Massive fossil fuel subsides must stop.

Returning to one of my favourite subjects – those disgraceful subsidies for fossil fuels. One of the features of having teenage kids is you often hear “whatever”, or more recently “no one asked” as conversation stoppers. In the same way, having reasonable conversations about fuel subsidies is often met with the “concerned citizen” equivalent – one such appeared on a previous blog post that laboriously (I thought) tried to show that it wasn’t a simple case of “Fossil-Fuels Bad (and subsidised), Renewables good (and yes subsidised, but that’s OK)”. Despite this I got the “whatever” style comment of how “we should just stop subsidising fossil fuels”.

So here I go again.  The infamous $5.2 Trillion headline has been widely debunked so will be ignored hereafter and whilst there are some places that have direct subsidies for production, in the vast majority these are “implied” subsides whereby the specific and very high petroleum taxes simply generate some rebates, and were discussed at length in the previous post.

However, there clearly are countries who subsidise the cost of (notably) petroleum products to their citizens. The headline number is often mentioned “$426bn” or “$372bn” or some such. A far cry from the debunked $5.2 Trillion, but still a big number, but you have to dig pretty hard to see who these bad actors are. The platitudinous headline is “fossil fuels subsides to consumers must stop” or in more thoughtful works, “should be swapped to subsidies for renewables”. Let’s just ignore that petroleum product molecules and renewable electrons are not always interchangeable, especially around transport.

Globally there are still more subsidies directed toward fossil fuel consumers and producers than toward renewable energy: currently around USD 372 billion is spent on producer and consumer fossil fuel subsidies, overshadowing the USD 100 billion in support to renewable energy (Best et al., 2015; International Energy Agency [IEA], 2018b; Merrill et al., 2017).

Note in the 33 pages of this report there is no definition of these subsidies other than the above – it is just gospel that they exist and must be swapped out. When digging, I found the cited IEA reference has no mention of subsidies at all in it, the Merrill paper is better, and references price-gap analysis.

Spoiler Alert: the countries that subsidise their citizens for say gasoline are clearly globally significant, get them to change and all will be well in the world…

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How to explain Embodied Energy: introducing the “WACE”: Weighted Average Cost of Energy

By conventional logic, low oil and gas prices suppress demand for low-carbon alternatives, and conversely high oil and gas prices spur substitution.  There is some debate that the current low oil prices will slow the transition to low carbon energies.  I argue below that we should not be worried about low fossil-fuel prices undermining the energy-transition, but rather the complete opposite.  High fossil-fuel prices will be a bigger problem.

In corporate finance the concept of the Weighted Average Cost of Capital  (“WACC”) is well known.  This is the total cost of how the company funds itself through equity and debt.  Simply put, the cost of funding a corporate entity is the percentage of equity times by the cost of equity and the percentage of debt times by the cost of that debt, thus:

  • WACC = (%E*costE) + (%D*costD)      where %E+%D=100%.

When thinking about the concept of embodied or embedded energy I have adopted and adapted the idea of the WACC to better explain the issues.  In this new model I call the Weighted Average Cost or Energy – I am trying to capture, albeit very simplistically, the idea that making wind-farms and solar panels requires a large energy input, and the cost of that energy input(“cRE”) is today dictated by the cost of fossil-fuel power (“cFF”).  This statement is true given that roughly 85% of the world’s primary energy comes from fossil fuels – so it stands to reason that this will underpin the cost base. Thus, the WACE can be expressed:

  • WACE = (85% * cFF) + (15% * cRE)

If you are constructing a renewable energy project today, the WACE for your project will be dominated by the 85%, that is by the cost of fossil-fuels.  This has important implications for the Energy Transition: if the cost of fossil fuels increase, the cost of renewable energy increases also.

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One black swan is unfortunate, two may be careless.

Summary: “Unprecedented” supply increase in the face of demand destruction. Fueling the fire.

About the publisher: Richard Norris is a leading business developer and advisor to energy investors, developers, bankers and the public sector.

Continue reading “One black swan is unfortunate, two may be careless.”

Nigeria to follow Angola off the production cliff?

Summary: Changes to fiscal terms and delays in licence renewals look likely to condemn Nigeria to declining production, following a path analogous to that of its regional challenger Angola.

About the publisher: Richard Norris is a leading business developer and advisor to energy investors, developers, bankers and the public sector.

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Snowflakes in Winter

I guess it is not unusual to find snowflakes in winter.

* Students demand declaration of climate emergency and divestment from fossil fuel companies;

* College suggests turning off heating as a direct measure to help.

* Students reply: “This is an inappropriate and flippant response by the bursar to what we were hoping would be a mature discussion. *It’s January and it would be borderline dangerous to switch off the central heating*”

* Me: LMAO Surely that is exactly the point (on a global scale)…. and yet the irony of the reply appears to be lost on even the brightest and best….

https://www.thetimes.co.uk/article/professor-at-st-johns-college-oxford-turns-oil-row-into-a-heated-debate-0zr2wpmb5

tag#oxford hashtag#energy hashtag#climate hashtag#energytransition hashtag#divestment hashtag#oil hashtag#oilandgas

Future Energy – technology will save us

Summary: With a focus on “Greener, Cleaner and Cheaper” energy, we are overlooking the possible negative consequences of cheap energy. More expensive energy can be seen as a big negative as it will slow economic growth, but cheaper energy could accelerate degradation of planetary resources. Damned if you do, damned if you don’t?

About the publisher: Richard Norris is a leading business developer and advisor to energy investors, developers, bankers and the public sector.

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What “Peak Demand”​ really looks like

Summary: Even in a “rapid transition” scenario the world will use over seven hundred billion barrels of oil in the next twenty years. This is more than 50% of the total oil produced since the inception of the industry in 1870. Since we have found and used most/all the cheap oil, inevitably the next 700 billion barrels will be more expensive. Peak Demand may be ahead, but “Peak Cheap Oil” is certainly behind us.

About the publisher: Richard Norris is a leading business developer and advisor to energy investors, developers, bankers and the public sector.

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The real fossil fuel subsidy – its not what you think.

A “$5.2 trillion subsidy for fossil fuels” scream the headlines, followed rapidly by the conclusion that the subsidy-free “real” price to consumers should be much higher. The logic being that this artificially low price drives consumer demand of fossil fuels and thereby acts as a barrier to entry of renewables. The figures bandied about are eye-watering: US$5.2 trillion is 6.5% of global GDP… a very big number indeed. And this is a very emotive subject. So before getting onto the *real* fossil fuel subsidy, let’s take a moment to consider what is meant by “subsidy”.

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