Editor’s note: Last of three parts to run on consecutive Sundays. Read part one by CLICKING HERE and part two by CLICKING HERE.
IN APRIL 2014, THE HIGHLY RESPECTED Paris-based financial company Kepler Chevreux released a research report that has rippled through the fossil fuel industries. In it, Kepler Chevreux describes what is at stake for the fossil fuel industry as world governments’ push for cleaner fuels and reduced greenhouse gas emissions gathers momentum.
The firm argues that the global oil, gas and coal industries are set to lose a combined $28 trillion in revenues over the next two decades as governments take action to address climate change, clean up pollution and move to decarbonize the global energy system. The report helps to explain the enormous pressure that the industries are exerting on governments not to regulate GHGs.
Kepler Chevreux used International Energy Agency forecasts for global energy trends to 2035 as the basis for its research, and it concluded that as carbonless energy becomes more available, and as government policies make steep cuts in carbon emissions, demand for oil, natural gas and coal will fall, which will lower prices.
The report said oil industry revenues could fall by $19.3 trillion over the period 2013-35, coal industry revenues could fall by $4.9 trillion and gas revenues could be $4 trillion lower. High-production-cost extraction such as deep-water wells, oil sands and shale oil will be most affected.
Even under business-as-usual conditions, however, the oil industry will still face risks from increasing costs and more capital-intensive projects, fewer exports, political risks and the declining costs of renewable energy.
The report continues: “The oil industry’s increasingly unsustainable dynamics … mean that stranded asset risk exists even under business-as-usual conditions. High oil prices will encourage the shift away from oil towards renewables (whose costs are falling) while also incentivizing greater energy efficiency.” Eventually, fossil fuel assets will be too expensive to extract, and the oil will be left in the ground.
As far as renewables are concerned, Kepler Chevreux says tremendous cost reductions are occurring and will continue as the upward trajectory of oil costs becomes steeper.
Kepler Chevreux’s report is consistent with others released in 2014. One report from U.S.’s Citigroup, titled “Age of Renewables is Beginning — A Levelized Cost of Energy (LCOE)” and released in March 2014, argues that there will be significant price decreases in solar and wind power that will add to the renewable energy generation boom. Citigroup projects price declines based on Moore’s Law, the same dynamic that drove the boom in information technology.
In brief, Citigroup is looking for cost reductions of as much as 11 percent per year in all phases of photovoltaic development and installation. At the same time, they say the cost of producing wind energy also will significantly decline. During this period, Citigroup says, the price of natural gas will continue to go up and the cost of running coal and nuclear plants will gradually become prohibitive.
When the world’s major financial institutions start to do serious research and quantify the declining costs of renewable energy versus the rising costs of fossil fuels, it becomes easier to understand the monumental impact that the Green Industrial Revolution is having.
Zero marginal cost
Marginal cost, to an economist or businessperson, is the cost of producing one more unit of a good or service after fixed costs have been paid. For example, let’s take a shovel manufacturer. It costs the shovel company $10,000 to create the process and buy the equipment to make a shovel that sells for $15. So the company has recovered its fixed or original costs after 800 to 1,000 are sold. Thereafter, each shovel has a marginal cost of $3, consisting mostly of supplies, labor and distribution.
Companies have used technology to increase the productivity, reduce marginal costs and increase profits from the beginning. However, as Jeremy Rifkin points out in “Zero Marginal Cost Society,” we have entered an era where technology has unleashed “extreme productivity,” driving marginal costs on some items and services to near zero. File sharing technology and subsequent zero marginal cost almost ruined the record business and shook the movie business. The newspaper and magazine industries have been pushed to the wall and are being replaced by the blogosphere and YouTube. The book industry struggles with the e-book phenomenon.
An equally revolutionary change will soon overtake the higher education industry. Much to the annoyance of the universities — and for the first time in world history — knowledge is becoming free. At last count, the free Massive Open Online Courses (MOOCs) had enrolled about six million students. The courses, many of which are for credit and taught by distinguished faculty, operate at almost zero marginal cost. Why pay $10,000 at a private university for the same course that is free over the Internet? The traditional brick-and-mortar, football-driven, ivy-covered universities will soon be scrambling for a new business model.
Airbnb, a room-sharing Internet operation with close to zero marginal cost, is a threat to change the hotel industry in the same way that file sharing changed the record business, especially in the world’s expensive cities. Young out-of-town high-tech workers coming to San Francisco from Europe use Airbnb to rent a condo or an empty room in a house instead of staying at a hotel. They do this because they cannot find a room with the location they need, or because their expense reimbursement cap won’t cover one of the city’s high-end hotel rooms. Industry analysts estimate that Airbnb and similar operations took away more than a million rooms from New York City’s hotels last year.
A powerful technology revolution is evolving that will change all aspects of our lives, including how we access renewable energy. An “Energy Internet” is coming that will seamlessly tie together how we share and interact with electricity. It will greatly increase productivity and drive down the marginal cost of producing and distributing electricity, possibly to nothing beyond our fixed costs.
This is almost the case with the early adopters of solar and wind energy. As they pay off these systems and their fixed costs are covered, additional units of energy are basically free, since we don’t pay the sun to shine or the wind to sweep around our back wall. This is the concept that IKEA, the Swedish furniture manufacturer, is exploiting. IKEA is test marketing residential solar systems in Europe that cost about $11,000 with a payback of three to five years. Eventually, we’ll be able to buy a home solar system at IKEA, Costco or Home Depot, have it installed and recover our costs in less than two years.
All three elements — carbon mitigation costs, grid parity and zero marginal costs — and others like additive manufacturing and nanotechnology are part of the coming Green Industrial Revolution. It will be an era of momentous change in the way we live our lives. It will shake up many familiar and accepted processes like 20th-century capitalism and free-market economics, reductive manufacturing, higher education and health care. More to the point, it will see the passing of the carbon-intensive industries.
Like the centralized utility industry, the fossil fuel industries and the large centralized utilities have business models predicated on continued growth in consumption. Once that nexus of declining prices for renewables and rising costs of extraction and distribution is crossed — and we are already there in several regions of the world — demand will rapidly shift and propel us into “global energy deflation.”
Think about it: No more air pollution strangling our cities, no more coal ash spills in rivers that our kids swim in, no more water tables being poisoned by fracking toxics. Better yet, think of no more utility bills and electricity that is almost free. These are among the unlimited opportunities that extreme productivity can provide.
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SO WHAT DOES ALL THIS MEAN FOR BENICIA? Our lovely town, along with some of our neighbors, has enjoyed a stream of tax revenue from the fossil fuel industries for several decades. This will end as these industries lose the ability to compete in price with renewable energy. After all, if my energy costs drop to near zero, I’m not going to pay $5 for a gallon for gas or 20 cents per kilowatt hour. If Kepler Chevreux, Citigroup and the prescient investment bankers are right — and they usually are — oil company profits will begin a death spiral accompanied by industry constriction and refinery closings. Losing $19.3 trillion over two decades is a staggering amount even for the richest industry in world history.
Benicia should begin a long-range plan to replace Valero’s current tax revenues. Two decades from now this town will be very different — we are headed toward a city of gray-haired pensioners and retired folks too contented with perfect weather and amenities to sell homes to wage earners who, in fact, may not be able to afford big suburban houses and garages full of cars.
Instead, the Millennials are choosing dense urban living that’s close to work, and they prefer getting around by foot or bicycle, with some public transportation and the occasional Zipcar to visit the old folks in ‘burbs. The last thing pensioners want to do is pay extra taxes for schools and services they aren’t using, so raising taxes to meet the tax revenue shortfall is probably out of the question.
A similar revenue shortfall is probably facing the thousands of fossil fuel and utility industry employees who are thinking of retiring in the East Bay. Many plan to live on their stock dividends and pass the stock along to their heirs. This will be difficult as the industry begins the attrition phase of its cycle. They should see a financial planner and diversify.
To gamble Benicia’s safety and expand GHG emissions by approving Valero’s crude-by-rail proposal is illogical given that the oil industry is winding down and fossil-fuel will soon not be competitive with renewables. It would better for the Bay Area if we start to help Valero and the other refineries begin the long slow wind-down process, and gradually close them while the companies are still profitable. If we leave the shutdown process to when the companies start to struggle financially, they will just lock the gates and walk away, leaving the huge environmental cleanup costs to the local communities much the way the military does when they close bases.
There’s no good reason why Benicia residents should be saddled with the burden of a shuttered and vacant Valero refinery. We should begin the process as soon as possible and work with the refinery to not only find a way to replace the lost tax revenue, but to identify who will pay for the hazard waste and environmental cleanup.
At the very least, Benicia City Council should understand the move to a carbonless economy, read the Citigroup and Kepler Chevreux reports and the other emerging research, and accept the fact that Big Oil has begun its endgame. Leadership is about looking forward, not back, and identifying and solving problems at the most opportune time.
Grant Cooke is a long-time Benicia resident and CEO of Sustainable Energy Associates. He is co-author, with Nobel Peace Prize winner Woodrow Clark, of “The Green Industrial Revolution: Energy, Engineering and Economics,” set to be released in October by Elsevier.
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Mr. Cooke, I can scarcely begin to express how important I think your insights are for Benicia’s future. I encourage the City Council and city officials to take them seriously and get started thinking about their facilitation.
Addendum: I have long felt that tar sands oil extraction, the XL Pipeline and Valero’s Crude-By-Rail plan are acts of death-struggle desperation for the carbon fuel industry at large, and this includes the nearly frenetic quest to frack more gas wells and sink more deep-water Atlantic coast wells. The hand-writing is on the wall.
Robert,
Thank for the compliment. I think it is extremely important for Benicia to understand that we are coming to the end of the fossil fuel dominated economies. The price of renewable energy continues to decline sharply, and sooner, rather than later, it will replace fossil fuels. The oil industry will go away, just as the steel and iron industries went away in the Midwest. When they went broke, the companies locked the doors and vanished, leaving ruined communities beyond. There really is no need to repeat those mistakes here. We should begin by asking Valero what plans and how much money they have set aside for removing their refinery and cleaning up their property. The city needs to take a long-term view of our changing world and not get trapped like Vallejo did when the military walked away from Mare Island.
Grant
Grant just what is your time table on Valero closing down. Tell us why the steel and iron industries left. Steel and iron are still a big product and still being produced. The question is where. Do you know where? China, India and the EU will need fossil fuel. Just who do you think will supply that? The USA. Valero and the big oil folks are a long, long way from being non-existent. You make it sound like it will happen tomorrow. Wrong. Cars, train, boats, tall building, weapons, houses, roads, bridges and many other things are still being produced as they were 100 hundred years AGO. Grant you cannot be serious on your views on fossil fuell.
Grant, just when is the end of the fossil fuel economy going to happen? Not in your or my lifetime. It will be decades at a minimum, and could be a century or two. The steel and iron industries did not go away, they moved to where they could have lower production costs. With the refineries already in place, your scare tactic is like screaming the sky is falling. Oh yeah, and you work in alternative energy. Is that a slight conflict in providing a self serving commentary?
See above reports by Kepler Chevreux and Citicorp. Kepler Chevreaux says the oil industry will lose about $20 trillion by 2035. No industry can sustain these kinds of loses.
John, you resort to an illegitimate form of argument in reply to Mr. Cooke’s forecast. Your ad-hominem attack implies dishonesty on his part by suggesting selfish motive to his views, as if his views are motivated by his behavior rather than his behavior being led by his views.
In this, your reasoning resembles that of a desperate fanatic unlearned in dispute, or an old-line Communist.
I don’t believe you’re either of these things.
To avoid a dismal future, we must focus on economic equality, stark decreases in consumption, and the fairer distribution of resources. Energy production should rely on cleaner, renewable technologies and support a smaller, more cautious population. If we are to survive, immediate political action is needed to curtail the runaway growth , the threat of pollution, and the unfair allocation of wealth. To preserve not just the quality of life but its very existence, it is time to restore balance to both natural and social systems.
Tom, specifics please. It reads well and means good, but what specifically would you like to see?
Mr. Petersen, I read your note with utter shock. You want to eliminate growth and consumption? How are we to employ people? How are we to help the poor and impoverished? How are we to generate government revenues to feed the government programs in which you have such great faith?
Your vision is one of economic recession bordering on depression. How are we to help society, the most needy, when no growth or revenues are generated?
These types of utopian dreams would be dangerous if it were in the majority.
But we do need dreamers and I find relief in the knowledge that you are part of a very small minority. Thank heavens.
“Matter,” you ask, “How are we to help society, the most needy, when no growth or revenues are generated?”
All society’s needs can be well afforded if the most highly propertied class would awaken and reform itself intelligently according to principles other than myopic greed and group arrogance.
Mr. Shelby, in so many words you make Karl Marx proud. “From each according to his abilities, to each according to his needs.”
Profit is not evil, only the method of accumulation or expenditure may be evil. But the pursuit of profit by ethical and moral means is worthy. It creates jobs and wealth among all income levels. As Kennedy stated, a rising tide raises all boats.
We cannot help the poor without embracing success and profit.
A resource-based economy would make it possible to use technology to overcome scarce resources by applying renewable sources of energy, computerizing and automating manufacturing and inventory, designing safe energy-efficient cities and advanced transportation systems, providing universal health care and more relevant education, and most of all by generating a new incentive system based on human and environmental concern.
Many people believe that there is too much technology in the world today, and that technology is the major cause of our environmental pollution. This is not the case. It is the abuse and misuse of technology that should be our major concern. In a more humane civilization, instead of machines displacing people they would shorten the workday, increase the availability of goods and services, and lengthen vacation time. If we utilize new technology to raise the standard of living for all people, then the infusion of machine technology would no longer be a threat.
As an aside, dreamers are those that would thank heaven.
Absolutely yes, Mr. Petersen. Were much more of society’s net income spent to improve people’s lives, and much less of it sequestered into static property and investment accounts that only maintain the status of our richest folks, miraculous progress would be possible. Working class people would not turn shiftless and lazy
as the ideology of wealth insists. They would be freed to be active in productive ways impossible for them at present, just as happens often (though not invariably) with very rich folks.
Real politics…
Beyond Mr. Cooke’s enthusiasm for technological fixes—
“Think about it: No more air pollution strangling our cities, no more coal ash spills in rivers that our kids swim in, no more water tables being poisoned by fracking toxics. Better yet, think of no more utility bills and electricity that is almost free. These are among the unlimited opportunities that extreme productivity can provide.”
Sounds terrific.
Question; How do we overcome the present status quo? The military,NSA-police industrial state? Corporate apologists/Supreme Court influencing our elections, i.e. corporate personhood and Citizen United– and the Chamber of Commerce/Business Roundtable and the National Association of Manufacturer’s influence?
No mention of these entities? That’s fine.
The article below gives the above author,our citizens and our appointed and elected officials a more realistic and comprehensive viewpoint ( from an emeritus professor) for the community to seriously consider about our present position in the world…
An excerpt about where the U.S. stands on the environment is instructive–
“What about the environment? Specialists at Yale University have developed a highly sophisticated Environmental Performance Index to examine the behavior of nations. In the area of protection of human health from environmental harm, their 2014 index placed the United States 35th in health impacts, 36th in water and sanitation, and 38th in air quality. In the other area studied―protection of ecosystems―the United States ranked 32nd in water resources, 49th in climate and energy, 86th in biodiversity and habitat, 96th in fisheries, 107th in forests, and 109th in agriculture.”
http://www.commondreams.org/views/2014/10/13/united-states-no-1-what
Mr. Gregory, our USA is ultra high on the list of societies whose political life is stultified and hamstrung by radical pseudo-conservative parties and persons who fanatically block compromise, and whose racist, classist, sexist and partisan hatreds oppose all progress on anyone’s behalf but their own.
Will,
Not sure I follow you. I was writing about the benefits of “extreme productivity”, which I anticipate will trigger energy cost deflation. The concept is based on the principal of zero marginal cost, which is inherent in using renewable energy instead on fossil fuels. Yes, as I’ve pointed out numerous times, the U.S. is badly lagging in cleaning up the environment. Once our nation was proud of its great natural heritage, now we have abandoned this as the wealth from the extraction industries has overrun our appreciation for the natural world. It’s truly a shame–one that I’m more sensitive to as I travel. America is an extraordinarily beautiful country–just taken for granted by its citizens. So, this leads us back to the question, will the citizens of Benicia be stuck for cleaning up the hazardous waste under the refinery property? Or should Valero?
As I read some of the comments in support of Grant I get a very eerie feeling. It sounds all to familiar to me. Very EU. Could there be a hint of Socialism? Maybe, maybe not. I do believe most believe that the priduction of goods is a good thing. Even if it is fossil fuel related. Tech and manufacturing have been working together for years. Less workers means that they are nowe available to support a thriving and advancing industrial country. Who could that be? Guess what, the USA. I do not think anyone is silly enough to think that renewable energy is not part of the pie. It is. But the main courser is still big business. Fossil fuel will be a major part for many centries to come. No country will advance without the main ingredient of fossuil fuel. It is here more years than anyone can imagine. Do not get mne wrong. I do understand the part renewable energy will play. But it wikll be a supoport part. Less costs and higher production and a booming economy woth plenty of very happy workers willing to be a part of it. High Teck will also be a big supporter also. None of them will be the main driver of an economy that is moving forward very fast. You must have the resources first like fossil fuel to make all this happen. Guess what, we do. Look for a very robust moving economy starting in about 2016. It is starting to take shape now.
Under federal law, Valero would be responsible for environmental remediation of their property.
Thank you for pointing that simple fact out. The requirements mandating such clean-ups by private companies has been on the books for many years.
This is why many companies may shutter a factory, but keep a modest ‘service center’ on the same property so they can claim the facility is still open.