

There are possible flies in the ointment of this forecast. In particular, the widespread adoption of AI is creating enormous new demand for the energy to power data centres. Being that it is such a new technology in the early throes of adoption, it’s hard to predict just how far this will go, but it’s possible that future energy demand will outstrip the supply available from new renewable generation.

This is why forecasts for future oil demand will always have a high margin of error. It’s too soon to bank on a future, permanent collapse of global oil prices. But it is starting to at least become conceivable.


John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a religion (Simon & Schuster, 2017).

jarapley

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El Uro
El Uro
1 month ago

What was it?

Jim Veenbaas
Jim Veenbaas
1 month ago

I’m always baffled by the sheer hubris of technocrats. They honestly think they can successfully regulate entire sections of the economy, and in the case of energy, the most important and foundational sector of the economy.

As much as they try, western technocrats are not regulating away the use of fossil fuels. Fossil fuels are still the least expensive and most reliable form of energy. We might cripple ourselves in the west, but developing nations aren’t buying into any of that nonsense.

You can try to force people to drive EVs using mandates and regulations, but people won’t buy them – because the batteries are unreliable in hot or cold weather, and there is justifiable charging anxiety. All the technocrats are doing is making combustible vehicles more expensive by limiting the amount they can sell without financial penalties.

The EU is a basket case because technocrats think they are smartest people in the room – that they have some anointed insight that allows them to create a planned economy. Ironically, the only part of the economy they refuse to regulate is immigration – one of the few sectors where regulation makes sense.

Fossil fuels will disappear when the market says so – when alternatives actually become cheaper and more reliable. Until then, technocrats are simply sacrificing the wealth and privilege we enjoy in the west to the alter of their latest luxury belief.

Ash Sangamneheri
Ash Sangamneheri
1 month ago
Reply to  Jim Veenbaas

At the rate EV and battery technologies are developing, IMO this transition to EV is inevitable, a pity the Chinese could see this and act on it, but we in the West are late to act and now facing the innovator’s dilemma.

Jim Veenbaas
Jim Veenbaas
1 month ago

We’ve heard this same assessment for years. Maybe it will happen, but certainly not by 2030. The Chinese have bet big on EVs. If we in the west simply let the market dictate sales, the Chinese would be sitting on a mountain of stranded assets.

Carlos Danger
Carlos Danger
1 month ago
Reply to  Jim Veenbaas

The Chinese electric vehicles are sold in China, not for export to Western countries, and the Chinese carmakers are content with that market. There’s no market for them here, just like there is no market for their gasoline vehicles. Maybe that will change, as the Chinese have made a lot more progress in getting robotaxis on the road than we have. But I doubt it.

Jim Veenbaas
Jim Veenbaas
1 month ago
Reply to  Carlos Danger

I’m not sure that’s the case anymore. China is just getting started with its EV exports. The only thing stopping it will be tariffs. The west would be much better off eliminating EV mandates, which is about the only thing driving sales right now.

https://www.atlanticcouncil.org/blogs/new-atlanticist/china-has-become-an-electric-vehicle-export-behemoth-how-should-the-us-and-eu-respond/

Carlos Danger
Carlos Danger
1 month ago
Reply to  Jim Veenbaas

You raise some good points, and I may well be wrong in discounting Chinese electric vehicles. We’ll see what happens!

T Bone
T Bone
1 month ago

Sure EV transition is inevitable wherever Socialist command economies are implemented. But places that haven’t outlawed cognitive liberty will still choose products that most efficiently gets it from point A to point B.

Martin M
Martin M
1 month ago

Maybe inevitable, but not by 2030. I for my part think that in the 20 or so more years of life I have got, I should be able to avoid the indignity of ever driving an EV.

Carlos Danger
Carlos Danger
1 month ago
Reply to  Martin M

You haven’t tried driving an electric car? You should. They are fun to drive. I wouldn’t want to own one, but I have driven several. An electric motorcycle too.

Richard Calhoun
Richard Calhoun
1 month ago

We are on the cusp of a political revolution, the politics of debt is coming to a close, the politics of the small state and low taxes is fast approaching, 5 years?
The re-industrialisation of the West will drive huge demand for energy and fossil fuels will be an important contributor to this demand.

Michael Cazaly
Michael Cazaly
1 month ago

One can only hope you are right.

Carlos Danger
Carlos Danger
1 month ago

Didn’t software already eat the Western world? In the carmaking industry, for example, we now talk about the “software-defined car”. And Elon Musk has built Tesla into such a valuable company by emphasizing software, not hardware.
The carmaking industry used to be the “industry of industries”, according to Peter Drucker. Charlie Wilson said, famously, what was good for the country was good for GM, and vice versa.
We don’t need to re-industrialize the carmaking industry — it’s still here. But it’s lost a lot of its importance. The computer industry has taken over as the industry of industries. And neither industry needs to be re-industrialized.
So I’m not sure how re-industrialization is going to happen in the West, or how our demand for energy and fossil fuels will go up significantly. I think we’ve peaked.

Carlos Danger
Carlos Danger
1 month ago

This article interests me because it touches on topics I’m writing about now in a book on how to speed up innovation in carmaking. My conclusion is that trying to predict and plan our industrial or energy future for years in advance is a fool’s game.
Top-down edicts like bans and industrial policy have never worked well before, though they have been tried in various flavors in centrally planned economies. No technocrats can hope to have a crystal ball that knows what will work in the market and what won’t.
Relying on the bottom-up mechanisms of the market works much better. That gives us the benefit of all the knowledge, experience and judgment of all participants in the markets. The wisdom of the crowds beats out the wisdom of the elites.
A good analogy to this is the way agile software development took over from the waterfall model. In the waterfall model, planners would lay out a step-by-step process to develop a new product. But that never worked well. Projects always came in very late and way over budget. There was no way to predict what problems would come up, but they always did.
With agile development, instead of planning out a step-by-step development process in advance, you just start taking steps, and see what happens. If you take a false step, you revisit. If you are going in the right direction, you press forward. The change in process from waterfall to agile is no panacea, but it helps. A lot.
We should do that more with all our industries, including energy. Not try to pan out a transition step-by-step to a netzero future, but to take steps and see what happens. If our technocrats were working bottom-up instead of top-down, they would have seen how they have taken some false steps already. They would have corrected, and put us on a better path.

Jim Veenbaas
Jim Veenbaas
1 month ago
Reply to  Carlos Danger

Interesting. Let us know when the book is done.

Chuck Burns
Chuck Burns
1 month ago

I agree with Jim Veenbass comment and will add that the brain dead power hungry Leftists show they have no common sense. If they would be patient and let the electric vehicle take a place for short repetitive commuter use the proliferation of electric vehicles would gradually evolve. But the power hungry Leftists, for example the Biden administration, start “mandating” this and that technology which requires massive increases of electricity through a power grid that is at present holding its own. Combine the 100 percent failure rate of the Cultural Marxist Left with the greed of the predatory Capitalists and you end up with some version of Orwell’s 1984 with everyone living in 15 minute cities and riding government owned bicycles.

Bret Larson
Bret Larson
1 month ago

How far does your ev go at -40c? How many people will freeze to death in an ev with a dead battery? These are pertinent questions for where I live.