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Homeowners’ interest in energy efficiency measures waxes and wanes. During the 1970s, when oil prices repeatedly spiked upwards, everyone wanted to save energy. However, in the 1980s, when oil prices collapsed, Americans forgot about saving energy, and most of us reverted to our usual wasteful habits.
By 2008, oil prices were high again, and green builders were receiving lots of phone calls from homeowners who wanted lower energy bills. But between June 2014 and now, oil prices have collapsed again, tumbling from $115 to between $37 and $40 a barrel. This raises several questions:
- What’s going on with energy prices?
- What does the future hold?
- What do low energy prices mean for green builders?
New Year’s Day is a good time to make predictions for the year ahead. I’ll attempt to answer the questions I’ve posed with a list of ten points.
Before going through these ten points, though, it’s worth emphasizing the fact that the world oil market is fairly responsive to changes in supply and demand. When the demand for oil exceeds the supply, prices rise. When the supply of oil exceeds the demand, prices fall.
Right now, oil producers are pumping lots of oil out of the ground — at a time when efficiency improvements (for example, improvements in vehicle fuel efficiency) have slowed the rate at which demand is increasing. The predictable result: prices have fallen.
1. Interest in green building is down because energy is cheap
Let’s face it: most Americans don’t care too much about saving energy when energy is affordable. Compared to your cell phone bill, Internet bill, and cable TV bill, your electricity bill may seem reasonable. So why worry about it?
When energy prices drop, the payback period for energy-efficiency measures increases. Some homeowners are happy to spend $6,000 on attic insulation if the payback period for the investment is 10 years. Once the payback period stretches to 20 years, though, the investment seems less wise.
2. Fracking and new drilling technologies have dramatically increased U.S. oil and natural gas production
This is old news, but it bears repeating. The “peak oil” concerns of the late 1990s have faded due to the surprising increase in U.S. oil and gas production in the first decade of this century.
In an article published in January 2015, Fortune magazine noted, “The rise of hydraulic fracking from Montana to Texas to Pennsylvania has lifted U.S. oil production mightily, from 5.6 million barrels a day in 2010, to a current rate of 9.3 million.”
U.S. oil and gas production. [Image credit: Wall Street Journal.]
Of course, the U.S. wells that caused this dramatic increase in oil and gas production were drilled when energy prices were high. The resulting glut of oil and natural gas has contributed to the collapse of oil prices, and the collapse in oil prices calls into question whether oil and gas companies can justify further drilling. Finally, there’s another wrinkle to consider: wells drilled using the new technology have a shorter productive life than wells drilled with older methods.
The final result of the interaction between all of these factors is far from clear: the U.S. may end up with a surplus of oil and gas for decades, or the current glut may be an anomaly.
3. The oil sands business in Alberta is in trouble
Oil producers in Alberta, Canada, have made huge investments in facilities that extract oil from bitumen-laced sand. But extracting oil from tar sands is expensive. The process requires lots of money, lots of energy, and lots of water. The environmental damage from the process — including problems related to deforestation, water pollution, CO2 emissions, and the creation of tailing ponds — is alarming.
It’s so expensive to produce a barrel of oil from the tar sands of Alberta that this type of production isn’t profitable unless oil prices stay high. Since world oil prices have collapsed, the oil sands business is in deep trouble — and that’s good news for the environment.
On August 24, 2105, the Toronto Star reported, “Analyst Menno Hulshof said more than three-quarters of Canada’s daily output of 2.2 million barrels of crude from the oil sands is being produced at a loss at current prices. He said thermal oil in which steam is pumped underground to heat reservoirs so bitumen can flow to the surface is losing money on every barrel produced.”
A September 2015 report from the Business News Network explained that the tar sands industry is in decline, but that the full collapse of the industry is going to take several years. The story noted, “Mining for bitumen in the oil sands of northern Alberta is among the most expensive ways on earth to produce crude, but in the Fall 2015 Oil & Gas Overview report published by Peters & Company this week, miners believe there is ‘no oil price low enough’ for them to significantly scale back on production. That is largely because of the significant costs involved in shutting down such massive industrial processes and then attempting to restart them when prices rebound. As a result, Peters expects oil sands production to continue rising steadily until 2020 regardless of what happens with the price of oil. After 2020 is when oil sands production will stall without a significant price rebound.”
[Image credit: New York Times.]
4. The U.S. coal industry is in steep decline
U.S. coal companies are beginning to go bankrupt. While this news is distressing to workers in the coal industry, it amounts to more good news for the environment.
In a story published on December 3, 2015, the New York Times reported that “a wave of a half-dozen bankruptcies has hit major coal companies. … Hal Harvey, chief executive of Energy Innovation, a policy research group, said that even though countries will continue to burn a lot of coal, the broader trend of coal’s decline is clear. ‘It’s not whether, but when,’ he said.”
5. Dropping oil prices aren’t killing the PV and wind industries
The price of photovoltaic (PV) modules is dropping so fast that even low oil and gas prices aren’t enough to put much of a dent in the PV revolution. This flies in the face of conventional wisdom — it used to be said that “low oil prices are bad for renewable energy” — but it’s true.
In windy regions of the world, electricity produced by wind turbines is now less expensive than electricity produced by fossil fuel-burning plants — and the per-kW capital cost to build the wind turbines is much less that the per-kW cost to build a coal plant or a nuclear power plant. In many parts of the world, wind and PV electricity are now cost-competitive with electricity generated by conventional power plants, and these renewable energy sources are setting (more or less) a ceiling for electricity prices — a ceiling that is surprisingly low. These facts can be used to argue that we’re more likely to face a cheap energy future than an expensive energy future.
As GBA has reported, homeowners who invest in PV often discover that their investment yields a better return than corporate bonds or the stock market. All across the planet, the installed cost of PV is still dropping. In Australia, large residential PV systems are being installed for $1 per watt. Moreover, the U.S. Congress recently reauthorized the 30% tax credit for residential solar equipment — a move that will give a further push in the U.S. to the apparently unstoppable PV juggernaut.
The PV revolution has barely begun. When this snowball starts rolling downhill, get ready for an avalanche.
6. As battery prices drop, grid defection opportunities increase
The Achilles’ heel of off-grid PV systems is the high price of batteries. Most GBA readers know, however, that Tesla is now building a mega-factory in Nevada to produce lithium-ion batteries; once this factory begins production, battery prices are scheduled to drop. The longer the factory operates, the lower the expected price for the batteries produced there.
Meanwhile, competing battery manufacturers are predicting that they’ll be able to match Tesla’s prices.
There aren’t any technical hurdles preventing homeowners from generating their own electricity and storing the energy in batteries for use at night and on cloudy days. The only hurdle is economic. In areas where electricity costs are high and PV costs are low, it already makes sense for some utility customers to cut the cord and go off-grid — a move known as “grid defection.”
PV prices and battery prices are both trending downward. These trends show every sign of continuing for a few more years, so grid defection is likely to increase.
7. Electric utilities are facing major disruption
Electric utilities in the U.S. can be divided roughly into two groups. In the first group are solar-hostile utilities like We Energies in Wisconsin; these utilities are facing the future by kicking and screaming.
In the second group are solar-friendly utilities like Green Mountain Power in Vermont. These utilities realize that “distributed generation” is an inevitable part of the future grid. (Distributed generation is a term that describes small systems that generate electricity near where the electricity is used.) The most disruptive element of the distributed generation revolution is PV; electric utilities that embrace PV are likely to be more nimble than the “kicking and screaming” group.
Electric utilities that have invested in large, expensive fossil-fuel-fired generating plants or nuclear plants will probably have to write down some of their assets over the coming years, because the PV and battery revolution will make many of these plants unnecessary and therefore obsolete. This process will be painful for most utilities, many of which are likely to declare bankruptcy.
8. The Paris agreement shows that the international political mood has shifted
I’m a cynic. Here’s a cynic’s report of what happened at the Paris climate change talks: not much. All of the announced carbon-reduction targets were non-binding. And even if every country manages to meet the non-binding targets, the efforts will be too little, too late.
I’m also imbued with hope. (As philosophers of hope note, hopeful people look for results they cannot see, in the teeth of evidence undermining that hope. Hope is not logical.) Here’s a hopeful person’s report of what happened in Paris: The international political mood has irrevocably shifted. Unlike Republican politicians in the U.S., the leaders of most of the world’s nations now (a) understand that the planet’s climate is changing, (b) recognize that CO2 emissions due to human activities are responsible for most of this climate change, and (c) accept the necessity of implementing policies that will reduce or reverse the rate of climate change.
Once this political shift has happened, there’s no going back to the status quo ante — the bad old days when denial ruled.
9. Saudi Arabia may be beginning to see the writing on the wall
Right now, Saudi Arabia is pumping lots of oil and selling the oil on the international market. Fellow OPEC members wish that Saudi Arabia would reduce oil production — a move that might help raise the price of oil. Saudi Arabia has refused. So what’s going on?
We don’t know; all we can do is speculate. In Saudi Arabia, the cost of oil production is quite low — about $9.90 per barrel. In contrast, the cost of production is about $17.20 per barrel in Russia and $36.20 per barrel in the U.S. Because of these disparities in production costs, low oil prices hurt Russia and the U.S. much more than they hurt Saudi Arabia.
Saudi Arabia’s decision to keep pumping large quantities of oil has led analysts to propose at least two conspiracy theories. Theory #1 is that Saudi Arabia is conspiring with the U.S. to cripple the economies of two rival oil producers: Russia and Iran. (Saudi Arabia has accumulated huge foreign currency reserves, and is thus better able to ride out several years of low oil prices than either Russia or Iran, both of which are relatively cash-poor.) Russia provides economic and military support to the governments of Iran and Syria — governments which are at political odds with the U.S. and Saudi Arabia.
Theory #2 is a variation on Theory #1. It holds that Saudi Arabia is hoping to cripple the oil industries of three rival countries: Russia, Iran, and the U.S. According to this theory, the U.S. is a victim rather than a co-conspirator.
I’m not going to comment on the two theories that I just summarized, in part because I’m not a fan of conspiracy theories. I’m more interested in a different explanation of what’s going on. It’s possible that Saudi Arabia’s leaders realize that we are in the last decades of the fossil fuel era. They probably see a variety of factors at play, including increasing international concern about climate change, the rapid development of electric vehicles, and dropping prices for electricity generated by PV modules and wind turbines. Saudi leaders may have concluded that they might as well sell as much oil as they can right now — because in a few decades, they may not be able to sell much oil at all.
An article published in the International Business Times on May 22, 2015 reported: “Saudi Arabia, the desert kingdom which was built on exporting crude oil, is predicting that fossil fuels will become a thing of the past by 2050. And the world’s largest crude exporter believes that in the not-too-distant future it will be exporting solar energy instead. … Speaking at a climate change conference in Paris on 21 May , oil minister Ali Al-Naimi said: ‘In Saudi Arabia we recognize that eventually, one of these days, we’re not going to need fossil fuels. I don’t know when — 2040, 2050 or thereafter. So we have embarked on a program to develop solar energy.’ Al-Naimi added that ‘hopefully, one of these days, instead of exporting fossil fuels, we will be exporting gigawatts of electric power.’ He noted that oil prices as low as $30 or $40 a barrel wouldn’t make solar power uneconomic.”
10. Green builders need to focus on issues other than low energy bills
Most homeowners aren’t willing to spend much money to lower their energy bills. Green builders can respond to homeowner indifference about energy costs two ways: either indignantly or pragmatically. The indignant path might include exasperated outbursts — “think about our dying planet,” perhaps — along with attempts to educate homeowners about their ethical responsibility to use as little energy as possible.
The pragmatic path, on the other hand, requires green builders to accept homeowner indifference about energy costs as a fact.
I would advise green builders that it’s probably time to stop selling your work on the basis of low energy bills. According to most marketing experts, the new recommended mantra is “a green home is more comfortable than a conventional home.”
Some green builders use another marketing ploy: bragging that green homes are healthy homes. If you’re tempted to follow this path, be careful. There is very little evidence that occupants of green homes are healthier than occupants of conventional homes. Without any data to support your claims, it’s better to steer clear of any discussions about occupant health.
If you’re really, really lucky, you’ll get a few phone calls from clients who say, “I’m interested in lowering my carbon footprint.” Those clients are rare — but they are a lot of fun to work with.