A couple of weeks ago, I was a guest at Northwestern for an energy and entrepreneurship course. The main question that we discussed was where do we see energy markets in 2020? It’s dangerous to speculate in energy, but here are my thoughts in four graphs:
1. Energy Transitions
Energy is a big, physical problem — it’s about math and physics — you’re not going to “Whats App” the energy market. Thus, energy transitions happen over large periods of time — it’s hard to turn the ship. But there are long-term trends and transitions, and they typically are towards cheaper and denser fuels. The large-scale trends seemingly evident now are that solar and natural gas are on their way up, and coal, nuclear, and petroleum are on the their way down. I think these trends will continue, at least in the US: we’re not going to build any more coal or nuclear power plants, and methane and renewables are growing fast.
To even begin to predict the future of energy, of course it’s important to understand the current and past dominant fuel source — in our case, that’s petroleum. If you had to guess what the price of oil would be in 2020, what would you say? Above $80? Above $120? Or even higher? The majority of the class thought it would be over $120. The day I was there, oil for delivery in December 2020 settled at $77.72. This tells you what the market thinks. As Ahmed Zaki Yamani, the Sauidi Oil Minister, said, “The Stone Age came to an end not for a lack of stones, and the oil age will end, but not for a lack of oil.” So it is a demand issue — fewer miles driven, fewer drivers licenses, and greater fuel efficiency will mean less demand for oil. Oil may not be $77 in 2020, but it’s going to be lower than people think—let’s say under $100.
It’s important to remember that $5 methane (natural gas) is the equivalent of a $29 barrel of oil. Methane is cheap, seemingly abundant, and the least CO2-intensive of all fossil fuels. Methane combusts cleanly while diesel produces SOx, NOx, and particulate matter. Just looking at the price disparity and the change in reserves, I think there is a real chance that you see methane pass petroleum in that first graph by 2020.
Solar is growing exponentially, and when things grow exponentially, we tend to under-predict the consequences, and I think this is true of solar. Gains in semiconductor technology continue to accelerate and have led to a Moore’s Law of solar as it relates to efficiency. It was originally assumed that band gaps would create a physical limit to efficiency. However, physicists have figured out how to stack cells to create complimentary band gaps or multi-junction cells with theoretical efficiencies north of 40%. Photosynthesis is just 11%. Think about that — we’re 4x better than photosynthesis, a process that took millions of years to hone. Solar cells with 50% theoretical efficiency by 2020 seems realistic.
Energy transitions are large-scale and slow-moving, to be sure, but they are real. So again, although it is difficult to try to predict energy markets, I think the four trends above are accurate and here to stay, at least for the foreseeable future.