The intellectual bankruptcy of supply-side environmentalism

Is it time to switch to demand-side environmentalism, focus more on developing technologies to displace oil?

Thanks, TransCanada. A 5,000 barrel leak of crude oil in South Dakota has the usual outrage machine – the Bill McKibbens and Greenpeaces of the world – demanding the project be scrapped. Which raises an interesting question: has pipeline opposition ever stopped one drop of oil from reaching market? If the answer to that question is, no, then maybe we’re doing environmentalism all wrong?

Former Alberta Oil magazine editor Max Fawcett has been criticizing supply-side environmentalism for years. “The idea that you can meaningfully reduce global emissions by targeting a single source of supply is both self-evidently flawed and intellectually bankrupt,” he wrote in 2015. “And yet, in the absence of a meaningful counter-argument, supply-side environmentalism has generated a much wider following than it otherwise would have.” [Full disclosure: Fawcett is a friend of mine, edited many of my freelance pieces for Alberta Oil, and has contracted with me for several writing projects over the past few years]

Supply-side environmentalism certainly has a much wider following than it should have.

So, what is supply-side environmentalism?

A few years ago, the Washington Post ran a story entitled, “Why activists are pushing a ‘supply side’ strategy for fighting climate change,” that included an interview with Michael Brune, executive director of the Sierra Club.

“Whether it’s with Keystone XL, or an expansion of drilling in the Arctic, or leasing on public lands, we need to see some examples of the fact that the president [Barack Obama] understands that energy supply and demand are linked, and we have to start to develop a supply-side strategy to address climate change,” Brune was quoted as saying.

President Obama was a pretty bright guy and I think he understood the basic economic principle that supply and demand are linked.

Despite his famous remark about leaving some of the oil in the ground, Obama’s actions undercut Brune’s other assertion in the Post article: “We know that we have made genuine progress in cutting carbon from cars and trucks and increasingly from the electric sector. And all of that is important, it’s necessary – and it won’t get the job done unless we begin to curtail development of fossil fuels…”

Curtail development? Not under Obama’s “all of the above” energy strategy.

His election in 2008 coincided with the start of the American “shale revolution” that saw oil production rise from 5MM b/d to 9MM b/d in just eight years. In its 2014 report, the Washington, DC-based Association of Oil Pipe Lines reported that in the past five years, total American liquids pipeline mileage increased by 9.3 per cent (16,431 miles). The next year it rose a stunning 9.1 per cent as $100 oil stimulated investment in what appeared to be ever expanding American supply.

But the growth during Obama’s two terms in office were just the warm up. In its recently released World Energy Outlook 2017, the International Energy Agency forecasts that “the United States is set to become the undisputed global oil and gas leader…By the mid-2020s, the United States is projected to become the world’s largest LNG exporter and a net oil exporter by the end of that decade.”

The IEA predicts that American oil supply will top out at 15MM b/d by 2040, beating even the Saudis and Russians.

That is an astonishing change in the structure of the global energy supply.

What is driving that change?

Demand, naturally, in the form of Asian economic growth. The IEA thinks global energy demand will increase by 30 per cent between now and 2040, with China and India accounting for 80 per cent of that growth.

Depending upon the forecasting agency, worldwide oil consumption will rise from its current 96MM b/d to 105MM b/d or as high as 115MM b/d.

During that time the global auto fleet is expected to double from one billion to two billion, most of them gasoline-powered vehicles. Aviation, freight trucking, and other forms of transportation are also expected to grow significantly.

Will there be enough supply to satisfy the world’s thirst for oil?

You bet. In addition to the American’s boost in production, there are still plenty of producing countries – including Saudi Arabia, which has the second biggest reserves on the planet – with room to grow and plans to do so.

The Alberta oil sands is forecast to increase supply by 1.3MM b/d by 2030, according to the Canadian Association of Petroleum Producers. If Canadian companies are successful in driving down costs, as they have committed to, the oil sands will presumably continue expanding after 2030.

To sum up, global oil demand over the next few decades will grow rapidly and producing nations have more than enough reserves and production capacity to meet that demand.

Given the scenario above, what are the chances that stopping a pipeline project or two from Canada to American markets will prevent one drop of oil from reaching market?

When pipeline capacity has been constrained, as it is now, Canadian producers have resorted to crude oil by rail to get their product to market. While rail is more expensive, there is plenty of spare capacity with the decline of coal demand, and given the oil sands’ requirement to keep plant running no matter what the price (unlike conventional or shale production), producers will use rail if they have no other option.

The reason Fawcett calls supply-side environmentalism a fallacy is because clearly the only way to reduce the consumption of oil is to reduce demand, i.e. to provide another fuel to power transportation, which uses over 65 per cent of global supply.

The only fuel with even a remote chance of displacing oil is electricity in the form of electric vehicles.

The IEA takes EVs into accounts in its forecasts, and even the more aggressive case with 100 million adopted by 2040 reduces oi demand by only 1.7MM b/d.

Not even a dent in consumption.

There is only one scenario that might have a chance of dampening the forecasts of the IEA and other agencies: banning the sale of new internal combustion engine vehicles, as a number of countries have said they would do or are expected to do. That list includes France, Germany, the UK, and Norway.

But the big player in that scenario is China, which hasn’t announced a future ban, but has hinted at one.

The Chinese motivation would be strategic, part of its already stated desire to one day dominate the emerging EV manufacturing sector. China currently buys about 27 million cars a year and that number if expected to boom in the future.

What might be the effect on oil demand if 500 million EVs are on the road by 2040? What about a million? What about all two billion?

One of those larger numbers might have a much bigger impact than the IEA predicts. And there are forecasters, like Stanford’s Tony Seba or Prof. Ray Wills in Australia, who describe business models or policy options that might see EV adoption rocket up the S-curve.

But huge technology disruptions are uncommon. Slow and steady change while the new technology progresses up the leg of the adoption S-curve, followed by more rapid adoption after it arrives at the knee of the curve, is the rule. As I’ve argued in earlier columns, thus far EVs look like any other new technology, nothing out of the ordinary that would suggest a more rapid diffusion in the near to medium-term.

Given the broad picture of global oil demand and supply sketched above, the likelihood of a pipeline being stopped by protests and eco-activist campaigns seems slim, let alone affecting the global supply of crude oil.

I’ve made this argument before, but it bears repeating: pipeline and oil opponents would get better results by abandoning their campaigns, starting up green tech venture capital funds, and raising billions of dollars for EV battery research. Cheap batteries with thousands of kilometres of range would kill the oil business far faster than supply-side environmentalism.

Maybe that kind of “demand-side environmentalism” is what the world really needs.