+1 (312) 520-0301 Give us a five star review on iTunes!
Send Buck a voice message!

377: Why is Oil Still Expensive Despite Clean Energy?

Share on social networks: Share on facebook
Share on google
Share on twitter
Share on linkedin

Buck: Welcome back to the show, everyone, today. My guest on what Formula podcast is Alex Stevens. Alex is a manager of policy and communication for the Institute for Energy Research. He writes on the relationship between business and government in the energy industry, as well as the effects of regulation and subsidies on energy markets. Welcome to the show.

Alex: Great to be here. Thank you for having me.

Buck: So, you know, this is obviously this stuff gets pretty complex. And so I want to kind of talk a little, you know, go back to kind of where we are right now. There is this, you know, obviously in recent years, a real push towards green and alternative energies and all that kind of thing. But we still are largely in oil and gas. Maybe not largely, but we are an oil and gas based global economy. Right. Still. And I’m wondering why where we are in that balance and what you see is potentially, you know, some of the tipping points that might happen.

Alex: Yeah. So just to give sort of the lay of the land globally, we get the largest amount of our energy from oil, followed by coal and the natural gas sort of in that order. And in terms of a percentage, about 80% of the world’s energy consumption comes from those three resources. And here in the US, we pretty closely mirror the global percentage.

It’s about 79% here in the US that comes from those three sources. And then just to give you an idea of kind of how that number has changed over time, if you go back to 1988, the global market share of fossil fuels was about 88% of total energy consumption. So it’s come down a little bit. But, you know, the reason I chose 1988 is really that’s the year that climate change kind of entered the policy discussions. So, you know, the point being that, you know, after decades of climate debate policy debates, treaties, subsidies, mandates, all sorts of things, you know, we still largely live in a world that’s powered by fossil fuel.

Buck: And beyond that, I would I wonder on that statistic you said going from, you know, what was 88 to 80%, the absolute amount of energy that it’s coming from, from fossil fuels, etc., is probably gone up.

Alex: Right. Yeah. So the market has grown. So yeah, obviously the we’re consuming more fossil fuels, even though that percentage has come down.

Buck: So I guess I guess one of the questions I have is multiple countries, including the US, claim they want to go to green. What the issue? Why isn’t what’s slowing the process down?

Alex: Well, it’s a good question. Yeah. So the answer is probably twofold why we’re not going into this like green revolution. The first is that it’s incredibly costly, despite everything that’s been made about how much renewable energy has come down in price in recent years. The fact of the matter is, you know, wind and solar energy are still very costly.

And the reason for that is that when you take into account the costs, the resources impose on the entire electrical grid, the entire system, because they’re not dispatchable. They end up actually increasing electricity prices. And that’s because you end up having to pay not just for the wind and solar resources, but then also the natural gas plants and nuclear plants that have to back them up when when those resources aren’t available. So when the sun is shining or the wind is blowing, you know, we demand electricity 24 seven. So you can’t just have a system where you only have those resources. So you end up paying for almost double the double the the system.

Buck: Well, let me ask you this. In terms of I mean, just looking at this again on more of a global basis, how does a policy, whatever policies we have right now in terms of, you know, green energy and that kind of thing, how does it differ from like China, for example?

Alex: Yeah, So I’m not an expert on vaccines, energy policy. But you know, what I can say is that there’s similarities and there’s some differences. So in 2020, China’s president Xi Jinping said that his country would his goal would be to further carbon emissions to reach their highest point before 2030, and then they reach carbon neutrality by 2016. The country’s new coal fired generating capacity, however, represents about six times the amount of total coal fired capacity added over the past five years of the rest of the world.

So it’s sort of like they’re saying that they’re going to set these goals and but what they’re actually doing is adding a ton of coal fired power plants. So I guess what I would say about China is that like a lot of other countries, their government has set very lofty decarbonization goals, pretty far out in the future. But their actions seem to point in a different direction. As you know, actually, at a it was over 100 gigawatts of coal fired capacity. So how does China’s green policy differ from the US? I would say, you know, basically it appears that they are saying that they’re going to do these things, but they’re not actually stupid enough to pursue them. They’re still relying on fossil fuel energy.

Buck: Yeah. So what I’m getting from you is essentially that okay? Yeah. This the green stuff? It sounds good in theory, but right now, I mean, what drives ultimately all of this is what it costs. And if it was truly cheaper, we’d probably be going in that direction. But it’s not. Is that fair?

Alex: Yeah, I think that’s fair. You know, obviously, there’s a lot of subsidies and mandates that sort of drive the renewable energy market. There’s no doubt that the cost of onshore wind and solar energy have come down a lot since the investment tax credit for solar and the production tax credit for wind were put in place in 1992. But those tax credits have been extended 13 times since then and they keep getting extended, even though these industries claim that they can be competitive without them. But whenever those those tax credits come up for review, you know, obviously those industries are kind of there behind the scenes saying, no, we need to keep these in place. 

Buck: Well, and it’s tricky, too, because you know it in reality, it doesn’t necessarily seem to make a whole lot of sense economically right now. But then even today or I don’t know if it’s today, but recently the EPA story is breaking about combustion engine emissions. It sounds like basically the government’s trying to and gas cars via regulation. So can you talk a little bit about that because that sounds like it’s relatively new news and I’m sure you’re all over it.

Alex: Yeah. So I don’t have the complete details of exactly what the EPA released earlier this week. I know some of my colleagues here at ICR have been working on it and we have a few blog posts on it. So I would encourage your listeners to go to our website and check it out. What I would say is that it’s obvious that what the administration wants to do is encourage people to buy electric vehicles and that changes to the tailpipe emissions rule are just one small piece of what they’re trying to do There. I think when you look at sort of some of the surveys that have come out recently about how consumers feel about electric vehicles and I’m hesitant to say that, you know, we’re definitely moving in this really quick transition to electric vehicles. Gallup had a report that came out this week that shows that only 12% of Americans are seriously considering buying electric vehicle.

On the other hand, 43% said they might consider buying one sometime in the future, but 41% unequivocally said they’re not interested in electric vehicles. So it’s probably not great news to Ford, who recently lost, you know, $3 billion in their EV sales this year. And, you know, most of the reports that I’ve seen, it’s still people citing the high costs for electric vehicles and then the problems with the lack of charging infrastructure as been the main concerns there. And I think that sort of makes a lot of sense. I think the average cost of electric vehicle, the upfront costs, is like over 65 or $66,000 right now. So I want to be clear, You know, I’m not against electric vehicles per say. I just don’t think the government should be handing out subsidies to people who want to buy them.

The majority of electric vehicle owners are high earners. In a lot of cases, it’s their second or third car. So I’m opposed to the government handing out subsidies to people who are wealthy and for things that are basically kind of choice for the rich. But so if you want an electric vehicle, you’re free to buy one. But I think the government’s probably making a mistake here trying to encourage everyone in that market very quickly.

Buck: So, yeah, I think yeah, it’s a it’s a complicated thing. I mean, I think also because I mean, I, I certainly no expert on this, but you’ve been talking about like a lot of these electrical vehicles, the the amount of the amount of fossil fuel energy that goes into producing them is significant. So it seems like, okay, well, then what exactly are you subsidizing?

Alex: Right. Yeah. So, I mean, when you think about electric vehicles, you know how green they actually are. You have to take into account, you know, exactly where the grid that it’s being charged off of, you know, what sort of resources are being used to power that grid. So it’s being powered by coal, energy, not so green. And, you know, there’s obviously some issues environmentally with the way with what gets put into the batteries. Obviously, it’s a lot of lithium mining. A lot of this goes on in countries that don’t have the greatest environmental records, especially China. So I think people are becoming a little bit more skeptical of, well, really just how green actually are these things like renewable energy and then electric vehicles. At the end of the day. And I think that skepticism is warranted.

Buck: I’m curious how some of the public oil companies like Exxon, BP, how are they responding to some of the pressures? You know, obviously, they’ve outperformed most asset classes over the last two years. Are you seeing anything? I think towards pushing towards any sort of green initiatives on on their end?

Alex: Well, so obviously, some of the European companies have sort of adopted more of a green energy posture, thinking BP and Shell have moved more in that direction. I think Exxon and Chevron and some of these companies haven’t been quite as eager to do that. You know, I think the energy companies are in a very tough position where they’re responsible for producing energy, for for basically our entire economy.

And they’ve sort of been put in this position where I don’t want to say everyone should be necessarily grateful for that. But obviously there’s this cultural movement that, you know, really is trying to demonize these companies in ways that doesn’t completely appreciate exactly, you know, the extent to which, you know, the products that they produce obviously greatly increase their standard of living, not just in terms of energy and electricity and things, but obviously, you know, all of our plastic products are petroleum based.

Natural gas is used as a feedstock to create fertilizer. So, you know, their products have impact on our food supply goal is used to create concrete. So, you know, really every part of our economy is touched by the products that these companies make and produce. So there definitely in a tough position where they’re being demonized. But really, you know, our high standards of living, the products that they produce, you know, we’re are really responsible for how well, you know, human beings, especially in the United States, live.

Buck: I mean, that’s that’s that’s the irony of it. All right. Is that I mean, the oil and gas industry, as much as they’re demonized now, I mean, we really owe modern civilization to to that. You never had the industrial revolution. You and had any any number of things happening without this kind of energy driving the whole thing in. Okay. So, you know, we talk about like the US and China, but there’s the rest of the world, too. I mean, and as the rest of the world, is there really I mean, the Middle East, etc., is there any push for them to to go green or are they just like, okay, you guys do what you want to do. We’re going to you know, we’ve got oil and gas here and we’re doing just fine.

Alex: Well, I think what you see with a lot of governments is they make these commitments that are very far off in the future, and especially in democracies where, you know, people aren’t in power for, you know, very necessarily for very long. They’re able to commit to things that are far off in the future. And then, you know, they won’t be around necessarily when the bill comes due. So it’s been pretty common for governments sort of all over the world to sort of make big commitments towards towards, you know, going green and committing to renewable energy and electric vehicles and these things. But to the extent they’re actually willing to do that, it’s kind of up in the air. I think if you look at Europe right now, they’re very far along actually in the process.

They’ve made these commitments and then actually have pursued them. And you’re seeing right now with the energy crisis in Europe, which there’s sort of a narrative out there that this whole thing has been caused by the war in Ukraine that’s obviously exacerbated the the energy problems in Europe. But those problems were starting well before the war happened. And the energy crisis is due to the policy decisions that have been made there. Most notably, they’ve retired a lot of coal and nuclear generation in in Germany especially. But a lot of countries have been retiring their sort of baseload energy plants and replacing it with renewable energy sources. And that’s for the reasons that I sort of explained earlier. That’s playing a big role in the huge, basically cost of living crisis that you’re seeing in Europe right now.

Buck: I’m curious what you think drives government policy policymakers towards renewables specific as opposed to, you know, a broader perspective like oil, wind, nuclear, as you mentioned. I mean, what why? Why just renewables? Why is there a focus on that?

Alex: Well, I think if you look at the actual like energy policy space, there are subsidies for really just about every source. So everything gets subsidized and everything gets regulated. So it all really doesn’t kind of make sense, but there’s no doubt that renewable energy sources receive the lion’s share of subsidies and mandates and things here in the US.

Why they specifically choose renewable energy, I don’t know. It’s been sort of a common theme for people to sort of, I guess, fantasize about a transition away from fossil fuels for a very long time. And I have a book on my desk right now that’s that was published in the 1970s that was trying to project the future of energy and everything.

And even back then, you know, they were saying, well, it’s obvious that solar energy, these renewable sources are the future and it’s only a matter of time to make this happen. So why they’re specifically fixated on those sources? I actually couldn’t tell you. But it’s it’s definitely interesting and sort of at odds for what is in the best interests of of people and people standard of living.

Buck: Has been you mentioned specifically about nuclear about, you know, Germany closing plants and and all that. There seems to be a little bit of a renewed interest, though, right, in nuclear aggressive or can you talk a little bit about that? Because I know I mean, this is it’s probably I mean, is is scary is nuclear is too. I think a lot of people it’s probably the most cleanest and most efficient way of getting energy. So what kind of movement are we seeing on that? Yeah.

Alex: So there’s definitely been a shift in policy circles towards a new emphasis on nuclear energy. There are problems with nuclear, though. They have very high upfront costs. So nuclear is very expensive. The degree to which that is that regulation is responsible for that is probably playing it’s probably playing a big role there. So, you know, nuclear is a great technology.

It doesn’t produce carbon, very minimal environmental impacts and things. But there’s sort of this problem where technologies that are born in sort of government captivity, like nuclear was through the obviously sort of the atomic bomb program and stuff. And technologies are sort of born under control of government. It’s very difficult for people in those industries and obviously the policymakers that sort of surround it to take a step back and say, you know, the government really needs to take a step back and then take a hands off role with this technology.

So, you know, I’m certainly in favor of basically decriminalizing nuclear and trying to move barriers to nuclear out of the way. I am a little pessimistic, though, because I think there’s sort of a culture within that industry that has sort of always been comfortable being a part of government, you know, playing along with the the agencies that regulate them. So it’s going to be very difficult for nuclear energy advocates to sort of decouple that that relationship. But, you know, I would support or support efforts to do that. And there is certainly a movement amongst policymakers to try to make that happen.

Buck: One of the things I think is a challenge even in the US, I mean, regardless of where you are on this, whether you’re really want to pushing for green or you’re not, is that, you know, from administration to administration, they’re going to have very different policies on this. So the Biden administration might have, you know, strong push towards renewables and green energy.

And then the next thing you know, you have a Republican administration that comes in who really has no interest in this. And so it makes it very I think it makes it very challenging when there’s not a consensus amongst politicians and amongst even people in the country about which way, which way to move.

Alex: Yeah, definitely. You know, I think in general with energy policy discussions, I think there’s a cultural problem where everyone is looking towards Washington, DC for, you know, how are we going to drive innovation, how are we going to change these industries and things? I think that’s really unhealthy because I don’t think politicians and policy makers necessarily have the best incentives to be able to identify, you know, what the future of technology is going to be.

And they definitely don’t have the knowledge or incentives to sort of guide that technology along. That’s what the private sector is so good at doing. So, you know, I personally would really like to see a shift away from energy policy discussions being about what type of energy are we going to support, you know, who are we going to subsidize, who are we going to regulate?

And a shift back to a culture of sort of free enterprise that says, no, we’re going to eliminate barriers to enter energy markets, we’re going to let everyone compete and we’re going to see what customers and consumers prefer, whether it be in terms of where they get their energy from or what type of vehicles they want to buy.

And I think that the business community really needs to play a role in making that shift from not looking towards Washington to tell them what sort of products to make, but to really rediscover, I guess, sort of the culture of free enterprise that has made America great and has really driven innovation and the sort of things that we’re looking for, for the future of energy.

Buck: What is the in your opinion? I mean, you’re kind of you’re obviously knee deep in this stuff every day. What do you think’s going to happen over the next decade? Do you think? I mean, I’m not asking to look at a crystal ball, but I mean, obviously you have got some data. You see trends. Do you see much changing over the next decade?

Alex: Yeah. So if you try to project forward a little bit, if you look at the CIA’s energy outlook for this year, for 2023, now they project that in 2025 oil and natural gas and coal are still going to make up the majority of US energy consumption in 2050.

Buck: 2050? 2050. Okay. Yeah.

Alex: Yeah. And they expect that number to be around like 65%. So coming down, their projections have historically been pretty good. Sometimes they make mistakes. So despite what people are saying, you know, this overnight energy transformation, even the government agencies are saying, you know, this isn’t going to happen overnight. In 2050, 65% of our energy consumption is still going to come from oil, coal and natural gas.

So, you know what’s going to happen in the next maybe ten years? You know, I think people are, one, waking up to the fact that, you know, government isn’t very good at driving innovation, that we’re spending tons of money subsidizing huge companies that, quite frankly, don’t deserve to be subsidized in the name of trying to drive innovation, trying to drive change and progress in the energy sector.

And I think people are going to become a little bit disillusioned, a little bit burnt out with the idea of government playing the lead role in all this. And hopefully people will sort of wake up to that and say, no, we need to get back to a world where companies are focused on providing things for the consumer and what consumers want. And in a competitive marketplace face that sort of driving the innovation rather than looking to Washington, D.C. to do it.

Buck: Good stuff, Alex. Very interesting. Where can we learn more about what you’re doing.

Alex: So you can find my work and my colleagues work at Institute for Energy Research Story. We’re a free market. Think tank based in Washington, D.C. here, and we have a blog where we publish one or two articles every single day, usually just daily news stories about energy. We have a newsletter called In the Pipeline, which is sort of an energy news roundup, and then we have a couple of podcasts as well as a podcast called Plugged In, where I talk to politicians, policymakers, journalists, people from the industry. And you can find all that work at Institute for Energy Research dot org.

Buck: Fantastic. Thanks, Alex, for being on well from your podcast.

Alex: Thank you so much for having me. It’s been fun.

Buck: We’ll be right back.