Green Tipping Points and Economic Momentum as Crude Goes Above $90

In September we saw oil markets tighten with prolonged supply reduction in a market priced by China determining demand and OPEC the supply. OPEC+ started the month confirming that Saudi Arabia will keep the 1 MMBD cut until the end of year. That brought crude prices above $90 per barrel for the first time in the year, climbing more than 30% since June. Brent crude closed the month at about $95 and WTI at about $92.

The CEO of Chevron, Mike Wirth, said that he saw crude heading to $100 “soon” based on tight supply and the possibility of the Chinese economy picking up speed again. The price of U.S. natural gas, a key feedstock for gas-fired power plants that represent 44% of the U.S.’s electricity generation capacity, reached above $7/MMBTU in November 2022 but have stayed below $3/MMBTU for most of 2023. The EIA expects the commodity to end the year at $3.44/MMBTU.

In September we also saw the UK Prime Minister pivot from previous NetZero commitment. During NY Climate Week, Rishi Sunak announced measures that will slow down the UK transition to Net Zero. Many key players promptly criticized the move, including the chairwoman of Ford UK Lisa Brankin, which has invested into EVs based on the policy of ending petrol or diesel car sales from 2030.

"Our business needs three things from the UK government: ambition, commitment and consistency. A relaxation of 2030 would undermine all three." The PM is pushing back the deadline for the ban on sale of ICE cars from 2030 to 2035, as well as the conversion for gas boilers. In his new policy, homeowners will only have to replace their gas boilers with electric heat pumps when they are replacing their boilers anyway, with lower income homes being exempt altogether. Insulation requirements for homeowners are to be scrapped. Energy efficiency requirements for landlords are also being cancelled. 

However, the energy transition is absolutely inevitable, as green solutions are cheaper, reliable, modular and decentralized. Grids based on solar and wind are by definition local, not subject to geopolitical volatility like the barbaric attack of Israel by Hamas. On the first day of trading following the attack, crude was up on fears of Iran's involvement in the attack and what an oil embargo to thee country would do to prices. Brent rose about 5% on the morning of October 9, while WTI was up more than 3.5%. Unlike the situation in 1973 when the world did not have alternatives to a fossil fuel based energy system, we now do.

A few developments that also took place in September highlight that we are experiencing tipping points in the energy transition, with large economic forces committed to accelerating the adoption of the many solutions:

Figures show that the acceleration of EV adoption continues, despite higher interest rates, and 23 countries pass a key tipping point

Global EV sales in 2Q23 were almost 2.2 million units, representing about 11.6% of all the passenger vehicle sales. Norway remains the market with the highest percentage of EV market share (at 82%), with high EV share also in fellow Nordic countries (Iceland at 28.9%, Sweden at 38.6%, Finland at 33.5%, Denmark at 32%; plus the Netherlands at 31.8%). While China’s EV sales represent only 16.8% of its passenger vehicle sales, it is the largest in absolute terms with 1.2 million EV units sold in 2Q23. German EV market share is 17.5%, with almost 128 thousand EVs sold in the quarter, while the U.S. is at 7% with 285.4 thousand EVs sold in the period. There are now 23 countries that have passed the 5% tipping point of share of EV market share.

California leverages its size and clout, sues oil major companies and forces companies to disclose climate data

Independently from the SEC ruling on climate disclosures, whose first draft of rules were proposed 18 months ago, California on September 26 passed a landmark legislation that will require about 5,000 companies (private and public) to disclose emissions, supply chain Scope 3 emissions included, and climate related risks. Earlier in the month, Governor Gavin Newsom said he was “taking action to hold big polluters accountable.” The state of California filed a lawsuit in the San Francisco County Superior Court against BP, ExxonMobil, Chevron, Shell and Conoco Phillips, and their trade group the American Petroleum Institute.

The claim is that these companies damaged natural resources, state property and violated California law, misleading residents. The 135-page complaint accuses the five major oil companies of knowing since the 1960s that burning fossil fuel has negative consequences but have downplayed the externalities.

Brazil in the top 25 and 25% for the first time for renewable usage

According to energy think tank Ember, the largest economy in Latin America in July generated more than 25% of its electricity from wind and solar alone. This milestone puts Brazil in the group of just 25 countries that have achieved over a quarter of electricity from wind + solar over a month-long period. In 2023, the increase in wind and solar generation (over 20 TWh) has more than met the increase in demand (more than 12 TWh). Year to date, wind + solar generated 19% of the country’s electricity, up from 15% in 2022. This increase allowed a reduction in the share of electricity from fossil fuels to 6.9% (compared to 8.9% in 2022). Hydro is still Brazil’s main source of electricity (at 70% YTD, compared to 73% in 2022), putting the country on the right path to 100% of electricity being carbon free by 2040.

IEA released an update on its 1.5-degree pathway

Ahead of COP28, the International Energy Agency released an update to the Net Zero Roadmap, first released in May 2021. The updated estimates consider the robust adoption of EVs and solar (behind the meter solar being a fast-growing solution) and state that the current announced capacities for these solutions would be enough to deliver the 2030 target. A broader ramp up in renewables, improving energy efficiency, cutting methane emissions, and increasing electrification with existing technologies (such as heat pumps) would be enough to deliver more than 80% of the emissions reduction needed by 2030.

The necessary developments are tripling global installed renewable capacity to 11,000 GW by 2030 and doubling the rate of energy efficiency by 2030. The IEA estimates that we are on track to invest a record $1.8 trillion in clean energy this year, but that the figure needs to increase to $4.5 trillion a year by 2030 to be in line with the goal. The agency estimates the demand destruction for the three main hydrocarbon sources by 2030 if the world can deliver this scenario: coal demand would fall from about 5,800 Mtce in 2022 to 3,250 Mtce by 2030; oil would decline from about 100 mb/d to 77 mb/d by 2030; while natural gas demand would drop from 4,150 bcm in 2022 to 3,400 bcm in 2030. 

What shall we really be fighting for

While we face headwinds in the short term, a lot of them related to the fast increase in interest rates in the U.S. and its consequences to funding for utility scale renewable projects, as well as the financing costs of the key behind the meter solutions and EVs, hurting the affordability of green solutions supported by the Inflation Reduction Act, the direction is clear. A greener future will be a much more prosperous, stable and sustainable one. Isn’t that what we should all be really fighting for?

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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