Peak Oil Is Near. The Energy Transition Won’t Be Easy.

The good news is that technological progress has delivered cleaner renewable alternatives that are now making a real difference to the world’s energy needs. The bad news is that economists have offered nothing nearly as promising to quickly accelerate the transition without stranding an industry that generally makes up nearly 4% percent of the global economy without counting all of the folks involved in producing petrochemicals, internal combustion engines and coal-fired power plants. The United Auto Workers strike that began last week is a harbinger of the problems to come as legacy jobs confront the clean-energy future.

A word about “peak oil,” which may sound familiar to the seasoned investor to whom this argument has been peddled more than once over the last century. As recently as the early 2000s  there was a view that the world was literally running out of oil. Anxious geologists would lead presentations with a picture of Earth from space to underscore that all fossil fuel supplies are by definition finite. That version of the argument went quiet after new drilling technologies and the shale revolution delivered more oil than we could use.

This time, however, the issue is that demand rather than supply is trailing off, and the decline includes natural gas and coal as well as oil. The IEA’s new forecasts cite improvements in solar, electric-vehicle and heat-pump technology, plus China’s shift away from coal and Europe’s sudden search for alternatives to Russian natural gas.

The nature of forecasting means that many guesses undergird the assumptions that drive these projections. Still even if these predictions prove wrong, the trends are unmistakable as the most recent IEA estimates have brought the peaks closer. A decade ago, the World Energy Outlook had oil, coal, and gas demand growing slowly but steadily through 2035, driven in large part by growth in emerging economies. Just last year, the same report had oil peaking only in the next decade followed by an extended plateau.

The biggest question before us is how to reach the peak even closer as we adapt to the extreme weather patterns that are already upon us. As Birol writes, even a peak in this decade will not keep temperature increases below the 1.5 degrees Celsius that experts believe to be a tipping point. The second biggest question, however, is how we climb down from the peak as quickly and safely as possible. 

The descent won’t be smooth or steady, as regional shortages and uneven cycles trigger price spikes along the way. Fresh fossil fuel investments will be required as well to make the transition less disorderly. Moreover, this influential part of the global economy will not accept secular decline without a fight. To be sure, Big Oil has made important commitments to cleaner technologies, but we have also heard the recent calls to slow the transition to mitigate recent oil price spikes. 

History demonstrates that we can count on technologists to deliver newer, safer and better products, as we have seen in the breathtaking emergence of solar, wind, and other renewable-power industries. Sadly, history also shows that we can’t yet depend on economists and politicians for programs that will take care of the people who make a good living in dying industries.

Capital can be redeployed, in theory, but it’s much harder to do when large investments are made on the expectation of returns that will come in over decades. Workers can be retrained, say the textbooks, but the reality is that it’s slow, expensive and rarely leads to new jobs at anything close to comparable salaries.  

For all the squirming around Saudi Arabia’s massive investments in global sports teams, there is impeccable logic behind any effort to create tourism and entertainment alternatives where oil extraction accounts for 46% of the economy. A grand experiment is underway in places like West Virginia, where massive subsidies from the Inflation Reduction Act seem to be coaxing a legislature to encourage electric battery manufacturing and even nuclear power in a state where coal power still provides more than 90% of its electricity.

Technological progress is well on its way to delivering clean energy. The incremental climate change dollar (or euro or rial) may be better spent on mitigating the decline of a giant global industry and its workers. Turning the sun into cheap electricity is a lot easier than finding new jobs for coal miners and oil riggers. 

As any climber will confirm, the path down is often far more treacherous than finding the peak.

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