The percentage of oil that is consumed for electric power generation by itself is not sufficient to determine the impact of growth of solar generation on oil demand. This 5% just means that if **all power generation in the world** will be replaced by solar, demand for oil will decrease by 5%. This by itself shows that increase of solar generation has minor impact on oil demand.
The other statistic that need to be taken into account is the one that I mentioned in my original post: the percentage of electricity that is generated using oil, and it is rather low,
about 1% for US and about
5% world wide.
View attachment 109125
If only 5% of electricity generated world wide is produced using oil, the question is whether solar generation is more likely replace oil burning power plants or other power plants (coal, nuclear, natural gas or hydro). Using the same reference linked above, and digging further, about 23% of world wide oil based electricity production is concentrated in Middle East, and I doubt that they will rush replacing of oil based power generation given that they have existing oil based generation capacity and glut of oil to burn.
Another major user of oil in generating electricity is, as you mentioned, Japan. They are responsible for another approximately 11% of world wide oil based electricity production. I am not sure why you mentioned that solar is actively replacing oil based power plants in Japan, as intuitively, in light of the major disaster at Fukushima, it would be more logical for them to try to shut down nuclear plants before getting rid of the oil power plants.
So overall, I does not seem that increase in solar generation will have significant impact on oil demand.
In addition to all of the above, there is another major change that will significantly increase demand for electricity - mass adoption of the EV. So increase of electricity production from solar might not have major impact on shutting down existing power plants after all, because solar-generated electricity will be absorbed by the increased demand in electricity from the growing fleet of EVs. Perhaps you can update your modeling with this? :wink:
BTW, I am big fan of your modeling efforts and really appreciate the time you put in to share it with the TMC community.
Vlad, I think you are missing the point that natural gas competes with oil across the spectrum of petroleum products. The point of about oil used in power generation is that this is where oil is exposed to direct competition to solar and wind, but admittedly this is only about 4.5 mb/d of exoosure. But consider indirect competition via natural gas. As solar competes with natural gas it puts a cap on the price of gas. Consider that globally the unsubsized price of solar is dropping below $40/MWh and wind is even lower. Next consider that combined cycle gas plants require 8 MMBtu/MWh. Thus the all in cost of solar is at parity with just the fuel cost of gas at $5/MMBtu. So natural gas must remain well below $5 or else it will rapidly lose market share to solar and wind. Moreover as the price of solar declines 10% to 15% per year so does the price cap on natural gas.
Now why does it matter that the price is natural gas is being driven down? Because cheap natural gas is an alternative to oil in just about every petroleum product. For example, Friday the price of oil jumped 9% because the price of heating oil jumped up 10% due to winter storm Jonas. Well, natural gas is quite competitive with heating oil. As the price of gas continues to be held low a certain fraction of oil heaters are replaced each year with gas heaters. But let's consider other products. Propane competes with natural gas. Natural gas vehicles compete with diesel and gas vehicles. There are new gas to liquid technologies (GTL) that are able to produce gasoline, diesel, and jet fuel from natural gas. So if oil is priced at a certain premium to natural gas, these technologies become profitable and investors build GTL plants. Natural gas is a viable feed stock for the chemical industry. For example you can make high value plasticizers. Again as the price of natural gas declines relative to oil, substitutions are made. In principle, you can make tar from natural gas, but why would you want to? The substitutions happen first where they are most profitable. So in the long run, wind, solar and batteries push natural gas out of the electricity market. In turn, this natural gas displaces oil until prices reach equilibrium. We should keep in mind that the price of natural gas crashed from around $8 to $4 well before oil crashed from $80 to $40. In response, natural gas fell again from $4 to $2. These fuels are economically linked. Oil, gas and coal are all in a glut as is consistent with this theory of displacement.
Regarding EVs, they are definitely important long-term for for dislodging oil from a transportation niche market. But I figure that about 25 conventional private passenger vehicles have an oil demand of about of 1 b/d. So if you want to offset 1 mb/d with private passenger EVs, you need 25 million EVs. I don't see the annual production of EVS hitting that level until 2025 at the earliest. So by that time renewables are adding some 18 times as much generation capacity per year as required to power the incremental EV fleet. Also by 2025 non-hydro renewables have only offset about 25% of all fossil fuels. So renewables still have a lot of work to do replacing fossils, but EVs do not significantly slow this. In fact, EVS do facilitate offsetting transportation fuels, which may be a cheaper substition than others not yet exploited at that time.
And yes, if renewables also have to replace nuclear, this will slow progress displacing fossils. While I am not a fan of adding to the nuclear fleet, it does seem prudent to retain the existing fleet until fossils are removed from power generation. Germany and Japan has other ideas. Even so, solar and wind can certainly scale fast enough to handle nuclear as well. The 121GW of wind and solar added last year was enough to offset about 31 GW of nuclear, or about 11% of the 2410TWh of annual nuclear production. Given a 30% rate of scale up for renewables, adding nuclear to the hit list adds less than one year to the time it takes for renewables to replace fossils. So this really is not much of an obstacle to addressing climate change.
BTW, my objection to new neclear power plants is essentially that it is huge waste of money, IIRC about $120/MWh for a 40 year investment. With wind and solar already touching below $40/MWh, I just don't see it. The smarter climate change investment is simply more wind and solar.
So getting back to the question of renewables and oil demand, my view is that the abundance of cheap natural gas has already led to enough substitution of gas for oil that the price of oil was made vulnerable. This is forcing oil to a new lower equilibrium for oil. The cheaper natural gas is the more investment there will be in capacity to replace oil consumption with natural gas. Thus, oil too is in structural decline along with coal and natural gas. Going forward solar and wind continue to drive gas and coal out of power markets leaving more gas to compete with oil. The relative impact on coal, natural gas and oil depend on which substitution technologies of gas for coal or gas for oil are taking in the biggest investments and demand elasticities as prices fall. The infrastructure of fossil fuel markets is shifting to rationalize low natural gas prices. This infrastructure shift is a slow process, but it is enough to impact marginal demand and hence prices. While it is hard to see how demand for hundreds of products will shift as renewables are injected into the power markets, it is a bit easier to see the impact on prices. Coal trades at about the same cost per MMBtu as natural gas, while oil seems to want to be within 2 to 3 times the price of natural gas per MMBtu. Thus with hanging out around $2.1/MMBtu, oil wants to be in range of $24 to $36 per barrel. So the question becomes, can solar and wind scale fast enough to keep gas below $3/MMBtu? If this is so--and I believe it is--this keeps oil below $52/b. So from this vantage point, you can ask, if demand for oil caps out at about $50/b, how fast can the oil supply grow? This is not the question of how low can producers go on existing capacity, but the price of oil were understood to cap out at $50/b, how much new investment would this attract? This knocks out deep ocean and most tight oil, fracking. You're pretty much left with conventional oil only, and in that case we are already post peak conventional oil. So basically, production increases and the glut persists as long as non-conventional oil producers are willing to lose money doing so. I'm playing pretty loose with numbers here. We could tighten this up, but the basic conclusion. Oil is price bound wrt natural gas and natural gas is price bound wrt renewables. This price bounds are bounds on demand, and consumption falls off rapidly when those price bounds are exceeded. This is complementary route to my fossil offset analysis. I think that path is good for understanding the magnitude and pace of transition, but the price bound path is better for understanding why this offsets must propagate out to the oil market.
