The Case for Energy Optimism
I’ve been working on a few more involved projects but thought it would be good to put down my thoughts on recent energy developments.
Gas storage levels are high and continue to grind higher with gas prices now back to mid year lows and falling further. Expiry on the October TTF contract is going to be interesting - what happens if storage is at close to its limits as was the case for oil in April 2020? I do not expect this to quite trade at a negative price but a very mild weather forecast and high storage levels can lead to strange things happening.
The steepness in the curve arguably already constitutes “weird things” and we are likely to see more before we are done. Weather for Europe is forecast to be mild for the next few weeks so that is *interesting*.
Looking out beyond the next month or two demand response is really taking off now in Europe as outlined in this Politico piece. Some of my initial despair at Europe’s prospects earlier in the year centred around the lack of demand response which in turn appeared to be as much consumer and policy inertia as chip shortages for heat pumps and solar inverters which have only recently eased. No more - we are seeing vertical adoption of consumer technology to structurally reduce gas use and, combined with very strong messaging and incentives from governments it is now showing up in the data. There are a number of dashboards here but what is particularly encouraging is that households are now responding almost as well as industry in reducing demand. If this can continue along with the current weather forecast this winter does not look that bad and gas prices should move towards a stable level albeit materially higher than before the Ukraine invasion, likely around 100 euro for TTF. For markets and confidence though seeing that the “top is in” is very important - so long as businesses and consumers can get some confidence around that as the key driver of inflation in the EU a lot of good can flow from there.
For that reason I am sceptical of people calling for sustained energy inflation going forward. In Europe inflation dynamics are almost single factor at this time, and if that factor is being fixed then the prognostications of Russel Napier do not make much sense to me. Prices are set at the margin and if Europe’s power and heating markets are on a path to marginal pricing from a scarcity pricing regime then the price is going down from here - at least 50% lower for gas for example. There are no other major gas suppliers to cut short of a complete explosion in the Middle East and the great US LNG deluge begins in earnest shortly, as well as the tantalizing possibility that EDF in France might not be as much of a gong show going forward.
A certain kind of Cassandra - very Tooze and Polycrisis-thought adjacent - seems to think that the energy mess will towards some kind of parallel where all the problems of fossil capital will remain but with new commodities and the same extractive dynamics and conflicts. I’m sure nothing is going to change in commodities, and I do agree with Thea Riofrancos that financialized capital’s home is in commodities - just that I am yet to work out how this is bad or how we get around it. As someone said it better:
Where I wildly disagree with this line of thinking is in the orders of magnitude involved. Annual vehicle sales are 90 million, give or take. Assume 50kWh per battery, and around 850 grams of lithium carbonate per kWh. No recycling, no tech improvement, full market penetration, no savings from autonomous vehicles or the like and it is 3.8 million tonnes of lithium carbonate equivalent - market price assuming today’s lithium price of $60k works out to $230bn, or the dollar equivalent of 23 days of global oil consumption. Assume more normal lithium pricing of $20,000 and you get 8 days of current run rate oil consumption for a year’s worth of lithium vehicles at 100% market penetration. This is existential for commodity trading houses longer term: they can sell more lithium, copper and nickel but the core businesses they are in are big, lucrative and going to shrink and there is no certainty that lithium is not going to disappear into vertically integrated supply chains that do not need freewheeling intermediaries or “financialized capital”. I’ve always found the commentary around this deeply aestheticized and as far as I can tell “people with Bloombergs and lots of exotic passport stamps bad, people with lab coats good”. Even the most cursory analysis suggests the Bloomberg people lose on the transition. An extremely dull future awaits of energy flows being largely local or in grids where the best meteorologists and machine learning engineers rake the table. Most people at trading houses see this and they do not like it, happily they are making more than they ever had right now which puts these existential issues outside the next bonus cycle.
This math for lithium stands before we consider really disruptive things such as: maybe lithium isn’t it for grid storage, or even autos? This is the latest from the Sadoway lab - if we are going to use primarily sulphur and aluminium for batteries they will be laughably cheap. A tried and tested way to make money in materials science is to “do it better, with more available materials and less energy” - this is all three if commercialized. Over the last few years cobalt demand estimates have been crushed by developments in cathode chemistry due to cost and performance improvements in simpler chemistries - I am sceptical that this is the last time that today’s “unobtainium” becomes tomorrows chopped liver. Maybe new nuclear works, even if at low levels of total energy provided simply for stability and security reasons? Perhaps we can do a lot more pumped hydro than we thought? All the while the solar wafers get thinner and more efficient and use less materials…. the preponderance for everyone now calling for longer term structural energy inflation when papers like this are coming from Oxford which take account of these dynamics seems deeply unwise if you are doing anything but playing quarterly revisions.
When thinking about potential growth I often come back to a paper by Steven Keen and Philip Ayres on the role of energy in production. It is a neat little paper which introduces exergy - useful energy - into the production function.
It would be a radical departure from current practice to measure GDP in terms of exergy. But we believe that, not only is this redefinition consistent with acknowledging the crucial role of energy in production, it also provides a solid basis on which many of the criticisms of the concept and measurement of GDP could be addressed.
On this basis the EROEI (lifetime energy out for a technology vs energy to make it) of energy technologies is crucially important. I am working at a desk with a laptop that sips energy compared to desktops when I started working. Similarly, EROEI of renewable technologies now by many measures exceeds that of marginal fossil sources. Combine the learning curves of solar and compute and you can get the sort of results coming out of computational architecture to design “solar exoskeletons” where you can get embodied energy of built structures down 37-80% and operating energy demand down 24-48% versus standard methods today. People think you can’t throw GPUs at solving an energy shock but in the medium term you really can if those GPUs are used by civil and chemical engineers and not to mine shitcoins. Overwhelmingly people seem to have confused a shock with a change in trend at this time despite zero evidence that is the case aside from prices having gone up. Making a petrostate - one of the largest in the world - a pariah is consequential but if this shock ends in a mere two years there is a lot of optimism and hope to be drawn from that. Perhaps long before the last barrel of oil is refined and burnt the political leverage and power of these states may be in decline. There should be some kind of remapping of the psychological literature on mid-life crises to states - it seems to apply well to recent Saudi behavior, for example. It may be that the energy transition elicits increasingly unstable behaviour from those who are losing their leverage. That is a shame but just another reason to push harder towards a more stable and secure world.