World-Gen Nov/Dec 2018

WORLD-GENERATION NOVEMBER/DECEMBER 2018 16 PERSPECTIVE RENEWABLES SLAY INFLATION BY JOHN MORAN Have Renewable Energy and fracking put the inflation genie in the bottle for the foreseeable future? There is an argument to be made that structural changes in the energy market brought about by the precipitous cost declines in wind, solar and natural gas have put an upper ceiling on the price of oil. Since energy and oil are embedded in the cost of almost everything it would follow that the risk of inflation rising due to energy prices, as we saw in the 1970’s, is no longer probable. The marginal cost of electricity is being set by the price of natural gas. Due to the proliferation of fracking in the United States, and now spreading throughout the world, the price of natural gas has plummeted: The price of oil has also dropped significantly and has been trad- ing between $40 and $60/barrel for the last two years: The Oil Markets have been fundamentally changed by the resur- gence of US Oil Production associated with fracking. The United States has become the swing producer for oil and is no longer at the mercy of OPEC. Furthermore, Oil production in the United States associated with fracking, as opposed to traditional drilling, is much easier to “turn on and off” as prices change. The slump in prices below $30 in 2015 caused some of the wells to be “out of the money” so they were simply capped and turned off. While the price was low the industry figured out how to drive production up, costs down and brought the breakeven price for these wells lower and lower. Now that the price has risen back over $50 a barrel, the spigots are being turned back on. A lot of these unconventional oil plays are now profitable at well below $40/bbl. The United States is becoming Energy Independent: As Domestic Supply has increased dramatically over the last 5 years, demand for oil as a ground transportation fuel is set to pla- teau if not decrease. Corporate Average Fuel Economy Standards (CAFE) are set to rise from 27 miles per gallon in 2011 to over 50 miles per gallon in 2025. So even if the price of oil doubles by 2025, the price consumers paying at the pump per mile driven will remain essentially the same. Increasing supply, flattening to decreasing demand and the emergence of electric cars all point to limits to how far the price of oil can increase. While internal com- bustion engines gain in efficiency, Electric Vehicles have started to take off. Sales in the US jumped 37% in 2016 to 159,139 vehicles: Of course air travel continues to increase and we will rely on oil for the foreseeable future but the increases in fuel efficiency stan- dards, the electrification of transportation, the blending of 10% eth- anol into most gasoline sold in the United States, the sharing econ- omy (think Uber and Zipcar) leading to less car ownership by Millennials, and the imminent arrival of autonomous vehicles all point to a weakening of demand for oil in the United States. All of these factors should put a damper on price increases for oil. The price of electricity in the United States adjusted for inflation has fallen 4% since 2007 and the proportion generated by Renewables and Natural Gas continues to increase at Coal’s expense: Renewables Slay Inflation  Have Renewable Energy and fracking put the inflation genie in the bottle for the foreseeable future?  There is an argument to be made that structural changes in the energy market brought about by the  precipitous cost declines in wind, solar and natural gas have put an upper ceiling on the pric of oil.  Since energy and oil are embedded in the cost of almost everything it would follow that the risk of  inflation rising due to energy prices, as we saw in the 1970’s, is no longer probable. The marginal cost of  electricity is being set by the price of natural gas. Due to the proliferation of fracking in t e United  States, and now spre ding throughout the world, the price of natural gas has plummeted:  Source:  180 160 140 120 100 80 60 40 20 0 VEHICLES SOLD (THOUSANDS) 2011 2012 2013 2014 2015 2016 TOTAL U.S. ELECTRIC VEHICLE SALES 2008 2010 2012 2014 2016 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 $140 $120 $100 $80 $60 $40 $16 $14 $12 $10 $8 $6 $4 $2 U.S. CRUDE OIL PRODUCTION BBL/D/1K 2008 2010 2012 2014 2016 10000 8000 6000 4000 2000