1. Will we ever stop using fossil fuels? Thomas R. Covert Assistant Professor University of Chicago Booth School of Business Thomas.Covert@ChicagoBooth.edu

2. Environmental costs of fossil fuel combustion Longstanding and worldwide interest in reducing the environmental harms of fossil fuel combustion During the 1970s, 1980s: PM, SO 2, NO x −i.e., costs associated with asthma, acid rain and smog −solved by new technology and fuel switching  scrubbers, improved combustion technology  substitution of coal and oil for natural gas, nuclear −economically rationalized by local and federal regulation  market-based and command-and-control −huge progress in developed world, less in developing world

5. Environmental costs of fossil fuel combustion Longstanding and worldwide interest in reducing the environmental harms of fossil fuel combustion Since the 1990s: CO 2 and its effect on our climate −again, role for new technology and fuel switching  CCS, energy efficiency, batteries  substitution of coal for natural gas, nuclear, PV and wind −Most scientists, engineers, and many regulators, entrepreneurs, and executives believe there will also need to be a role for a significant reduction in consumption Not yet economically rationalized by regulation, in most areas

6. Harder problem this time PM, SO 2, NO x : problem in the quality of combustion CO 2 : problem in the quantity of combustion PM, SO 2, NO x : “local” pollutants −easier to find political support for regulation, possible for one community to “solve” its own problem CO 2 : global pollutant −impossible for one community to affect its own climate by reducing its own CO 2 emissions Slow and limited progress in “global” CO 2 regulations −widespread subsidies for alternatives (PV, wind, EE, biofuels)

7. Could the market solve climate change for us? Without global coordination, could market forces reduce fossil fuel combustion enough? Will we “run out” of supply of or demand for fossil fuels? If so, will it happen “fast enough” to make regulation unnecessary?

8. Running out of supply

9. Fossil fuels are, by definition, in finite supply −eventually we will run out of them Capacity to produce at a given price must eventually diminish −supply curve must eventually shift upwards and backwards Without changes in demand, supply reduction leads to: −higher prices −lower quantities −(eventually) When is eventually? Are we close?

10. Running out of demand

11. Technology of all kinds, including alternatives to fossil fuel production and/or consumption, tends to get better over time −energy efficiency, batteries, wind, PV −All getting cheaper to produce, with improved quality Improving alternatives to fossil fuels reduces demand for them Without changes in supply, demand reduction leads to: −lower prices −lower quantities Are alternatives improving fast enough?

12. Goals of the paper Will we run out of supply? −examine historical record of fossil fuel reserves, exploration and development risk, technology −look for signs that progress is decelerating −are we near a version of Hubbert’s peak? Will we run out of demand? −examine historical record of alternative power generation technology and electric vehicle battery development −look for signs that progress is accelerating more in the paper, available on my website

13. Running out of supply

14. Are investments in future supply slowing down? Focus on reserve data from the BP Statistical Review, 2015 What are reserves? −“quantities that geological and engineering information indicates with reasonable certainty can be recovered in the future from known reservoirs under existing economic and operating conditions” Reserves change for three reasons 1.new reserves are discovered and proved 2.old reserves are produced and consumed 3.old reserves become uneconomic (prices fall or costs rise)

16. What else is in the reserve data? Steady aggregate growth masks volatility within countries −US oil reserves fell, 3% in 1986, 6% in 1998 (oil crashes) −Australian natural gas grew 30% in 1994, fell 5% in 2002 Data quality concerns: do the numbers always go up? −in average year, 25% of countries report reserve decreases −countries with NOCs do report decreases (Iran, SA, Russia) In developed world, securities regulators have strict reporting requirements for proved reserves −OECD average growth rates of 2.7% (oil) and 1.0% (gas)

18. Why is future supply consistently growing? Two possible ways this could happen 1.We are getting better at finding/developing new deposits −pushing the boundaries of “geological information” and “known reservoirs” 2.We are getting better at developing technology to commercialize deposits that were previously uneconomic −pushing the boundaries of “engineering information”

20. Improving ability to find new resources Exploratory drilling success went from 20% to 60% in 50 years −seismic technology (2D->3D, onshore->offshore) −offshore drilling (shallow in the 50s, deep water in the 80s) −horizontal drilling and hydraulic fracturing today Development drilling success went from 80% to 90% −also important: 10-20 times as many development wells!

21. Development of formerly “impossible” resources Two major events in reserve growth 1.Canadian tar sands in the late 1990s  triples Canadian oil reserve estimates  10% increase in world oil reserves from this alone 2.North American shale gas and oil (2005-present)  50% increase in oil reserves, 60% increase in gas  ROW only grows 16% in the same time Both resources were long known to be large, but previously thought to be technologically/economically infeasible

22. Future development of “impossible” resources Oil shale (not to be confused with shale oil) −similar to tar sands technology, but more viscous −USGS estimates 2.8 trillion bbls of oil shale resources  compare to 4-6 trillion bbls of “conventional” oil resources Methane hydrates −solid mixture of natural gas and water, trapped in high pressure, low temperature environments, beneath seafloors −USGS estimates 10-100 trillion cubic feet of natural gas resources in methane hydrates  compare to 28-410 trillion cubic feet of “conventional” natural gas resources

24. Future development of “impossible” resources No current commercial methane hydrate or oil shale operations −No commercial tar sands in the early 1990s −No commercial shale gas/oil in the early 2000s Ongoing hydrates research effort dating back to mid-1990s −“gas poor”: Japan, South Korea, China, India −“gas rich”: US, Canada Shale just getting started outside North America…

26. Running out of demand

27. Could we run out of demand for coal? Primary use: electricity generation Alternatives to coal in electricity generation −Gas, nuclear, renewables + storage, energy efficiency Already happening in the US −Coal delivery costs alone ≈ current price of natural gas  (i.e., PRB->Illinois vs. Chicago city-gate natural gas price) −Coal was 80% of US generating capacity retirements in 2015 −Share of power generated fell from 50% in 2005 to 33% now Outside of the US, coal still growing (e.g., China, India)

28. Could we run out of demand for natural gas? Primary uses: electricity generation, heating Alternatives: PV, wind, nuclear To replace demand in generation, PV/wind need to have cheaper “all in” costs −Levelized cost of energy = price per kwH that a plant must earn in order to be NPV positive  Marginal cost advantages vs fixed cost disadvantages −Marginal costs for renewables are already lower (they are 0) −Fixed costs are still higher Must PV/wind “beat” gas everywhere in the US?

30. Could we run out of demand for oil? Primary uses: transportation Potential alternatives: biofuels, EVs Biofuels comparison is easy: are biofuel prices lower than gasoline and/or diesel? EV comparison is harder for same reason as LCOE comparison −Fixed costs of EVs are higher (batteries still expensive) −Variable costs of EVs are lower (electricity cheaper than gas)