Oil prices remain the most important determinant of where the energy markets are heading.
The impact of oil prices on industry and trade in oil-importing countries has decreased, partly due to the increase in renewable energies.
1. History of oil markets
The price of oil has fluctuated greatly over the last 100 years. This was due to various factors that contributed to price volatility. Oil supply and demand have recently fluctuated very strongly. Other factors that have played a role in this have been geopolitical tensions and the introduction of new fuel production technologies.
The greater the uncertainty in the oil supply, the more volatile the oil price became. From time to time the price has taken on epic proportions.
The general tenor of the argument revolves around the oil production maximum on the one hand and new radical technologies on the other. The new technologies will continue to shape the energy markets for many years to come. This second thought often includes a scenario in which oil supply slowly loses importance for global energy trade because we have found better alternatives. But how realistic it is that we will find such alternatives in time. Will we find these alternatives when we need them?
The counter-argument of the peak oil supporters is often that we are under time pressure to find new energy fuels. The time horizon for the search for these new fuels is limited. If we do not find alternatives, our industrial production will be severely restricted.
2. Current developments on the oil markets
So after more than a century of oil’s dominance, we actually find ourselves in a situation where oil is competing with other energy sources for the number one position in the energy markets. We are facing a change in the energy industry. However, the rise of renewable energies is only a small part of the entire history of the energy industry.
In general, renewable energy sources have made a sustainable contribution to our overall energy security. Renewable energies have changed the fundamental structure of the energy markets. They have diminished the relative power that oil producers had over their competitors. As renewable energy sources approached grid parity, they began to compete increasingly with hydrocarbons. Renewable energies offer oil importers an alternative energy supply.
Renewable energies are particularly attractive for industrialized nations that have only limited hydrocarbon reserves of their own. We can almost always fall back on renewable energies, whereas fossil fuels often have to be imported. This means that the industrial nations are only able to cover their own industrial and commercial needs to a limited extent. This makes them indeed geopolitically vulnerable. Petroleum importers are exposed to price fluctuations in hydrocarbon fuels such as crude oil and natural gas.
In the early years, renewable energy sources seemed to be more of an add-on to our existing fuel supply. They have since become critical to maintain the stability of our electricity grids. They also affect overall network stability for the transmission of electricity through high voltage power lines. One could make the argument that renewable energies will become more attractive as time goes by. Over time, renewable energies will have reached economy of scale.
Manufacturing processes have been optimized for renewable energy production which has slashed costs per unit. This resulted in lower electricity prices for the population. Once elecrricity prices for renewable energy sources have become competitive with fossil fuels, investors will likely shift to renewables instead of furthering the growth of hydrocarbon sources. That point where renewable compete effectively with fossil fuels without the inclusion of subsidies has not been reached yet.
One we reach the point where electricity prices without subsidies for renewables are lower than fossil fuels, we will likely see a shift in the energy markets. We will see more investment in power-to-x technologies. This will further reduce societies dependance on oil importing countries. This will also contribute to the energy security of oil-importing countries.
However, this should be seen in the light of current macroeconomic developments. The counter-argument is provided by the peak oil enthusiasts. Their argument is that renewable energies depend on a whole range of inputs, including rare earths and metals. Machines need to be maintained. Construction costs must also be taken into account when considering renewable energy.
4. What role does the energy yield play in all this?
Instead of paying attention to cost factors, the technical focus of peak oil supporters is more on the energy yield, the EROI (energy-return-on-energy-invested). In this category, renewable energy sources perform significantly worse, with the sole exception of hydropower. There are some exceptions such as solar energy. Photovoltaics is certainly as useful in equatorial latitudes as geothermal energy in countries with significant geothermal energy potential. This is particularly relevant for countries located on the Ring of Fire and on the shores of the Western Pacific.
Offshore wind energy has great potential along the northeast coast of the United States, the North Sea and in the southern part of Argentina and Patagonia. But all in all, the energy output of renewable energies is not significant enough to get us where we want to go in terms of our energy goals. The goal should be to replace fossil fuels with renewable energies over time, because fossil fuel reserves are diminishing. The main question is how we can store the energy, and batteries are not the ideal solution.
The main objective of this exercise is to find a source of energy, preferably a renewable energy source, capable of providing energy to modern civilization. If all these factors are taken into account, the growth potential for renewable energy sources is limited. This is especially true if we look at it from the point of view of energy yield in comparison to hydrocarbons.
5. When will renewable energies replace fossil fuels?
The main problem with renewable energies is that even when they reach grid parity, renewable energies are often only available regionally. If renewable energy sources are available, they are often located far away from the industrial centers of industry and trade. But this is exactly where they are needed most.
The transmission of electricity over such long distances is a rather energy-intensive process. This activity requires a lot of effort, is burdensome and capital-intensive. The key, however, is to transport the electricity from the place where it is generated to where it is needed.
Also, the various renewable energy sources are not all located in the same area or in the same vicinity. However, this also increases the complexity. The more parts an energy system comprises, the more vulnerable it becomes. In other words, the larger the system is, the more work is needed to maintain the system to make it work. In the end, the costs add up, so it is no longer worth it. Maintaining an electricity system and network infrastructure over such long distances is often a balancing act. Why is this the case? Because it requires work.
The point is that oil has an ace up its sleeve. Oil scores especially in areas where wind and sun do not flourish as well. This is one of the reasons why oil prices remained relatively high until recently. And falling oil prices have a lot to do with the economic downturn we are going through.
This raises the question why oil is so successful. Oil began its triumphal march more than 100 years ago. That was at a time when coal was the predominant fuel source for transportation, along with horsepower. In the early days of automobile production there was healthy competition between electric vehicles and diesel engines.
After all, the end customer has decided that oil should become the fuel that will drive our economy. Oil had the advantage that it could be used almost everywhere and oil could be stored almost everywhere. Electricity decreases over time and slowly loses power in car batteries.