Philip K. Verleger
Daniel Yergin has bookended the zenith and coming nadir of the oil era with his new volume, The New Map: Energy, Climate, and the Clash of Nations. This work follows several other volumes, including his Pulitzer Prize-winning The Prize and The Commanding Heights (written with Joseph Stanislaw). However, it was his initial volume on energy, Energy Future (written with Robert Stobaugh), that became the first popular book on the energy crisis. The New Map will mark the end of the fossil fuel era because the industry is shrinking to where antitax agitator Grover Norquist could drown it in his famous bathtub.
Energy Future was written during the Iranian oil crisis as crude oil prices were rising in a seemingly uncontrolled fashion. Future oil supplies were in doubt. Inflation was out of control. And the energy industry was at its peak. In December 1979, a few months after the book’s publication, energy shares accounted for twenty-three percent of the S&P 500 index by market capitalization. A year later, energy would reach twenty-nine percent of the index, the largest sector. The combined shares of the three next biggest sectors were still smaller than energy.
Forty years ago, energy was the story, and Yergin and Stobaugh’s Energy Future dominated the public discussion. Today, things are vastly different. At the close of August, energy stocks accounted for just 2.3 percent of the S&P 500. Of its eleven sectors, energy is now the smallest. Investors have moved on to more exciting prospects that offer greater returns, often with fewer risks.
Today—as California, Oregon, and Washington burn (and Australia earlier this year) —climate, not energy, dominates debates. This summer’s many severe Atlantic storms further intensify the environmental concern (at one point, five named tropical cyclones were churning simultaneously in the Atlantic Basin, which ties the record). Another worry is the threat of Arctic and Antarctic melting, which could raise global sea levels, and the melting of permafrost with the attendant tons of methane release. Recognition of the danger posed by continuing to support and use fossil fuels is spreading quickly. Companies that manufacture these fuels are experiencing a shareholder exodus. Banks are also shunning the industry.
Hopefully then, The New Map will be the last hurrah for an industry that will continue to cause catastrophic environmental damage if not curbed, serving as the closing “bookend” of the oil era.
Yergin believes the ongoing energy transformation will be slow. In an excerpt from his new book published by The Wall Street Journal, he made this assertion:
History shows, however, that energy transitions don’t happen quickly. The key moment in the first major transition—from wood to coal—was in January 1709, when an English metalworker named Abraham Darby figured out how to use coal in order, he said, “that a more effective means of iron production may be achieved.” But it took two centuries before coal overtook wood and waste as the world’s number one fuel. Oil was discovered in western Pennsylvania in 1859, but it was not until a century later, in the 1960s, that oil replaced coal as the world’s top energy resource.
Others besides Yergin are convinced the energy transition will be slow. Vaclav Smil has written extensively on how slowly one energy system changes to another. Harvard researcher Megan L. O’Sullivan, author of Windfall: How the New Energy Abundance Upends Global Politics and Strengthens American Power, is in their camp. In a recent Bloomberg article, she wrote that “most evidence suggests that a period of prolonged, slow growth like the world is now likely to face will be more harmful than helpful in advancing the global transition to alternative forms of energy.”
The facts do not support such assertions. Businesses often close factories or scrap equipment long before they reach the end of their useful lives. Unlike human beings, capital goods are kept in operation only as long as they can operate profitably.
The term “sunk costs” applies to almost all capital goods. Once a good is built, the money spent to construct it has been spent, and little can be recovered. Yergin, Smil, and O’Sullivan seem to believe owners will continue to use equipment or factories until they wear out. History demonstrates that this view is incorrect.
In the 1950s, thousands of steam locomotives were scrapped while still fully functional, much to train buffs’ sadness. The locomotives lost out because they could not compete with the less-expensive, more reliable diesels.
Between 2010 and 2020, more than 200 coal-powered plants have shut in the U.S. or been reconfigured to operate with natural gas because they cannot produce electricity with coal at the low costs achieved with renewables and gas. The New York Times ran a four-page article on October 6, 2020, on the closure of coal-fired power plants in Arizona and Kentucky. The front-page piece explained that the plants were shuttered because they cannot compete.
As economic progress drives down the cost of renewable energy supplies, we will see more coal-fired plants and other types of capital goods such as automobiles scrapped well before their usefulness comes to an end. Harvard economist Joseph Schumpeter described this process as “creative destruction.”
While Yergin does not seem to understand the “stranded assets effect,” he does note that the speed of the current energy transition has been accelerated by unprecedented government involvement. He extols the contributions of government-sponsored research in the United States, saying, “The U.S. has big advantages in these fields thanks to its unique and dynamic energy-innovation ecosystem—consisting of the Energy Department’s 17 national laboratories, the country’s universities and research institutes, and countless established companies and startups.”
Missing from the Yergin analysis are four names: Jeff Bezos, Tim Cook, Elon Musk, and Sundar Pichai. These individuals are, respectively, the CEOs of Amazon, Apple, Tesla (and SpaceX), and Google’s parent company Alphabet—companies that have all made considerable contributions to the U.S. energy position by pushing the replacement of fossil fuels in transportation, creating new ways to store electricity, and developing large-scale facilities (such as “server farms” powered solely by renewable energy). None of these contributions came from DOE labs.
Yergin, Smil, and O’Sullivan all underestimate the exponential growth of technology. The speed of change was best captured in a June 2011 advertisement celebrating IBM’s centennial. The two-page ad began with this statement: “Nearly all the companies our grandparents admired have disappeared.” Today, one could write that nearly all the industries our parents admired have vanished. Fossil fuels are on the way out, and the speed with which they exit will surprise.
A day before The New Map was released, BP issued its new forecast of energy demand in conjunction with its announced decision to move rapidly off oil. Contradicting Yergin, Smil, and O’Sullivan, the company issued detailed forecasts showing that oil use could drop by as much as seventy percent by 2050 under an aggressive push to bring net emissions to zero by that year.
Embedded in the BP forecast was an analysis of the investment requirements for oil and gas producers. The firm’s BP forecasters noted that between $750 and $850 billion per year were put into oil and gas between 2013 and 2018. They projected a further $300 to $400 billion per year in spending over the next thirty years, even in their net-zero emission scenario. In aggregate, between $9 and $20 trillion in investment is required to produce the thirty million barrels per day it sees as needed in its net-zero scenario. Oil supply will be even lower without such investment by 2050, according to BP, and prices perhaps higher.
The BP forecast is silent regarding these funds’ source, as is Yergin’s The New Map. Indeed, no one who writes on the slow transition away from fossil fuels has identified a lasting funding source. Were they to try, they would likely conclude that the money will not be there. Investors and banks are starving the oil, gas, and coal sectors of the capital they need to expand.
The decline of U.S. coal producers offers a foretaste of the capital squeeze. Elliot and Randles published a lengthy report on the US coal industry’s decline in The Wall Street Journal. They noted that Contura Energy, coal producer for steelmaking, has been abandoned by insurance companies and bond providers. Their CEO told the reporters, “If they can cut off your financing, they cut off your ability to function as a company.”
The cutoff of lending to fossil companies and investor shunning can be attributed to several factors. First, the total return offered by energy shares has generally been low relative to other industries, causing investors to put money in different sectors of the economy. Second, fossil energy’s contribution to global warming has made it “unattractive” to many socially conscious investors. Finally, banks, pension funds, and large sovereign wealth funds have moved funds away from the fossil sector, fearing exposure to liabilities created by global warming. Former Bank of England governor Mark Carney warned of these potential problems in his now-famous speech, “Breaking the Tragedy of the Horizon,” to an audience at Lloyds of London in 2015.
The same threat confronts oil and gas producers. BP’s CEO Bernard Looney seeks to bring investors back by moving away from oil and gas while boosting renewables investment.
The fossil fuel industry’s capital starvation will accelerate the transition to a net-zero world. It is here that those who see a slow changeover to new energy technologies make their mistake. Yergin and O’Sullivan both follow the research of Vaclav Smil, who has remarked often that historical precedent tells us that the move off fossil fuels will not be quick:
The historical verdict is unassailable: because of the requisite technical and infrastructural imperatives and because of numerous (and often entirely unforeseen) socio-economic adjustments, energy transitions in large economies and on a global scale are inherently protracted affairs. That is why, barring some extraordinary commitments and actions, none of the promises for greatly accelerated energy transitions will be realized, and during the next decade none of the new energy sources and prime movers will make a major difference by capturing 20 percent to 25 percent of its respective market. A world without fossil fuel combustion is highly desirable and, to be optimistic, our collective determination, commitment, and persistence could accelerate its arrival—but getting there will demand not only high cost but also considerable patience: coming energy transitions will unfold across decades, not years.
Yergin, O’Sullivan, and Smil all fail to understand that the past snail-paced transitions have occurred because investors, banks, and insurance companies were willing to support the fading industries. Such support is unlikely to be forthcoming for fossil fuels in the future. While some private investors may initially agree to replace the vanishing public investors, increasing potential liabilities for damages caused by fires and storms will discourage the prudent.
Investments will not come. Instead, fossil fuel supplies will drop, prices rise sharply, and the shift to renewables will accelerate because the returns to renewables, already high in the period of low prices, will increase further as oil prices go up. The price rise will occur because the additions to oil production capacity forecasters see as needed in the current decade will not be forthcoming. Consequently, prices will need to be higher to balance supply and demand. The price increases may be exaggerated if, as consumption nears world oil production capacity, some producers find they have market power and choose to reduce output, as they have in the past. Private-sector firms owned by investors will contribute to the price increase because the push from their investors to boost returns will prevent them from investing in significant capacity additions before prices rise. That is, these companies cannot cut dividends to finance investment. Instead, they reduce expenditures to pay dividends or even borrow to meet shareholder demands for cash.
Should oil prices rise, some firms will likely try to boost investments, assuming they are still in business. However, their remaining investors, seeing the imminent end to the fossil business, will almost certainly demand higher payouts. Thus, fossil energy companies today are slowly being liquidated, a trend that will not reverse.
Yergin’s The New Map says nothing about this turmoil. In a sense, it is a map of the sort produced by Gerardus Mercator in 1569 rather than something made by modern cartographers. As Caitlin Dempsey explains, “a Mercator map is notable for being the first attempt to make a round earth look ‘right’ on a flat surface.” She adds that Mercator distorted the size of objects at the North and South Poles to keep longitudinal lines straight.
Just as the size of the North and South Poles is exaggerated in many Mercator projections, Yergin’s The New Map inflates the future importance and ongoing contribution of fossil fuels. The rapid evolution of consumer priorities and clean energy innovations spurred by the threat of global warming will redraw it quickly.