A Convenient Lie: Why Fossil Fuel Supply Matters for the Climate

Over the past week, virtually every article on the President’s trip to Alaska to highlight the impacts of climate change, has in the next breath mentioned the President’s approval of Shell’s arctic drilling. The allegation made vocally by the environmental community is that these two things are deeply contradictory, and blatantly hypocritical.

It’s an allegation that is sticking because it happens to be true, and as more and more Americans come to terms with the reality that climate change will force us to leave at least three quarters of all existing proven reserves in the ground, the Administration is on increasingly thin ice (sorry).

This is not a new discussion. Since the Keystone XL campaign began to pick up steam and support in the summer of 2011, Very Serious People in Washington energy & climate circles have dismissed the focus on supply side infrastructure as “futile”, “pointless” and “lacks empirical foundation”.

It hasn’t mattered that where Keystone is concerned those arguments have been fully rebutted in exhaustively sourced documents. It hasn’t mattered that every Econ 101 class in the world teaches that supply influences demand and vice versa. The argument has persisted.

With Shell in the Arctic, the scale and volume of the blowback from the environmental community has clearly caught the Administration flat footed. When confronted, they usually first mumble something about highest standards (which is completely irrelevant to the climate argument) but if pressed, the Administration and its defenders invoke a sober, scolding tone to explain:

1) We need oil and we will need oil for a long time. While we’re all concerned about climate, we’re still going to need oil and gas in the future and we might as well make as much of it as possible right here at home.

2) U.S. oil production is essentially irrelevant for climate, because “more oil production in one place generally means less oil production elsewhere – that’s how markets and prices work”.

Together, these two arguments form what we can think of as the Convenient Lie that we can be serious about fighting climate change and also approve virtually all new fossil fuel infrastructure in the U.S. It’s the Convenient Lie that keeps us from dealing with the Inconvenient Truth.

This is indeed a very convenient argument for politicians who are getting increasingly stuck between the rock of increasing public concern about climate change and the hard place of oil industry political power.

That doesn’t make it right though. To start with, its quite rich to hear defenders of Arctic drilling talk about making as much oil as possible “here at home”, while exporting record amounts of crude and products and considering actually lifting the crude export ban. Ending dependence on “foreign” oil polls well, but everyone serious on all sides knows the oil market is global, and that anyone who is selling energy independence from more drilling is really just spinning. The only way to reduce dependence on foreign oil is to reduce dependence on oil – period.

That said, there are several key points that argue strongly that focusing on the supply side is an integral part of any climate strategy.

1) In general, supply side campaigns build political power. It is undeniable that supply-side campaign work has galvanized a growing climate justice movement in ways demand-side policy advocacy work has not been able to do. There is value in an approach that is able to energize activists, as laid out well by David Roberts. Power flows from money and people, and we all know which we have and which the industry has. We need more people.

We know that if the world is to be successful in keeping carbon in the ground we will have to essentially phase down oil production over the next several decades to climate safe levels. This is an inconvenient truth for an industry that makes the vast majority of its profits from crude oil production. This truth is arguably what has driven decades old denial campaigns from Big Oil. They can’t adapt to that scientific reality – they have to deny it. They are fighting – we have to too.

The supply-side campaigns against pipelines and other infrastructure help to identify, display, symbolize and strengthen a movement calling for action on climate change to both stop the expansion of fossil fuel supplies as well as work towards solutions to address demand for such fuels.

Supply side campaigns connect people with places, and with a struggle that many people see in other ways between corporate power and people power. People seem to understand quite clearly that Congress is broken and corrupt – so it is not a major surprise that people gravitate towards campaigns that do not revolve around legislative theories of change.

2) The fundamental analytical reason to focus on supply side expansion is the danger of carbon lock-in. The vast majority of capital expenditure in the oil industry is up front, in the exploration and development phase. This is particularly true of expensive high carbon resources such as the tar sands, Arctic oil, and deepwater offshore.

The oil industry, and particularly the North American oil industry, has been undergoing an exploration boom since 2011. The chart below, illustrates the huge growth in daily global supply capacity that the industry is currently building out.

Source

While it may be that low oil prices slow this trend somewhat, the overall direction still remains problematic. Once offshore oil platforms, pipelines and other major supply infrastructure is put in place, the marginal cost of producing each barrel of oil drops to the operating cost – which is typically quite cheap. Once these initial investments are made, an over-production of oil beyond climate limits becomes much more likely, because the producers will seek to recoup their massive investments by producing as much as possible, even if their profit levels are less than expected, or indeed, simply to limit their losses.

Furthermore, since new supplies would tend to decrease prices and increase global consumption, this over-investment could therefore lead to a net increase in global CO₂ emissions.

In short, almost the only time it is possible to stop oil projects is before they have started producing. This is the area that current supply side campaigns are effective in – by stopping output before it starts, rather than by reducing existing production.

In the case of the tar sands campaign, the objective has always been to limit production to levels that are at or below levels consistent with the IEA’s 450ppm scenario. That level is roughly 3 mbpd of tar sands production, as shown in the chart below.

Source

In fact, tar sands production continues to hold at levels which are much closer to 2mbpd, which is attributable both to low oil prices and even more importantly to a lack of infrastructure available for export (i.e. – not enough pipeline space). Guess why industry can’t build more pipelines? Short answer? Activism works.

3) Carbon lock in is in fact baked into the models. Claims that the U.S. will “need” this oil are based on flawed models that assume climate disaster.

Read this.

If you don’t have time, this graph, from our recent report laying out the climate case against Arctic drilling, really says it all:

Basically, EIA’s reference case scenario – their baseline – is a 5 degree future – aka climate disaster. The Obama Administration, deep in its approvals for Arctic drilling, points to this scenario to justify the supposed “need” for Arctic oil. So, pretty much anytime you hear someone say we will “need” Arctic (or almost any new) oil, insert the words “in a nightmarish future” at the end of the phrase. That should help clarify the issue.

Will we need some oil even in a safe climate future in 2040? Yes, of course – some, although less is definitely better. Will we need that expensive, high carbon, risky oil? Almost certainly not. If you are aiming for a safe climate future you will have to leave oil in the ground – and therefore starting with the Arctic (and tar sands) makes the most sense, as was argued in Nature last year.

As a side note – it is a concerning thing that our nation’s preeminent energy forecaster, the Energy Information Administration, a) is so often totally wrong and b) does not actually produce a 450ppm or 2 degree Celsius “safe climate” forecast. This is the stated national and international goal of our climate policy. Seems like we should at least produce scenarios and models that help us to achieve that goal, and that we could then measure the impact of any particular policy or project against the future we actually want. Call me crazy.

4) Finally, supply side critics do not take into account current oil market conditions. A favorite canard of the anti supply side campaign crowd is that supply side “leakage” means that supply side campaigns net no or few emissions reductions. The essential concept of supply side leakage is that a reduction in supply in one field or country is met with an increase in supply somewhere else. As one energy analyst recently put it: “[M]ore oil production in one place generally means less oil production elsewhere – that’s how markets and prices work”.

This argument – while it has been conventional wisdom for most of the last decade – would seem to have been well and truly rebutted over the last year by facts – i.e. the refusal of Saudi Arabia to restrict production to moderate prices. In a world where major oil producers are seemingly more concerned about preserving market share instead of price, this just doesn’t work anymore, if it ever did. At the very least, the last year makes it clear that supply reduction by other producers can’t be counted on to balance production, or reduce emissions.

Regardless of whether or not OPEC and Saudi Arabia decide to change policies and reduce production (and at some point, they might), it is also worth asking: is it a good idea to leave climate policy in the U.S. to OPEC? The only way for the U.S. to be sure that emissions are reduced is to both reduce our own consumption, and to produce less fossil fuels ourselves. This would seem to be blindingly obvious, but somehow, buried under a blizzard of industry funded studies, it has become less so.

Supply side leakage was never an immutable law of economics, and in fact that is not how “markets and prices work” in the global oil market. Supply side leakage was a result of market manipulation by a cartel that still controls enough oil production to significantly manipulate the market whenever it chooses.   OPEC no longer perceives it in their interests to pursue that strategy, and this change exposes this very convenient lie behind increased US oil production.

The shift in the oil markets over the last year means that the idea that increased U.S. oil production is not in conflict with climate protection is not much more than wishful thinking. And that means that activists, advocates, and policy makers who are concerned about climate need to pay close attention to all the new sources of carbon and pieces of fossil fuel producing infrastructure being brought online in North America today. Ten or twenty or thirty years from now, they will still be transporting, producing, and emitting, and they will be much, much harder to stop.

 

 

 

NOTE: This post was edited on September 7th, when the last chart was updated to show Global Oil Supply in the EIA Reference Case vs. IEA’s 450 scenario. Originally the chart showed the difference in emissions between the two scenarios.  Both charts appear in the Arctic report, as mentioned.