High oil prices drive inflation and recession, slowing the technological transition off fossil fuels.
Episode Summary:
Global warming or not, all energy sources are in competition with one another. The lowest-priced source dominates, and $120 per barrel oil, combined with high gas prices and the supply instability caused by short-term interruption of Russian supply, makes new tech like solar a no-brainer for power utilities planning for growth. While Covid-damaged supply chains are a factor, the irony of alternatives like solar is that they are still heavily dependent on cheap oil. Jim Anderton comments.
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Transcript of this week’s show:
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So, gasoline is twice as expensive today as it was last year. Inflation is running at double-digit rates. And the unthinkable is being talked about in ways that we haven’t heard since the 1960s: nuclear war.
While I think the chance of atomic attack is effectively zero, the chance of economic instability caused by war in Ukraine is now 100 percent. From an engineering perspective, it’s creating a confluence of negative forces that, if handled correctly, could result in a more stable global economy.
As usual, energy is the key. As I record this, oil is trading at about $120 per barrel. While this level of pricing is generating a lot of talk—and fear—it has been at this level before, in 2008. In that year, prices hit an all-time high of $145 a barrel. Oil has been cheap for some time, and had pricing been stable at this level from 2008 to today, it’s likely that overall oil consumption would have been significantly lower than it is today.
Global warming or not, all energy sources are in competition with one another. The lowest-priced source dominates, and $120 per barrel oil, combined with high gas prices and the supply instability caused by short-term interruption of Russian supply, makes new tech like solar a no-brainer if you’re a power utility planning for growth.
Ironically, the U.S. Solar Market Insight Report, published by the Solar Energy Industries Association and Wood Mackenzie, predicts that utility-scale solar power construction will fall by 14 percent in 2022 over last year due to a combination of project cancellations and delays. While Covid-damaged supply chains are a factor, the irony of alternatives like solar is that they are still heavily dependent on cheap oil. Petroleum underpins every aspect of global manufacturing, from the feedstocks that drive the fertilizer, chemical and plastics industries to the fuels that power global shipping.
Last year, freight rates were astronomical because hull and container capacity was limited. This year, fuel prices are the issue. As these input costs are passed through the economy, margins are squeezed even more than they are now, and inflation naturally rears its head. If you are planning a large solar installation, the panels will be more expensive, as well as the cost of shipping and installing them. And higher cost pressures will exist for other alternates, as well, everything from windmills to small modular reactors.
Higher oil prices ironically have a dampening effect on the switch to alternates from oil. Elon Musk understands this, and has publicly called for a significant increase in U.S. domestic oil production to compensate. Now, Musk is in the car-selling business, and he needs consumers worldwide to have enough disposable income to buy his products. That prosperity is based on the energy system that we have now—not the one we want to have 10 or 20 years from now.
That means that we need cheap oil now, in order to accelerate the deployment of technologies that reduce the demand for oil later.
The Biden Administration’s reluctance to increase domestic supply, or to facilitate the movement of Canadian heavy oil products to U.S. refineries, looks increasingly irrational in the face of a looming recession—and it will slow the shift to alternates.
I’m very skeptical of the environmental movement’s ability to understand that a long-term future with less carbon dioxide means generating a lot more carbon dioxide in the short term. Friedrich Nietzsche famously said, “That which does not kill us, makes us stronger.” It will not kill us, or the planet, to backfill a disrupted global energy system with a year or two of cheap oil to keep the alternate energy and electric vehicle revolution on track.