With Climate Change, Where Will Be the Next Energy Capital?

No matter how civic leaders try to spin it, the Houston economy is still very much tied to oil and gas. Below are three reports that recently came out on the state of the economy of Greater Houston area. You will see that each report highlight the fossil fuel industry as being the economic engine for Greater Houston area. There is little mention of any other economic factors, other than services, which are largely here to support the fossil fuel industry. When we look at the global activity to decarbonize the economy to mitigate climate change, this continued reliance on a single economic driver may be a problem.

Economic Outlook for Greater Houston

Texas A&M Outlook for the Texas Economy –

  • Houston posted the largest monthly increase with 8,000 jobs, half of which occurred in professional
    and business services (often linked with the region’s energy sector).
  • The Greater Houston region added 30,000 jobs in the first quarter alone amid strength in the energy and manufacturing industries. (the manufacturing is largely oil and gas related.)
  • Increased drilling activity and weaClimate Change and Texas Economykness in the U.S. dollar supported 5,800 manufacturing jobs over
    the past two months. At the metro level, manufacturing employment surpassed 4 percent growth seasonally adjusted annual rate (SAAR) in both Austin and Houston, translating to 900 and 1,800 industry jobs this year, respectively.
  • The wave of professional and business service jobs grew higher, adding more than 50,000 jobs across the state in just six months. Many of these jobs supplement the energy industry and are located in the financial sectors of Dallas and Houston.

Greater Houston Partnership – Economy at a Glance

  • The region’s leading exports in ’17 were petroleum products ($18.2 billion), basic chemicals ($12.9 billion), oil and gas extraction ($11.5 billion), agricultural, construction and mining machinery ($3.5 billion) and plastics and resins ($3.4 billion).

Greater Houston Partnership Employment Forecast 2018

Approximately one-third of Houston’s GDP is tied directly to oil and gas. This figure doesn’t include energy’s impact on wholesale trade, transportation, and professional services. Nor does it account for how much of their paychecks energy workers spend at the grocers, in local restaurants or at the drug store. Factor in those expenditures and energy’s impact on local GDP is significantly higher.

Risk of Decarbonization

Although it may be less apparent in the US, there is a global push to decarbonize our energy and transportation systems. My concern is that the Greater Houston region is underestimating the pace of this global energy transition. This is problematic for the Gulf Coast in the mid to long-term. For the short-term things are looking pretty good with oil prices lingering around $70 a barrel. However, when we look at global factors relating to the decarbonization of our world economy, it is hard to be as optimistic. Much of the world is taking climate change seriously and is taking steps to mitigate greenhouse gas emissions.

Some indications of the risk include:

Climate Change Policies
Carbon Brief Map of Climate Change Policies

Oil and Gas Majors Are Taking Note of Climate Change

The large major oil and gas companies are taking note of the global climate indicators and appear to be conceding to some degree that business-as-usual may need to change. Shell and BP are both publishing reports in 2018 that will provide greater insight into operational risks due to climate policy. The realize the near term political climate is pushing for policies that are intent on keeping the planet below two degrees Celcius temperature increase. Chevron has provided some insight as to what the near to mid-term would look like with lower oil demand due to climate-related policies. Chevron does not see peak demand in the near term but concedes that there is a future where there will be less oil demand. This will increase competition among oil and gas companies and result in lower cash flows. Exxon Mobil and BP both see peak demand coming in the next couple of decades. The peak is driven by a shift to renewables and to electric vehicles, as well as improved efficiency of internal combustion engines.

Greatest Risk is Shift to Electric Vehicles

As seen in the LNNL graph below 72% of petroleum goes to transportation. The longevity of the oil and gas market is driven by the continued consumption of oil by the transportation sector. However, forecasts point to a growing number of EVs and improved efficiency of autos which will lessen oil demand.

Climate Change Changes Energy Mix

Lawrence Livermore National Lab US Energy Consumption 2017

BP predicts 300 million electric vehicles by 2040. This will account for 15% of all vehicles. The most recent Bloomberg New Energy Financing research estimates that by 2040 there will be 530 million EVs on the road. This potentially could displace 8 million barrels of oil per day, 336 million gallons. By 2040, over 50% of car sales will be EVs. Recently, Aurora Energy Research reported in Oilprice.com that similar to the BNEF report, it sees 540 million EVs on the road. EVs will make up a little over one-quarter of total vehicles on the road. More concerning is that the firm estimates that with EVs and improved efficiencies of internal combustion engines (IEC) total revenue loss by oil and gas companies may be around $21 trillion.

China Leads the Way

Who is leading the pack? China. Being a leader in EV technology and high-tech manufacturing is one of the key focus areas of China.  As part of its Made in China 2025 strategy, the government is pouring billions of dollars into EVs to make it happen. When the worlds second largest economy is looking to electrify the transportation sector, primarily driven by strategic concerns related to importing much of its oil and gas supply and the choking smog largely attributed to the internal combustion engine, it may be time to think beyond the short-term gains being reaped from the most recent resurgence of the regions oil and gas sector.

Natural Gas May Not Pick Up the Slack

As more EVs are on the road more power generation will be needed.

It is possible that combined cycle natural gas plants will be built to provide the additional power required to power the fleet. However, with unsubsidized renewables having a similar levelized cost of energy as natural gas plants,

building more natural gas plants to offset the decrease in fossil fuels used to fuel the transportation sector is not certain.  A recent Greentech Media analysis finds lithium-ion storage looks to compete head to head with gas peakers by 2022 and beat out peakers by 2027. See below.

Climate change and energy storage

Greentech Media Image – Storage and Nat Gas Peakers 

Where are Public Leaders?

In the Greater Houston area there needs to be more leadership to diversify beyond the oil and gas sector. There has been much excitement around how the Greater Houston survived much of the last oil bust cycle due to its growing export market. However, when you look at what was being exported, a good bit of it was and continues to be petroleum products.

The Greater Houston area must take concrete steps to seriously diversify the region’s economy. The Amazon HQ snub should be a wake-up call. Dallas is more attractive than Houston to Amazon.

Exporting more oil and gas products vs. importing is not really diversification. Further, it does nothing to limit the reliance of the economy on the fossil fuel industry. Houston is not seen as anything more than an oil and gas town. Otherwise, we would not have been the only large city not making it to the top 20 of the Amazon search.

There was a step forward with the announcement of the new Innovation District in Midtown. This is a $100 million project led by Rice University, in partnership with the city and business leaders, to kick-start the high tech start-up community. Hopefully, there is more being planned than this one initiative.

Advertisements