Dispersion in global gas prices has hit new highs in 2022. Hence this 17-page note evaluates two possible solutions. Building more LNG plants achieves 15-20% IRRs. But displacing industrial gas demand in Europe, then re-locating it in gas-rich countries can achieve 20-40% IRRs, lower net CO2 and lower risk? Both solutions should step up. What implications?
Global gas price dispersion is hitting new highs, with the best geographies remaining consistently below $2.5/mcf, but many others spiking to peak prices in 2022. Theories of gas price dispersion are laid out on pages 2-3, while we present data and conclusions on 20 different countries’ gas prices on pages 4-6.
Will it accelerate renewables? An interesting observation is that the countries with spiking gas prices are already deploying renewables ‘as fast as feasible’. Whereas it is often the countries with very low gas prices that have very low renewables deployment (page 7).
Will it accelerate LNG? In theory yes. Our expectations for future gas prices should unlock 15-20% IRRs at new LNG projects, and our growth forecasts re on page 8.
Will it accelerate industrial re-location, away from geographies with high-priced gas, and towards geographies with low-cost gas. This is the main focus of the note. And we think greenfield industrial facilities can earn 20-40% future IRRs if they are cited in geographies with low-priced gas. By contrast, we have constructed a ‘shutdown curve’ showing what gas prices are needed to free up 13bcfd of industrial gas demand in Europe. Our modelling framework is explained on pages 10-12.
There are further economic and ESG advantages to re-locating industry to gas-rich countries, compared with exporting their gas. They are quantified on pages 13-14.
Who benefits? We outline examples of leading companies in gas-rich countries on pages 15-16. This includes both emerging world producers, US E&Ps and US industrial companies that have featured in our research to-date.
Finally, for the renewables and LNG industries, we would highlight that this analysis is not an either-or. We will need all solutions to alleviate energy shortages. Yet displacing industrial gas demand in Europe may mute the kind of runaway cost-inflation that de-railed the LNG industry in the 2010s, and threatens the renewables industry in the 2020s (page 17).
Britain’s remarkable industrialization in the 18th and 19th centuries was part of the world’s first great energy transition. In this short note, we have aggregated data, estimated the end uses of different energy sources in the Industrial Revolution, and drawn five key conclusions for the current Energy Transition.
In this short note, we have sourced and interpolated long run data into energy supplies in England and Wales, by decade, from 1560-1860. The graph is a hockey stick, with Britain’s total energy supplies ramping up 30x from 18TWH to 515TWH per year. Part of this can be attributed to England’s population rising 6x, from around 3M people to 18M people over the same timeframe. The remainder of the chart is dominated by a vast increase in coal from the 1750s onwards.
A more comparable way to present the data is shown below (and tabulated here). We have divided through by population to present the data on a per-capita basis. But we have also adjusted each decade’s data by estimated efficiency factors, to yield a measure of the total useful energy consumed per person. For example, coal supplies rose 40x from 1660 to 1860, but per-capita end use of coal energy only rose c6.5x, because the prime movers of the early industrial revolution were inefficient. This note presents our top five conclusions from evaluating the data.
Five Conclusions into Energy Demand from the Industrial Revolution
(1) Context. Useful energy demand per capita trebled from 1MWH pp pa in the 1600s to over 3MWH pp pa in the mid-19th century, an unprecedented increase.
For comparison, today’s useful energy consumption per capita in the developed world is 6x higher again, as compared with the 1850s. A key challenge for energy transition in the developed world is that people want to keep consuming 20MWH pp pa of energy, rather than reverting to pre-industrial or early-industrial energy levels. As a rough indicator, 20MWH is the annual energy output of c$120-150k of solar panels spread across 600 m2 (model here).
Furthermore, today’s useful energy consumption in the emerging world is only c2x higher than Britain in the 1860s. I.e., large parts of the emerging world are in very early stages of industrialization, comparable to where Britain was 150-years ago. Models of global decarbonization must therefore allow energy access to continue rising in the emerging world (charts below), and woe-betide any attempt to stop this train.
(2) Shortages as a driver of transition? One of the great cliches among energy analysts is that we “didn’t emerge from the stone age because we ran out of stone”. In Britain’s case, in fact, the data suggest we did shift from wood to coal combustion as we began to run out of wood.
Wood use and total energy use both declined in the 16th Century, and coal first began ramping up as an alternative heating fuel (charts above). In 1560, Britain’s heating fuel was 70% wood and 30% coal. By 1660, it was 70% coal and 30% wood. This was long before the first coal-fired pumps, machines or locomotives.
This is another reminder that energy transitions tend to occur when incumbent energy sources are under-supplied and highly priced, per our research below. Peak supply tends to preceed peak demand, not the other way around.
(3) Energy transition and abolitionism? Amazingly, human labor was the joint-largest source of useful energy around 1600, at c25% of total final energy consumption. But reliance upon human muscle power as a prime mover was bound up in one of the greatest atrocities of human history: the coercion of millions of Africans, slaves and serfs; to row in galleys, transport bulk materials and work land.
By the time Britain banned the slave trade in 1807, human muscle power was supplying just 10% of usable energy. By the time of the Abolition Act in 1833, it was closer to 5%.
Some people today feel that unmitigated CO2 emissions is an equally great modern-day evil. On this model, it could be the vast ramp-up of renewable energy that eventually helps to phase out conventional energy. But our current models below do not suggest that renewables can reach sufficient size or scale for this feat until around 2100.
What is also different today is that policy-makers seem intent on banning incumbent energy sources before we have transitioned to alternatives. We have never found a good precedent for bans working in past energy systems. Although US Prohibition, from 1920-1933, makes an interesting case study.
(4) Jevons Paradox states that more efficient energy technologies cause demand to rise (not fall) as better ways of consuming energy simply lead to more consumption.
Hence no major energy source in history has ‘peaked’ in absolute terms. Even biomass and animal traction remain higher in absolute terms than before the industrial revolution, both globally and in our UK data from 1560-1860.
Jevons Paradox is epitomized by the continued emergence of new coal-consuming technologies in the chart below, which in turn stoked the ascent of coal-powered demand, while wood demand was not totally displaced.
The fascinating modern-day equivalent would suggest that the increasing supply of renewable electricity technologies will create new demand for electric vehicles, drones, flying cars, smart energy and digitization; rather than simply substituting out fossil fuels.
(5) Long timeframes. Any analysis of long-term energy markets inevitably concludes that transitions take decades, even centuries. This is visible in the 300-year evolution plotted above, and in the full data-set linked below. Attempts to speed up the transition create the paradox of very high costs or potential bubbles. We have also compiled a helpful guide into transition timings by mapping twenty prior technology transitions. Our recent research, summarized below, covers all of these topics, for further information.
Source: Wrigley, E. A. (2011). Energy and the English Industrial Revolution, Cambridge, TSE Estimates. With thanks to the Renewable Energy Foundation for sharing the data-set.
Another devastating impact of COVID-19 may still lie ahead: a 1-2Mbpd upwards jolt in global oil demand. This could trigger disastrous under-supply in the oil markets, stifle the economic recovery and distract from energy transition. This 17-page note upgrades our 2022-30 oil demand forecasts by 1-2Mbpd above our pre-COVID forecasts. The increase is from road fuels, reflecting lower mass transit, lower load factors and resultant traffic congestion.
Upgrades to our granular 2020-2050 oil demand models, including headline numbers, are outlined on pages 2-3.
Travel demand that will never come back is described on pages 4-5, including remote work, a shift to online retail and lower business travel. Our forecasts for higher oil demand are not based on a Panglossian recovery of travel habits to pre-COVID levels.
The shift from mass transit to passenger cars is detailed on pages 6-9, covering ground-transportation (buses and train), mid-range air travel, and reverse urbanization enabled by remote working.
Load factors are lightly reduced, requiring more cars to service each passenger-mile of travel, as outlined on page 10.
Higher road traffic dents fuel economy, which we have quantified using real-world data from the City of New York, also drawing on data from prior oil downturns, on pages 11-14.
Implications for oil markets, companies and the energy transition are discussed on pages 15-17.
Key points on long-run oil demand after COVID-19 are spelled out in the article sent out to our distribution list.
The COVID-19 crisis will structurally accelerate remote working. The opportunity is explored in our 21-page report. It can save 30% of commuter journeys by 2030, avoiding 1bn tons of CO2 per year, for a net economic benefit of $5-16k per employee. This makes remote work a materially more impactful opportunity than electric vehicles in the energy transition.
Remote work currently saves c3% of all US commuter miles, which comprise 33% of developed world gasoline demand (pages 2-4).
Remote work could save 30% of all commuter miles by 2030, structurally accelerating as the COVID-19 crisis changes habits (page 5).
Remote work, thus screens as more impactful than electric vehicles, as an economic opportunity in the energy transition (page 6).
Ecconomic benefits are $5-16k pp pa. Our numbers are conservative. They under-reflect productivity and wellbeing improvements in the technical literature (pages 7-8).
We stress test our numbers, looking profession-by-profession across the entire US labor force, and considering new technologies (pages 9-13).
Direct energy impacts save 1bn tons of annual CO2. Impacts on oil, gas and electricity demand are quantified, including evidence from the COVID crisis (pages 14-17).
Hidden consequences are more nuanced: reshaping mobility, urbanization and online retail habits (pages 18-21).
This 15-page note outlines our top three conclusions about COVID-19, which the oil markets may have missed. First, global oil demand likely declines by -11.5Mbpd YoY in 2Q20 due to COVID-19. This is over 15x worse than the global financial crisis of 2008-9, and too large for any coordinated production cuts to offset. Second, once the worst of the crisis is over, new driving behaviours could actually increase gasoline demand, causing a very sharp oil recovery. Finally, over the longer-term, structural changes will take hold, transforming the way consumers commute, shop and travel. (Please note, our oil supply-demand numbers have subsequently been updated here).
Pages 2-7 outline our new models of global oil demand and US gasoline demand, underpinning a scenario where oil demand likely falls -11.5Mbpd in 2Q20, and -6.5Mbpd YoY in 2020. In a more extreme downside case, declines of -20Mbpd in 2Q20 and 10Mbpd in FY20 are possible.
Pages 8-10 illustrate how gasoline demand could actually increase in the aftermath of the COVID crisis, once businesses re-open and travel resumes. The largest cause is a c25% potential degradation in developed world fuel economy per passenger, as lingering fears over COVID lower the use of mass transit and vehicle load factors.
Pages 11-15 outline our top three structural trends post-COVID, which will persist for years, transforming retail, commuting, leisure travel and the airline/auto industries.
Please don’t hesitate to contact us, if you have any questions or comments…
We presented our ‘Top Ten Themes for Energy in the 2020s’ to an audience at Yale SOM, in February-2020. The audio recording is available below. The slides are available to TSE clients, in order to follow along with the presentation.
Please sign up to our distribution list, to receive our best ideas going forwards…
Small, autonomous, electric delivery vehicles are emerging. They are game-changers: rapidly delivering online purchases to customers, creating vast new economic possibilities, but also driving the energy transition. Their ascent could eliminate 500MTpa of CO2, 3.5Mboed of fossil fuels and c$3trn pa of consumer spending across the OECD. The mechanism is a re-shaping of urban consumption habits, retail and manufacturing. The opportunities are outlined in our new, 20-page report.
The average US consumer buys 2.5 tons of goods per year, served by a vast distribution network of ships, trucks and smaller vehicles, collectively responsible for 1.5 barrels of oil, $1,000 of cost and 600kg of CO2 per person per annum (page 2).
Fuel economy currently deteriorates, with each step closer to the consumer. Container ships achieve c900 ton-miles per gallon of fuel. But delivery vans, the dominant delivery mechanism for internet purchases, are least efficient, achieving just 0.02 effective ton-mpg and costing at least $3.6 per delivery (page 3).
The rise of e-commerce has already increased supply chain CO2 by c30%, and supply chain costs by 2x since the pre-internet era. On today’s technologies, CO2 will rise another 20% and cost will rise another 50% by 2030, adding 0.7Mbpd of oil demand, 120MTpa of CO2 and $500bn of cost across the OECD (pages 4-5)
Drones and droids are 90-99% less energy intensive than delivery vans, and 70-97% less costly. The technology is maturing. Thus small, autonomous, electric vehicles will move immediately, efficiently, straight to their destination (pages 6-8).
Retail and manufacturing will have be transformed by the time drones approach 50% market share in last-mile delivery. Tipping-point economies-of-scale mean that they will take market share away from cars and delivery vans very rapidly (pages 9-10).
The second half of the report focuses in on the opportunities. Retail businesses must consolidate, specialise or diversify to “sharing” models. The latter can save $1trn of consumer spending and 100MTpa of emissions in the US alone (pages 11-20).
Precision-engineered proteins are on the cusp of disrupting the meat industry, according to an exceptional, 75-page report, published recently by RethinkX. The science is rapidly improving, to create foods with vastly superior nutrition, superior taste and superior costs, by the early-2020s.
The energy opportunities are most exciting to us, after reading the report. If RethinkX’s scenarios play out, we estimate: direct CO2 savings of 400MTpa, enough to offset 10% of US oil demand; 2bcfd of upside to US gas demand; and enough land would be freed up to decarbonise all of US oil demand, or increase US biofuels production by 6x to c6Mbpd.
We would be delighted to introduce clients of Thunder Said Energy to the reports’ authors, Catherine Tubb and Tony Seba. Please contact us if this is useful.
Many commentators fear long-run oil demand is on the cusp of a steep contraction, leaving oil and gas assets stranded. We are more concerned about the opposite problem. Projecting out the current trends, global oil demand is on course to keep rising to over 130Mbpd by 2050, undermining attempts to decarbonise the world’s energy system.
Our new, 20-page note reviews seven technology themes that can save 45Mbpd of long-term oil demand. We therefore find oil demand would plateau at 103Mbpd in the 2020s, before declining gradually to 87Mbpd in 2050. This is still an enormous market, equivalent to 1,000 bbls of oil being consumed every second.
Opportunities abound in the transition, in order to deliver our seven themes, improve mobility, substitute oil for gas, reconfigure refineries for changing product mixes, and to ensure that the world’s remaining oil needs are supplied as cleanly and efficiently as possible. Leading companies will seize these opportunities, driving the transition and earning strong returns in the process.
Gas demand could treble by 2050, gaining traction not just as the world’s cleanest fossil fuel, but also the most economical. The ascent would be driven by technology. Hence this note outlines 200MTpa of potential upside to consensus LNG demand, via de-carbonised power and shipping fuels. LNG demand could thus compound at 8% pa to 800MTpa by 2030, justifying greater investment in unsanctioned LNG projects.
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