The dampening of demand for fossil fuels, stimulated by the fight against climate change, accelerated by the pandemic, is disrupting the energy sector in a major way. While the periodic upswing in price has produced massive profits for shareholders, it is injurious to consumers and the social and economic systems in many developing countries. In addition, the ecological impacts of fossil fuels are well documented as this sector is responsible for the lion’s share of greenhouse gas emissions that have resulted in global temperature rise and led to climate change
Hydrocarbons are not only an important source of fuel but also inputs into a host of other processes and materials. Energy, economy, and environment are inextricably linked. While fossil fuels will continue to be relevant, there is growing demand for alternatives: renewables, to satisfy the need for clean energy and energy security.
But have we found the “killer app” to replace the functionality provided by fossil fuels?
How do we wean ourselves from this volatile yet lucrative fossil fuel economy?
How do we reorganize our economic and industrial systems, our consumption patterns to decarbonizing energy systems?
What does this mean for future society and economy?
Energy consultant Nneka Matthews and Host Derval Barzey discuss the link between energy and economics and the influence of increased pressure for sustainability. We examine the evolving energy systems and the changing social contract. Its tricky with GDP being so closely tied with energy consumption. Can we sustain economic activity as we encounter limits to growth and push the earth into ecological overshoot? Have we exhausted the existing business models?
The wheels of change have started turning. All we have are a best guess of the outcomes. As dynamic and exciting as the energy sector is, this transition will be nothing less exhilarating. It’s fascinating to see how businesses and economies respond to the compelling case for decarbonization. Will they be first movers or late adopters?
So many issues to unpack. No simple answers
Stay tuned for part 2 of the discussion.
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The Climate Conscious Podcast
Episode 14 Transcript
Derval Barzey (DB):
Hello and welcome to the climate conscious podcast, a podcast for people who care about environmental sustainability and climate action.
I’m your host Derval Barzey and today’s guest provides consulting services to government agencies and start-up companies and the energy industry. She has 15 years’ experience in oil and gas project development and delivery in Trinidad and Tobago. She began her career at local conglomerate, Neal & Massey, now Massy, developing strategic development plans and feasibility studies for new energy business. She has worked and project engineering at a Worley Parsons with clients including British Gas, now shell, bhp Billiton on Chevron, and the National Gas Company of Trinidad and Tobago. She also a BSc in chemical and process engineering, an MSc in oil and gas exploration and production, and is currently pursuing an MA in sustainable energy management. Her broad experiences provide her with a comprehensive understanding of energy markets, and a unique viewpoint on value creation and energy projects. I am delighted to welcome to the climate conscious podcast, Miss Nneka Matthews. Hi, Nneka.
Nneka Matthews (NM):
Hi Derval. It's so good to be here.
It’s so good to have you joining me on the podcast and for us to discuss the transformation of the global energy sector.
Yes, this is certainly an exciting times, the future holds tremendous possibilities in the area of sustainability as well as specifically in the energy sector.
Certainly. Energy is a key issue globally, particularly in our region, depending on which side of the fence you sit, either as a producer on importer. Energy has a significant influence on our economies and our sustainable development. And for a long time, the energy sector has been dominated by fossil fuels, for our region, that would be oil and gas. And the oil and gas industry. You know, it's characterised as being very volatile, with cycles of boom and bust as the prices fluctuate. So in addition, the influence of energy on our environment has gained prominence, as we grapple with climate change, and as we seek to minimise global temperature increase. Essentially, in 2020, we are dealing with multiple crises all at once. We have the health crisis with a global pandemic, the economic crisis, as world economies are shrinking. And on top of that, we have the ongoing climate crisis. So Nneka, as someone who has spent the past 15 years in the energy sector, what is your take on the impact of this disruption on the energy sector?
Well, there are certain fundamentals about energy that we know. But we forget. Energy is basically a unit of economic input. No matter how you try to change the formula, you can't really have an economy of any kind, digital otherwise, without the use of energy. And so anything that happens in the energy sector, regardless of what kind of energy, we're talking about, the traditional system that was based on fossil fuels, or new systems based on alternative types of energy, the equation of what energy does in the economy remains the same. And so, if you have a crisis that affects any type of economic activity, it's going to affect energy. And if you have a crisis in the energy sector, it's going to affect the economy. And so there's a delicate balance that has to be held, regardless of what choices we make about what type of energy we want to use in the future, and what we want to be able to use it to do.
One of the things that kind of stays in my mind right now, with all the activity towards a sustainable energy transition, is that we don't have a killer up in energy. And by that I mean it's something thing that can give you so much more functionality than whatever existed before. So for example, when you have a smartphone now, you can do so many things on it than you could have done with your old Nokia TDM 1100. I'm sure everybody remembers that, right? Because it may have been the first phone that you had. The one with the antenna, right. And it was, it was indestructible, right, it could fall out of your pocket fall apart, and you put it back together again, and it worked fine. And you can hear really good, the keypad, the keypad was big enough, you could send a text, right, but that's basically all that it could do. And if you compare that to the smartphone that you have, no, because everybody has one regardless of whether it's you know, Apple or Android, you have a platform now that lets you do so many things that were not possible 15 years ago, you can send an email, you can call, you can do a lot of the computing things that you couldn't have done in the past on a on a cellular phone. You can take pictures, you can make videos, you can call somebody and see them, there's so much that you can do with a phone, we still call it a phone. But it's so much more than a phone, like the phone part is probably the least used parts of your actual phone, smartphone that you carry around with, you know.
Now with energy, as you know, a unit of economic inputs, you don't really have something as yet that does everything that fossil fuels do. Because sometimes we think of fossil fuels as energy. So we only think about, okay being able to use it directly for energy. But we also use it to make petrochemicals, some applications, you have to use it directly as combustion, or the time to use the products to be able to make other things. And then in addition to that any type of construction activity requires huge amounts of energy to make that happen. For example, if you require steel, if you require cement, etc, you have to have a particular type of energy that's able to do those things. So that when you start to talk about making an energy transition, and basically reducing demand, because that's the only way you can really do it, what you're saying is, you'll have a reduced level of economic activity, there's just, that's just the way the equation works. And so unless you have a new form of energy, that can do all the things that fossil fuels are able to do, you're going to have a huge gap in being able to, to meet your transition requirements.
And it's something that I think is difficult to talk about. Because right now it's like this, this blank space that we have to figure out. And I believe that we need much more research going into the technology, much more research going into new opportunities for us to be able to do things differently. And that's an area where I'm not so sure where the funding is coming from for specifically that. There's funding for technologies that exist already. But as yet that killer app that gives you so much more functionality out of any type of energy, to be able to do everything that you're used to doing. It's not there yet. And in terms of the disruption hits in the energy sector, I think that's something that we're kind of overlooking a bit.
And I think it's something that that is very important to pick up on and, and, and shift the thinking around it. Because I think that's the gap that we're missing. When we think about how to participate in our transition. There's so much for the transition to work, there is so much that has to change. And I think we spend a lot of our energy worrying about what's going to be lost, and maybe not seeing the opportunity for new developments that create new industries, new sectors, new activities, and therefore new opportunities for everybody to have more economic wealth. And that's an important parts of the energy transition. It's not just what we're going to do, sometimes, like I don't ever think about my TDMA phone. Except that while I enjoyed it so much, even though it was so simple, but there’s no way I would trade back my smartphone, for what I had. And that's something I think we really need to take it out.
So you highlighted several of the many applications of fossil fuels. And on Episode Five of this podcast, featuring Dr. Devon Gardner of the CARICOM Energy Unit, we spoke about the dark side of fossil fuels. The sad reality is that the burning of fossil fuels, oil gas coal produces greenhouse gases, carbon, methane, nitrous oxides, which are increasing global temperatures and leading to a host of other negative effects. And the energy transition is about transforming our energy system away from fossil fuels, to more environmentally friendly alternatives. And these alternatives include renewables, as well as the efficient use of energy. So we're seeing a greater emphasis being placed on alternatives. But from what you just described, fossil fuels will continue to be relevant, you know, until we find that sweet spots, but the trend is that the focus is now on decarbonizing our energy systems. And in the past, there seemed to have been some resistance to the shift. Why do you think this shift is occurring now?
Yeah, I think, um, this is really a innovation issue. So, in the area of innovation, this is the dilemma that anybody who is faced with change has to deal with, and that is, when do you jump on board? When do you ride the wave of change. And so there will, there will always be early adopters, people that recognise the changes coming the way of, you know, maybe new technologies that and they can see the possibilities for them, and they jump on board, and they harness that and they move with it quickly. And those first movers will always have a really good advantage as markets change. And then there'll be others who adopt the technology or whatever the changes a little bit later. And then there are those that will wait until it's ubiquitous, until there is not really a reasonable enough opportunity to stick with what you used to use. And only then will they adopt. I think with regard to oil and gas, because of COVID-19 as well as, because of the general moves in recent years to take climate change seriously, and the moves of governments around the world to increase policy around cleaner energy, it's affected the outlook for demand for oil and gas.
Now, in the oil and gas sector. You know, we know it's a high revenue earnings sector. But that's not really because of the price of oil itself. The price of oil has basically always hovered around $40 a barrel. What makes the energy sector so lucrative the fossil fuel sector, is the potential for windfall profits when the price is very high. So that the business model for oil and gas is really about that potential for upswing. And it's really based on an environment in which demand outstrips supply. Because as long as you have that, you will have the potential for prices to be very high. And that potential is what is exciting for shareholders, that's what they invest in, the potential that you could go from $40 a barrel to $120 a barrel and just make massive amounts of money. It's also one of the reasons that the oil and gas sector has been attacked in the past because it's a lot of profit to make very quickly. But it does impact the environment in a negative way, especially because scenarios like that not only affect the environment, but the affect society, because of a situation where you have a price that can just go up very, very high has economic knock on effects, because a high price of energy is great for energy producer. But what happens is, if you sustain those high prices, consumers cannot afford energy. It means that if you are working person, and you're just trying to live your life, now more of your finances have to go towards just being able to provide the basic things that energy provide, which is everything. It's your food, your shelter, your clothing and your security, the lights in your house, warmth, everything. So that there's a wider effect both on society and the environment when energy prices are high. And the whole world has had this problem. Well, when I say the whole world, all of us have had this problem. The thing is in developed countries, they've had the opportunity to inspect the problem and see what was really going on. And they've made certain moves to change that. And with those moves, the policy adjustments, as well as the latest development which is fixing this pandemic situation that has drastically affected demand for fossil fuels. We're seeing outlook and BP recently published the outlook for energy. And we're seeing an outlook where that potential for that upswing in demand is no longer there. And with all that, a company that is entrenched in oil and gas has to ask itself, how much should it be investing in developing future reserves? How much should it be investing now in trying to increase its operating margin, where are the best places to invest on and as their strategy changes, to adjust to that, we're finding that they have to try to decarbonize. To me, energy companies know perfectly well that the oil and gas industry will remain for the very reason that there is no killer. Right? Unless the technology is invested in for something to provide more functionality than oil and gas provides, you're not going to see it. So it's not going to happen for a while. Right, you can bring on alternative energy, and they can do what they can do. But in the interim message and things like just construction, for one, construction is probably the biggest one, because if you are seeing that you're gonna try to reduce fossil fuels. Okay, you will, you could address like major transport because there's stuff with hydrogen and fuel cells for marine transport and for you know, large trucking systems. You can kind of deal with the logistics system, right? You can kind of deal with, you know, consumer, you know, individual transport, because you can kind of make it unattractive for people to really buy new cars, and those that do maybe on the high end, so they buy electric vehicles, right, so you can make it mandatory or whatever, right. But for all the other industrial things, you can start bringing on, you know, green hydrogen to make ammonia this that and the other, but you know what, all of that is dependent on how much people consume. And people could only consume if they have money. And people could only have money if they have jobs. And people could only have jobs at this moment. And they could only be demand if you use energy. So that unless we have like a new way to create economic wealth, with all without using energy, the way we have, you kind of have a cycle that just kind of supports itself.
So Nneka, you're talking about delinking our economies from energy?
Now. So this is the thing, right? I've heard this thing many times, it sounds like nonsense to me. I don't understand how you could delink economy from energy, because energy is a basic economic, unit of economic input. So okay, so countries make reports that you have, that they're finding that the GDP is not as closely linked to energy consumption as in the past, right? But the reality is, there is nothing that you use, that didn't take energy to produce it, regardless of whether it was a physical, tangible, good, or an intangible service. Yeah, you don't have to use the energy in your country. But somewhere on planet Earth, the energy was used. And that’s where it is accounted.
But I think the argument is that you are able to extract more from that one molecule of energy as opposed to what it would have produced in the past. It's a matter of increased efficiency,
You can increase efficiency within the limits of what physics will allow. But what ends up actually happening is that if you want to make money, you have to sell product, no matter how efficient that product is, yes, if it's efficient, you can get more use out of the same energy that you put into it. But let's go back, it's the same energy so that if you're talking about cutting fossil fuel use, right, it means that you are still talking about using the same energy to get greater economic outputs. So that where is the cut gonna happen?
I will revise my statement and say, delinking our economies from fossil fuels, because I agree with you, you'll always need energy to the power your economy. But the issue here is the source of that energy and the impact that that energy has.
I mean, you have spent 15 years and I have spent a decade working in the energy sector. And I must agree it's very dynamic. It's, I would say it's an exciting field to be a part of.
Yep, for sure.
And you also mentioned how lucrative the oil and gas business model is, or has been with the potential for up swings with the price moving from $14 a barrel to 120. So that covers Economics. But there are other aspects or externalities that are not factored in. Or that that weren't factored in in the past. But no, you're seeing more pressure, Yeah, I would say greater pressure,
It is greater pressure.
To account for the environmental and social impacts of the fossil fuel industry.
Yeah, I think part of it as well is that, you know, the social contract has sort of changed. And it's something that we see more. It's so funny, we see these, we actually see every impact of the, you know, the sustainability issue. In every economy around the world and every sector of society. The thing is, we don't necessarily know how to recognise it. So in developed countries, young people, Millennials have recognised that the social contract has changed, they would have seen as we would have seen, parents have jobs have a certain amount of job security, would for a long time, you know, do things, they buy a house, buy a car, they send their kids to school, etc, etc. And the outlook for that, for the generation that's coming up as change. There's no such thing as job security anymore. In many countries, the idea of, Do you know, like my parents, I mean, then you there was a home available in every income category that you were in, right? For a generation, it's not like that. And in many countries, homeownership is no longer a goal, because what's the point? You know, how are you going to? Are you going to support that? How are you going to pay for that in the long term, without job security, owning a car is not that big a deal anymore. So a lot of things have changed. And knowing that, young people now knowing that they have to rely on themselves a lot more, I think, scrutinised and company sent me a lot more. And that's where the sustainability issue I think, has really started to come up, especially because of the presence of social media that now allows young people to not only research a company very quickly, it doesn't have to be in depth research, you go on Facebook, somebody mentioned something, you can go and check it yourself, you see how the company is, and you see what you feel about it. And depending on how clever you are, and how you put that forward, that can circulate around the whole world to your whole demographic of, you know, associates, and it suddenly becomes very big, and it now affects the reputation and the image of the company.
And so, companies have an issue, regardless of whether they need an energy sector or some other sector, where their work, what they do, is under the very real threat of no longer being attractive to young people who are entering the workforce. The consumer age of your life is from about 25 to 45. So if that generation of people is not interested, where is the demand going to be? If that generation of people is not empowered in terms of they don't have the money to spend. So this is this is two different issues. One is whether you're interested and one is whether you can even afford it because do you have a job? Did you hustle to make it on your own, you know, you had online business, so whatever it is that you did, and you made it yourself, you're not going to be in a hurry to buy from a big institutionalised Corporation, you're going to buy from somebody who's like you. So it changes the whole arrangement. You also have a situation in which if you notice, even before COVID, even before we were talking about climate change in a big way, the biggest companies in the world the most asset heavy companies in asset heavy industries like energy for one, industrials, for other telecommunications, utilities, for example, all these companies, were seeing a decline in their operating margins, because something was happening on the something that's been happening is that as we get closer to basically wearing out the limits of the resources of this planet that can support us here, everything becomes harder to do, the business becomes harder to do. The competition becomes stiffer. And all of that impacts that breaking of the social contract in terms of the job stability not being there, in terms of the outlook for people's incomes, not necessarily matching the expectations based on what they've spent on education. And all of these issues linked together under the sustainability umbrella, and they hit not just the energy sector, we see it in the energy sector because of the significance, the link between energy and economics. You don't have an economy without energy input. And the energy sector based on fossil fuels, because of those up swings in price has that potential for that huge windfall profit that is very visible. Or at least it has been. Now the tech companies are kind of replacing them.
And that shift, that overall shift that anybody who is heading up a company can see happening, it's very compelling. It's almost impossible not to decarbonize in the face of God, or at least try to. Because if you don't, you'll be left behind in a world that increasingly requires more sustainability. If the economic model is to continue, and even that I have a bit of trouble saying, because I don't think the economic model that we're used to con continue, I think we've probably exhausted it, I think we are probably at a time where we really need to ask ourselves what kind of world we want to live in. And this is no longer a question for philosophers and tree huggers, it is a real business question that the answer to that is going to affect what direction the whole world goals, because if we are at the limits of what the planet could realistically support based on the models that we have, then unless something is going to change, we had it towards the south. So there was a study in the 70s, called limits to growth. And what it did was it modelled a lot of things, population, any different resources to the world, etc. and model it, projected it out or up to 2100. And those models suggested that we would have a collapse before 2100, based on the part that we were on. And so far, most of the things were spot on. So that unless something shifts, we're kind of headed in a pretty bad way.
There was another book by Jared Diamond, Collapse. And that book was basically about societies making choices that, in a lot of instances ended their civilizations. And it was about resources. Most of the time, the issue was resources, that the resources that they use to build up these fantastic civilizations they had, the key resources started to run out, they kind of ran up against the limits of that resource. And they weren't able to make any kind of change. And then all the things happen that we've been seeing now you know, the economics collapse, you start to see a prevalence of all kinds of unusual diseases and then eventually you've got civil unrest and people turn on each other and that was the end of that. Now we look at this in science fiction movies. And you know, we kind of laugh it off. Until it started to happen. Right. When we weren't aware of it, it was fiction, it was fantasy, but now that we see it, especially having social media and being so connected and being able to see everything. We see it happening. It's not funny anymore. We almost, we don't want to see those kinds of movies right now because it's dystopia, dystopian is not interesting to look at anymore because it hits a little bit too close to home.
(see Part 2 for continuation.)
Transcribed by https://otter.ai