The Energy Revolution Will Be Optimized
Once upon a time, a new country called the United States of America burned a lot of wood without much to show for it.
Quite a lot has changed since that chop-baby-chop era: In 2016, America consumed almost 400 times as much energy as it did in 1776, according to Department of Energy estimates, and you'd scarcely find a twig in the mix now:
That chart is the story of America's economic development. In the late 1800s, wood finally gave way to coal and the ages of steam and electricity. Then oil shot up as Americans took to the roads, followed by its close companion, natural gas. The atomic age brought nuclear power, which really got a leg up amid the energy crises of the 1970s. More recently, we have witnessed the shale-gas boom (and parallel coal bust) as well as wind and solar power edging onto the scene.
For all the subplots, though, the story is defined by one constant and one twist: relentless technological change and the sudden absence of growth, respectively.
The most obvious elements on that chart are fossil fuels -- petroleum, coal and natural gas -- which provide a little less than 81 percent of U.S. energy consumption, the lowest share since 1902 but still dominant.
But before even getting into the mix, consider just how much energy the U.S. uses and, more important, how this has changed over time.
Here are the data presented in a slightly different way, showing the average annual change in energy consumption each decade (and the six-year period ending in 2016):
Those negative bars on the right are striking. The first decade of the 21st century was also the first in America's history when energy consumption fell overall (the peak of 100 quadrillion BTUs was in 2007). Granted, there were two recessions in that period, including a global financial crisis. On the other hand, take a look at the hardly-trouble-free 1920s and 1930s: no decline there.
Given that consumption has stayed down over the past six years, there's clearly more to this than just gross domestic product.
Energy efficiency is a big factor. Each U.S. household consumes, on average, 9 percent less electricity now than in 2007, according to the Energy Information Administration. And as Nathaniel Bullard of Bloomberg New Energy Finance has pointed out, while the computing power of data centers has spiraled up in the past decade, their collective electricity consumption has climbed by just 7.5 percent. Over the same period, meanwhile, the average fuel economy of new vehicles has risen by roughly 25 percent, according to the University of Michigan's Transportation Research Institute.
In its long-term forecasts released in January, the EIA projected overall U.S. energy consumption to essentially stay flat through 2030. And "flat" is a four-letter word in any industry -- especially one in which growth has been reliable for two centuries.
The predictable response is a more intense battle for market share; if the pie isn't getting bigger, you take someone else's slice. There's always been competition between different sources of energy, but elbows have suddenly gotten much sharper. This chart shows the average annual change in different types of energy being consumed for each decade roughly since the U.S. began:
The collapse in coal demand, largely at the hands of ascendant natural gas, in that bottom bar, stands out. The sudden flatlining of oil -- the last year it showed a notable gain was 2004 -- is also eye-catching.
Meanwhile, non-hydro renewable power, chiefly wind and solar, has sprung up from nowhere. In 2016, it accounted for the single largest slice of demand growth, almost as big as that for oil and gas combined.
We don't usually think of energy as a single market because each source tends to specialize in one or two subsegments: coal for electricity, natural gas for heating or electricity, oil for transportation and chemicals.
There are real barriers separating different parts of the energy market; you wouldn't run your truck on coal, for instance (remind me not to ask for a ride if you do).
But those barriers have never been airtight. Looking back at the long waves of change in America's energy mix, they have involved both competition between fuels and the creation of brand-new markets. For example, coal displaced biomass in fireplaces but also underpinned the creation of a new market: railroads. Petroleum, meanwhile, shoved whale oil aside in lighting; was then trumped itself by the electric light bulb; and then found its true calling with the advent of the automobile.
Today, those barriers look ever less solid.
One force eroding them is the competitive pressure stoked by that dramatic slowdown in overall consumption. Witness the dissension within the fossil fuels industry as oil majors have built big gas businesses, then turned their lobbying powers against coal, that fuel's main rival. Miners are hitting back by touting coal as a reliable source of fuel to produce all the energy that will be needed to charge up electric vehicles -- which, incidentally, won't require any oil.
The other pressure concerns technology. The obvious example here is fully or partly electrified vehicles encroaching on what has long seemed to be the most impregnable of energy markets: petroleum-fueled road transportation. But pressure also comes in the form of more efficient hardware and sophisticated software curbing energy demand in general -- plus, of course, renewable sources that continue to fall in price and compete against coal, gas and uranium in producing power.
This new paradigm of flatter domestic demand, and greater competition, explains a lot.
There is the intense push to enable greater exports of U.S. coal, oil and gas in search of growth elsewhere. The Donald Trump administration's desire for "energy dominance" should be viewed in this context. With the Organization for Economic Cooperation and Development's energy demand now in flat or negative territory -- and likely to stay that way -- growth rests entirely on emerging markets such as China and India.
Meanwhile, with oil's long-term demand being called into question, the majors are diversifying ever more into natural gas and touting what used to be their Cinderella downstream businesses, such as refining and gas stations.
On the power side, incumbent utilities are either consolidating or retreating to the relative safety of their regulated businesses as wholesale markets for electricity have become ultra-competitive. Calls to subsidize nuclear power -- or, on the risible grounds of national security, coal -- are a corollary to this.
Some utilities are also investing heavily in renewable energy and gas-fired power or pipelines. And as electric vehicles edge further into the market for transportation, you can bet utilities will seek growth in that market -- at oil's expense.
As I wrote here about electric vehicles, clues to systemic transitions are to be found in marginal change, not just totals. The first chart at the top of this column tells an epic history; the one showing the rate of change offers glimpses of the future. Capital likes dominance, but it also has an enduring affinity for growth.
And in considering the broadly defined energy market, it is not just the fact that growth in the U.S. and other major developed economies has largely gone AWOL that's important. It is also the simultaneous erosion of barriers between energy's submarkets.
For example, you may think electric vehicles will take off in 2020, 2030 or 2040. Whatever the case, the bigger point concerns the inexorable slide toward greater fuel-on-fuel rivalry in another major end-market as electrification and digitization take on the dominant mechanical model. How far and how quickly that door opens is of course up for debate, but the fact that the door is open isn't.
The primary job of the 20th-century oil major or utility was to raise the capital required to build enormous energy production and distribution networks to feed industrialization. The onus was on providing ever more supply, since growth in demand was a given.
The latter no longer holds true. Energy efficiency matters more now, especially as concerns about pollution, including carbon emissions, have intensified. The job of the 21st-century energy provider, therefore, will be less and less about sheer quantity and more about both quality and smart consumption. Think software-as-a-service rather than just getting Windows 95 installed on as many desktops as possible.
This, more than anything, is why attempts to turn back the clock by, for example, paying direct subsidies for using Appalachian coal would be ultimately futile gestures. Indeed, they would represent a waste of capital and effort that could be used more productively in helping those affected to deal with the impact of relentless changes in technology and consumption patterns. Some 241 years on, this is no longer about chop-baby-chop, dig-baby-dig or even drill-baby-drill. Optimize, baby, optimize.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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Brooke Sample at firstname.lastname@example.org