For the past 67 years, BP has published its Annual Statistical Review of World Energy, a consolidated data set that spans primary energy, countries, and regions. On a new episode of Columbia Energy Exchange, host Jason Bordoff sits down with Spencer Dale, who serves as Group Chief Economist at BP, to discuss the key themes and insights from the recently released 2018 report. Prior to joining BP in 2014, Spencer was with the Bank of England, where he was Chief Economist and a Member of the Monetary Policy Committee. 

One of Spencer’s key takeaways from the report was that while last year (2017) was an exceptional year for renewables, little progress has been made to reduce coal consumption. In fact, coal continues to demand 38% of the total fuel share mix, the same percentage as 30 years go. As a result, Spencer highlights the importance of targeting efficiencies in the power sector to reduce the consumption of high-carbon energy sources. Spencer and Jason also discussed interesting trends such as the fall in energy intensity and the pivotal roles that China and India will continue to play in the global energy market in the years ahead.
 
Other topics discussed include Spencer’s thoughts on peak oil demand and what peak oil means for oil majors like BP; the role that EV’s will play in the transportation sector; and the role of sources like natural gas and nuclear power in the energy transition.

Read the Transcript

[00:00:02]

Jason Bordoff:  Hello and welcome to Columbia Energy Exchange, a weekly podcast from the center on global energy policy at Columbia University. I’m Jason Bordoff.  The global energy outlook seems as uncertain, ambiguous, complex as ever.  Nearly 200 nations came together to sign the Paris Agreement, corporations and financial institutions are pledging to invest more in clean energy.  Electric vehicle use is rising rapidly. Global spending on renewables have outpaced investments in hydrocarbons.

 

But at the same time, last year oil use was up sharply.  Natural gas had one of its best years in a long time.  Coal use rose for the first time in several years as did total greenhouse gas emissions.  So, where are we in the energy transition?  Well, one of the best places to look for that is the BP statistical review, an annual report from BP offering a snapshot into where things stand today.  And I’m delighted to talk about where we are today and where we may be headed with my friend Spencer Dale, the chief economist of BP.  Spencer, thanks for joining us.

 

[00:01:05]

Spencer Dale:   It’s a pleasure, always a pleasure.

 

[00:01:07]

Jason Bordoff:  So this statistical review has just come out.  Tell us what some of the key insights are and what some of the most important and unexpected findings were from your standpoint?

 

[00:01:20]

Spencer Dale:  Yeah, as you say, the energy system is a really tricky thing to try and monitor and navigate at the moment.  And BP’s fiscal review for the last 67 years has been providing sort of the energy reference source for people around the world.  I think we can all defer on how to interpret the data and what the data mean and what they mean for the future.  But it’s really helpful if we all stuff in the same place.  And BP’s fiscal review has been playing that role for a long time.

 

And I think -- I agree with you.  Taking the first blush, the headline number from last year which we reported in the stat review are a little disappointing.  Energy growth up, gaining --.

 

[00:01:58]

Jason Bordoff:  Disappointing, just to be clear from --

 

[00:01:59]

Spencer Dale:  Disappointing from the context of the energy transition into a lower carbon energy system.  Global energy demand growth up, gains in energy intensity down, coal consumption growing for the first time in four years and carbon emissions as you say from energy use growing by over 1.5% following three years of little or no growth.  But I think it’s important to see last year in the context of exceptional performance that we had seen in the three previous years between 2014 and 2016.

 

Some of that exceptional performance -- where energy growth is really week and as I said you saw little or no growth in carbon emissions, some of that exceptional performance was driven by long-term structural factors which are still there, strong growth renewables, stronger natural gas, big gains in energy efficiency.  But some of them were driven by more -- by short run cyclical factors; weak growth in overall economic activity.  Much of that weakness concentrated in the industrial sector which is particularly energy intensive, particularly short falls in some of China’s most energy intensive sectors.

 

We always knew some of those cyclical factors that unwind, which they did do last year.  So, I think the big picture, the way I think about 2017’s data is sort of in the context of two steps forward, one step back.  Taking it around, we still made some good progress in terms of that energy transition over the last three or four years.  But last year, we saw some sort of backward step following the exceptional progress we had seen previously.

 

[00:03:33]

Jason Bordoff:  And do you think the last three years are -- is that sort of more the new norm in terms of where things are headed or was that an unusual confluence of circumstances that paused business as usual for the last several decades continuing?

 

[00:03:47]

Spencer Dale:  So, I think the period of three years of little or no growth in carbon emissions was not indicative of where we are.  That sort of was exceptional reflecting some of these cyclical factors.  But likewise, I think growth rates of 1.5% are perhaps -- is not either an indicator of where we are.  And I think you sort of perhaps need to sort of balance and see these in the round and sort of take as sort of the average.

 

If you take an average of carbon emissions over the last four years, you have a growth rate of a little over half a percent.  If you look at the growth rate in the 10 years prior to that period, you have a growth rate of closer to 2.5%.  So, we are making progress.  I think we are making progress.  But perhaps that exceptional period of 2014-2016, I don’t think is an indicator of quite the progress we’ve made.

 

[00:04:33]

Jason Bordoff:  And if I remember correctly from, maybe it was last year’s fiscal review or the outlook; you talked about declining energy intensity.  That’s not new.  Energy intensity has declined for a long time.  But the pace at which carbon intensity was beginning to fall faster than the decline at energy intensity was accelerating.  And so, the point being, in addition to being more efficient with how we use energy, we are starting to see a change in the energy needs.  Is that continuing?

 

[00:05:01]

Spencer Dale:  It is continuing, but -- and so, there were some good some and bad bits related to that last year.  One which -- sort of the encouraging signs was a combination of natural gas and renewable energy together counted for around 60% of the total growth of that primary energy last year.  So, 60% coming from cleaner energy and that is helping to improve the fuel mix.  The counter argument there is, we saw, as you mentioned in the introduction, coal consumption grew for the first time last year after three years of quite significant fall.

 

And so, the carbon intensity or the overall fuel mix did improve last year, but it improved at a less quick rate than we had seen in the previous three.  So, again, encouraging, but not quite as encouraging as we’ve seen before.

 

 [00:05:51]

Jason Bordoff:  And for, you know, more than a decade when we talked about the growth in coal demand, we looked at China, its rapid industrial growth, the amount of steel and cement and materials it’s using to build cities of millions of people; last year China took pretty strong measures to reduce the use of coal, especially in coal fired boilers, address air pollution.  That, as I think you know in the _____ [00:06:12] review kind of led to a pushed up natural gas demand.  So, what was the driver for global growth in coal demand and what role did China play in that or was it coming from other emerging markets?

 

[00:06:27]

Spencer Dale:   So, the overall driver of global coal consumption last year was particularly India.  India accounted for around three quarters of the growth of coal consumption last year.  And that was increasing demand by inside and outside of the power sector in India.  But interestingly, you also saw coal consumption in China increase last year.  This, despite this enormous program with coal to gas switching which you mentioned in the industrial and residential sectors.

 

So, that in itself is a fascinating pit episode to look at.  The huge environmental policies encouraging this massive switch away from the use of coal in both industry and households into cleaner fuels and gas particularly and as a result which is massive growth in the demand for natural gas last year.

 

[00:07:13]

Jason Bordoff:  Still growth in coal demand though, right, in China?

 

[00:07:15]

Spencer Dale:  And so, coal within no sectors coal consumption fell.  What we saw though was overall coal consumption increased in China last year and that was in the power sector.  And I think the way to think about this is not some strategic shift in China about the use of coal in the power sector.  I think, think of the coal in China in the power sector as the balancing fuel.  So, what we saw last year was overall power demand growth increased.  So, we had an acceleration in power demand in China last year.

 

Renewable energy, wind and solar grew -- continue to grow strongly.  Hydro energy was relatively week, just purely due to weather effects and essentially coal was just sucked into the power sector a balancing fuel.  They needed to power that to sort of an input to fuel that overall growth in power demand and coal was -- is the natural balancing fuel in China.  So, I think -- you think of this as sort of a cyclical thing given those factors going on rather than some structural shift back into using coal and an increasing coal share or anything like that.

 

[00:08:16]

Jason Bordoff:  But given how important Chinese economy and China’s policies are to the outlook for everything, coal and carbon emissions, what's your take on how China is addressing coal now?  They had put limits on production.  Then to ease those, they're trying to manage prices within the economy.  And they’re making very strong investments to clean up local air pollution.  But as you said, still saw coal growth.

 

[00:08:42]

Spencer Dale:  I think China is making huge strides within coal in the fuel mix and also the role of coal within the economy.  So, even though last year we saw a slight increase in the overall consumption, the share of coal within China’s fuel mix both -- both of them within the country as a whole and within the power sector carried on declining.  So, we’re seeing a declining share.  And the other feature which you’ve seen in China over the last couple of years, which I don’t think has got credit or the tension that it deserves is a really significant progress China has made in reducing its excess capacity within the coal sector.

 

So, over the last couple of years, based on both sort of external estimates and the published numbers, it appears that China has reduced its excess capacity by around a half over the last two years.  And this is, I think it’s significant for the role of coal within China.  But it’s also significant for thinking about the risk to China.  Many people who are worried about Chinese prospects will often think about the excess capacity within coal, within steel is one of the sort of the Achilles Heels of China.

 

Quite quietly, carefully Chinese authorities over the last couple of years have been taking steps to close down merge rationalize coal mines within China a result of which appears to reduce capacity, the excess capacity by around a half.  There’s still more to go.  But they’re making progress in doing it.

 

[00:10:10]

Jason Bordoff:  And the reason I ask is because it comes back to that sort of point I made just in the introduction where I think there are often very exciting and celebrated headlines about the growth of zero carbon energy and very aggressive goals in India to grow solar in particular and they made actually quite a bit of progress.  China has huge plans to invest in renewables as well as zero carbon nuclear.

 

We see reports of coal plans being cancelled and curtailed the headline, I think a few days ago in the Wall Street journal was renewables investment outshines hydrocarbon investment.  Is it a sense that renewables are winning and competing now effectively in some cases with subsidies and in some cases without with hydrocarbons?  On the other hand, these are very small numbers.  And you know, a large growth rate off a very small number still takes a really long time to make a difference.

 

So, from your standpoint, is this discussion about the economics of renewables and the growth rate overhyped or is it real, you know, it takes some time, but these things really start to add up and make a difference in the longer term?

 

[00:11:22]

Spencer Dale:  So, let me tell you some good news and some bad news.  It depends on if you look at your glass and think of it as half full or half empty.  The half full story was another exceptional year for renewable energy last year grown by 17% and the strongest every contribution of wind and solar energy; wind providing the bulk of that growth.  But the real sort of exciting progress being made within solar energy, we had over 100 gigawatts of new capacity built in solar last year, 50 gigawatts in China alone.

 

If you think about sort of typical low factors, that’s something equivalent to sort of seven or eight conventional nuclear power stations being built in China in a single year in solar, so, really big progress we’ve made.

 

[00:12:08]

Jason Bordoff:  Equivalent to that many nuclear from a capacity or generation?

 

[00:12:11]

Spencer Dale:  Generation.  So, sort of -- if I think in -- if I take typical low factor, that’s generation of that seven or eight gigawatts, it’s enormous, enormous.  That’s the good news.  The half empty side of the story is I think perhaps the most striking and worrying chart in this year’s statistical review which is when I look at the fuel shares going into the global power mix.  And I sort of say, well, how much has coal come down after the last 20 years given -- and all the progress which we want to do in shifting away from coal?

 

Or how much has the share of non-fossil fuels grown within the power sector over the last 20 years given the huge growth in renewable energy?  The answer is we’ve made almost zero progress.  The share of coal in 2017 was 38%.  If I go back 20 years, the share of coal in 1998 was 38%.  The share of non-fossil fuels in 2017 was actually lower than it was in 1998.  Renewable energy has picked up, but that’s been more than offset by the declining importance of both nuclear energy and to a lesser extent hydro.

 

So, what's worrying about this is we’ve made almost no progress in the global fuel mix going into the power sector.  But the power sector really matters.  It’s the single biggest use of energy, absorbed over 40% of primary energy last year.  It accounts for around a third of carbon emissions from energy use.  And we know from countless studies that if we are going to make a serious attempt to get on the road to achieving those Paris Climate Goals, we may need to make significant progress within the power sector.

 

But how much progress have we made in 20 years just by all this enormous pressure to move away from coal, these amazing numbers in terms of renewable energy?  Almost none.  And so, I think I took -- I was surprised when I just looked at these data and sort of the coal [crosstalk] [00:14:08].

 

[00:14:08]

Jason Bordoff:  The coal share of -- just so people heard you, coal share of the energy mix, of the electricity mix.

 

[00:14:13]

Spencer Dale:  The coal share going into the global power sector, unchanged to one percentage point.  38% in 2017, 38% --

 

[00:14:22]

Jason Bordoff:  And of course I presume that the denominator is larger.  So, what the climate cares about is not percentages of the total, but the climate cares about tons of CO2.  So, the total volume has gone up.

 

[00:14:34]

Spencer Dale:  And part of this is, you can point at different countries in the world where you’re making very significant progress.  So, if you look at for example, the U.S. coal had been previously the -- for like sort of 50, 60 years, the dominant fuel powering -- the dominant fuel for the U.S. power market. That’s no longer the case.  Coal has come down and overtaken by both natural gas and actually sort of non-fossil fuels combined with all of those in the U.S. power sector, very roughly providing about a third each; coal, natural gas and non-fossil fuels, very different from what it was 10 or 15 years ago.

 

So, you’ve seen progress there.  You’re seeing progress -- you're seeing less strong progress in other parts of the world.  But also, as the developing world grows, the importance of those sectors in the global mix increases.  And so, you need to make double progress in order to get that overall share coming down.  And we just haven’t seen that.  And I guess what I worry is that some people sit back and think it’s okay.

 

We’re making progress.  There’s a momentum here.  Renewables, a shift away from coal is doing it for us.  So, we can be a little bit relaxed.  And the argument here was, no, we can't because even though this stuff is happening and it’s been happening for many years now, the net of all that is we haven’t made any progress.

 

[00:15:52]

Jason Bordoff:  What share of total global energy, not electricity is solar today and wind today?

 

[00:15:59]

Spencer Dale:  Of global energy?

 

[00:16:01]

Jason Bordoff:  Yeah.

 

[00:16:02]

Spencer Dale:  About 4%.

 

[00:16:03]

Jason Bordoff:  And do you know what that breakdown is?  Is it -- solar --?

 

[00:16:07]

Spencer Dale:  So, wind -- so, you’re going to quote me on this in terms of -- I think wind is significantly more.  So, we maybe sort of very roughly if you want.  So, when I answer your questions on renewables, I’m thinking about wind solar and bio fuels.  I’m treating hydro power separately just because hydro power has sort of different characteristics.

 

[00:16:23]

Jason Bordoff:  I thought when I looked at last year’s statistical review was something around like 1% solar, 2% wind.

 

[00:16:28]

Spencer Dale:  Yeah, it’s sort of one third -- two thirds wind, one thirds solar is a sort of very rough --

 

[00:16:33]

Jason Bordoff:  For total energy, not just --?

 

[00:16:35]

Spencer Dale:  For total, yes.  But all of that -- and so, it’s 4% in terms of total energy and something like 8% in the power sector.

 

[00:16:41]

Jason Bordoff:  Right.  And so obviously, the reason -- an important reason it’s larger for total electricity than for total energy is transport which is all about oil for the most part, although maybe that will change.  We’ll talk about that.  So, I do want to ask you about oil demand.  Really strong growth last year, projected to be strong again this year.  The more we talk about peak oil demand in the end of the oil era, the stronger the reported news is about oil demand today exceeding expectations.  So, tell us where we are today and where you think we’re headed?

 

[00:17:18]

Spencer Dale:  So, global oil demand grew by 1.7 million barrels a day last year.  As you say, it looks like it will grow by similar risk type number this year.  One of the features over the last four or five years is strong oil demand.  I think often, people when they look back and think oil price has been weak, they said well, oil demand has been weak.  That’s not the story over the last four or five years.  Oil demand has been strong.

 

If I take the average growth rate over the last five years of oil demand, it’s at its highest level since the peak of the super cycle in 2006-’07.  This despite all that talk about peak oil demand, increasing vehicle efficiency, growth of electric cars, all those factors are real.  But on the other side here, one of the messages we should take from the last few years, low oil prices can have a very big impact on oil demand and that’s what we’re seeing.

 

Almost all of the growth in oil demand last year was driven by the countries which are net oil importers.  So, that’s just benefiting from the windfall of low oil prices pushing up oil demand.  And so, we say -- as I say another year of strong oil demand growth and that’s being driven by those low oil prices.

 

[00:18:32]

Jason Bordoff:  And where do you think that -- is this kind of -- you wrote an article recently with my friend Bassam Fattouh, the head of another great energy academic institutions -- the Oxford Institute for Energy studies about peak oil demand.  So, what does where we are today tell you about where you think we’re headed given lots of announcements by various cities that they may or may not be banning the internal combustion engine, lots of announcements by car companies that they’re going to put much more capital into trying to electrify their vehicle fleet?  Is a big change coming around the corner?

 

[00:19:11]

Spencer Dale:  So, my very simple response in peak oil demand is I don’t know and I don’t care.  And that sounds a little bit flipping.  Let me explain to you why I don’t know and I don’t care.

 

[00:19:22]

Jason Bordoff:  it seems like BP might care.  So --.

 

[00:19:24]

Spencer Dale:  So, I don’t know because I can tell the precise timing of that peak can change on the base of a whole variety of different assumptions.  If I tell you that the growth of _____ [00:19:37] income in China maybe slightly different over the next 20 years in one scenario relative to another or the pace of vehicle efficiency gains maybe slightly different.  That can shift that timing about 10 or 15 years very easily.

 

So, unless you have a crystal ball and I don’t, I truly don’t know.  Perhaps the second bit which is more controversial, why don’t I care -- the point of it, why I don’t care is because people attach a significance to the point at which your demand stops growing as if once it stops growing, it’s likely to decline very sharply.  Under all the whole range of different scenarios I’ve looked at, and to some oil demand keeps on growing up to sort of -- well in excess of 105, 110 million barrels a day by 2040.

 

In other scenarios, particularly consistent with ones where you really do make strong efforts to achieve those Paris Climate Goals, it can peak a lot earlier and can get down as low as 80 or 85 million barrels a day by 2040.  So, that gives you a range if you like between say 80 and 110 million barrels a day of oil.  To put that into context, if we as a -- across the whole world said let’s just stop investing in oil today and let’s just -- that the existing facilities just decline at, say, 3% a year decline rate, we would be able to produce something like 40 or 45 million barrels a day of oil in 2040 compared to this demand sway of somewhere between 80 and 110, so half.

 

So, what message do I take from that?  Under almost any scenario that I’ve seen and even though it’s entirely consistent with two degrees C, entirely consistent with electric cars taking on far, far greater proportions than almost anybody else is predicting, the world will still consume enormous amounts of oil in 2040.  And importantly, the world will need huge investments in oil over the next 20 to 30 years if we’re going to make sure that we can provide as little as 80 million barrels a day in 2040.

 

Remember, if we don’t carry on investing, that will go down to as little as 40 or so.  And that, under almost any scenario is far, far less than the world will need.  And that’s why I sort of don’t care.  I don’t know if it’s going to be 80, 90, 100 or 110 million barrels a day. I’m pretty certain it’s going to be more than 40.  And so, the message from here is the world needs significant amounts of new investment in oil for many decades to come.

 

[00:22:06]

Spencer Dale:  So, let me just tease that out because you made one comment in the middle there I want to pick up on.  And of course, when some people hear the chief economist of BP say the world needs more investment in oil, they may see it as self serving or people would say, well, you’re looking at projections of business as usual or status quo.  And if we’re serious about a two degree target as countries promised in Paris, that’s not consistent with that.

 

You made a comment that even the two degree scenarios show an amount of oil in 2040 that is larger -- that requires new investment, right, that we still need new investments.  Now, those have assumptions about negative emissions and carbon removal baked into them so we can tease those apart.  But even in a world where we take more ambitious climate action, your view would be we still are going to need to offset declines which people don’t know is sort of, I guess fully understand what those look like to meet demand as part of a transition.

 

[00:23:03]

Spencer Dale:  Absolutely.  So, I can understand why people may say, well, BP would say that.  Now, frankly we use these types of projections to do our own strategy.  So, it will be a bit silly for us to pretend to ourselves the world is going to be a wonderful place if it’s not going to be a wonderful place.  But, others may not believe that.  So, don’t take my word for it.  Don’t take BP’s analysis. Look at the IEA’s.

 

So, the International Energy Agency, I think one of the most _____ [00:23:25] bodies in the world, I think even your listeners would say okay, perhaps they’re reasonable.  If you look at their sustainable development scenario which is consistent with both increasing access to energy around the world, but also importantly consistent with actually meeting, I think closer to one and a half degrees C rather than two degrees global warming target.

 

Their total demand for liquids in 2040 is just over 80 million barrels a day of oil.  This is not my prediction.  This is the IEA’s compared to their 40.  We have a scenario in the BP’s energy outlook and this is arithmetic.  Anybody can tear this scenario apart and say why it’s wrong.  It’s been out for six or seven months now, nobody has where we assume the number of electric cars goes from three million today to over one billion on the planet by 2040.

 

That’s consistent with across the world there being a worldwide ban on the sale of all internal combustion engines, cars, from 2040 onwards.  That’s --

 

[00:24:30]

Jason Bordoff:  Just to be clear, some people criticize the IEA for being too conservative with the growth rate of clean energy, zero carbon energy technologies.  That number you're talking about would be on the high side even for Bloomberg New Energy Finance or others that have a more aggressive view of where electric vehicles are going.

 

[00:24:47]

Spencer Dale:  So, that one billion number is roughly double, almost any other sort of projection out there.  I think Bloomberg New Energy Finance is sort of the 500 million type number by 2040.  If I’m wrong _____ [00:25:02] should tell me off.  And I think it’s that sort of order magnitude.  So, here it was just a though experiment and said suppose our entire world puts a ban on the sale of all internal combustion engines from 2040 onwards and ramps up to that quite aggressively over the next 25 years.

 

Now this type of ban would be more aggressive than any country anywhere in the world is currently suggesting.  But let’s just think about it.  That increases the number of electric cars from three million to over one billion.  In that scenario, the level of oil demand in 2040 is higher than it is today because the world carries on growing.  The number of cars in the planet, we expect to roughly double over the next 25 years period as you have hundreds of millions of families in China and India increasing -- moving from low incomes to middle incomes being able to buy their first motor bike, then their first motor car.

 

The simple arithmetic of electric cars, and I think this now is understood in a way it wasn’t  a couple of years ago is it doesn’t have huge implications for oil demand.  Will electric cars grow very rapidly?  Absolutely, yes.  Is it exciting?  Yes.  And does BP want to be part of it?  Yes.  Anything which is growing from three million to hundreds of millions over the next 25 years, you want to be part of.  Will it have benefits in terms of urban air quality?  Yes.  Does it have huge implications for oil demand?  No.  And it’s just almost arithmetic and interestingly --.

 

[00:26:31]

Jason Bordoff:  And that’s hard for people probably to -- it sounds a little hard -- it sounds counterintuitive.  So, just help people explain why -- that is, I mean cars are only a quarter of the world’s oil demand as one starting point.  And as you said the total number of cars grow because the economic growth grows.

 

[00:26:46]

Spencer Dale:  I mean the way to think about this very roughly is today, in round numbers, the world consumes about 100 million barrels of oil today in round numbers.  It’s just slightly less from that.  Of that, about 20 goes into the cars, okay.  So, only 20 million barrels a day is consumed by the car fleets, about 20%.  Very roughly, see if I can do these numbers off the top of my head.  Today, there’s about one billion cars on the planet.

 

They consume about 20 million barrels of oil, so roughly 100 million cars equals two million barrels a day of oil you need to service that.  Those cars become increasingly efficient overtime.  Also more and more of those -- some of those cars, those electric cars will be fully -- pure battery electric cars.  Some of them will be plug in hybrids where there’s a mixture of two.  So, very roughly, you can think of 100 million cars in 20 years time -- displaces -- 100 million electric cars will displace somewhere between one and one and a half million barrels a day of oil.

 

So, in that world if that goes up to 300 million or 400 million, you're talking about three million or four million barrels a day of oil less growth than you otherwise would have done.  But at that same time, the number of cars in the planet doubles.  The number of trucks going up and down the motor ways of the world increases, number of air flights increase.  The air vessels traveling around the world with trade growth carries on growing.  And so, three or four million barrels a day, less growth than it otherwise would have been, although a big number is not a huge number.

 

In that scenario, I talked to about what we just had in this sort of complete bag, then the amount of oil going into the car sector roughly halves over that period.  You take out that 10 million barrels a day of oil.  But you’ve still got enough growth elsewhere to meet the overall level of oil demand carries on growing.  So, just as a matter of arithmetic and this really is arithmetic, very, very rapid growth of electric cars over the next 20 year which I think will happen, just doesn’t have a huge impact on oil demand.

 

And perhaps one other point to note which I was most surprised by is that scenario where we had over one billion electric cars in the planet, we assume just for simplicity and said, suppose all of those electric cars are powered by renewable energy.  So, have no carbon emissions associated with them whatsoever.  So, one billion electric cars on the  planet, all powered by renewable energy.  What impact does that have on carbon emissions? Almost nothing.

 

Electric cars just do not move the dial in terms of carbon emissions.  There are many reasons for doing electric cars in terms of improving urban air quality.  But if you’re sitting down with a policy maker and they're saying they're doing electric cars, but they really care about carbon --

 

[00:29:40]

Jason Bordoff:  Are you talking about the -- because of the power mix today or even if we --?

 

[00:29:43]

Spencer Dale:  Remember what I just said.  I assumed all of those one billion electric cars were powered by renewable energy.  So, there’s nothing to do with power sector.  It’s just intuitively the way to think about it is the following.  In that one billion electric car scenario, it reduced oil demand by 10 million barrels a day.  Reducing oil demand by 10 million barrels a day in 2040 has -- it’s a welcomed conscious step in the right direction in terms of carbon emissions, but it’s a tiny step.

 

[00:30:13]

Jason Bordoff:  Yeah, there’s no silver bullet.  I suspect -- if we’re serious about a two degree target, you're going to have to start to decarbonizes transportation as well as the power sector.  I mean it all has to work together.

 

[00:30:24]

Spencer Dale:  Yes.  But just to give you an idea here, we had a scenario where we called it the evolving transition scenario which is sort of a sense about the path the economy, the global economy is on if policy, preferences and technology continues to evolve in the manner we’ve seen in the recent past.  In that scenario, carbon emissions grew by about 10% out of 2040.  We know, to hit the two degree scenario they need to fall by about 50.  So, there was a gap of 60 percentage points you needed to fill.

 

What did those one billion electric cars powered purely by renewables do?  Instead of growing by 10, they grew by seven.  So, instead of plus 10, plus seven, leaving you still a gap of 53.  Going back to our earlier conversation, well, how do you make, what is all the analysis of ours, IEA’s, MIT’s, the United Nations’, where do you really make the gains in terms of reducing carbon emissions?  It’s the power sector.  And the reason why it’s the power sector is the power sector is huge and also, it’s the place where fuels compete side by side.

 

So, small changes in relative prices can have very big effects.  It’s a very economically efficient place to try to make these gains.  How much improvement have you made in the power sector in the last 20 years?  None.  And so, that’s why we’re trying to sort of say, look, we know this is a sector where you need to make progress.  Why is so much effort and so much energy being devoted and so much policy effort being devoted into spaces which makes relatively small impacts and not more being devoted to the thing which we know we can -- we need to make progress and we can make progress?

 

I mean I’m from the U.K. I sort of have a goal of I’ve allotted myself that I don’t ever talk about the U.K. when I’m going around the world because I think there’s too many people prompting their own country.  I will just do -- the U.K. for one thing is a great example here.  The U.K. in 2015 introduced a carbon price flaw -- so, a flaw on the carbon price in the U.K.  So, we remain within the European trading system.  But we said if the carbon price fell below something like very roughly £20 a ton, so $25 a ton.  We would keep that as a sort of the minimum price.

 

Over the last two years, we’ve almost entirely eliminated the use of coal within the power sector.  Relative prices work in the power sector.  You do not need to do much to have a very dramatic effect.  To get one billion electric cars on the planet, you need to move huge amounts of effort.  It would take huge policy effort and huge amounts of money.  You can make that same progress, many times more with a lot less fiscal space if you focus that -- that type of energy and those types of incentives in the power sector.

 

[00:33:20]

Jason Bordoff:  There’s a lot more to say on that.  Obviously we need to focus on cars.  So, the potential for tucks and electric buses now are moving more quickly. So, there’s all that.  One of the concerns people raise is whether there will be enough minerals like cobalt and lithium to achieve rapid growth of electric vehicles.  You look at that in the statistical review.  What did you find?

 

[00:33:40]

Spencer Dale:   Yeah.  So, the statistical review has been playing this reference source role for I think pretty much the world.  And I can say this because I’ve only been at BP for three or four years.  I’m not taking credit for this.  If I go around the world and people are going to energy ministers’ offices in different parts of the world and they often point to their bookshelves and say look, I’ve got the statistical review for the last 15, 20 years.

 

So, it is the reference source, but we have to keep on changing with the times.  We’ve got to make sure that it answers and addresses the questions of today’s economy and tomorrow’s economy as well as yesterday’s one.  So, one thing we -- one sort of new data we include in this year’s fiscal review is those data on the fuel mix in the power sector that I was just talking about.  Another one, we’ve included a new section called key materials for the changing energy world.

 

Just try to say what materials are very important for this changing energy world and let’s monitor those as well.  And so, part of that was -- we include data on cobalt and lithium which are key ingredients -- key materials for batteries in electric cars and we sort of just look at the data, you know, where there is a -- where’s the production, but also can we tease out from there sort of could the availalbity of cobalt and lithium act as a constraint on the pace of which electric cars grow.

 

And I think I -- sort of to give you a very short answer to a quite complicated question is, if one of those fuels is like -- or one of those materials is likely to be constrained, I think it’s more likely to be cobalt.  Lithium looks -- there’s plentiful supplies of lithium and also expansion plans look very strong.  Cobalt reserves are concentrated in just one or two countries.  Moreover, cobalt is more complicated because it’s often -- it produces a byproduct of either nickel or copper.

 

And so, you also -- production plans depend on the price trends in those material -- metals as well as those for cobalt.  And so, cobalt looks like it could be more of a constraint.  But at the same time what’s going on at the moment is battery technologies are moving -- are developing in such a way they're becoming less cobalt intensive.  Part of that is driven by the price pressure of cobalt, but more of it is driven by changing technologies and moving to better types of battery technology.

 

And so if we do see constraints on cobalt, it may perhaps just act as more to provide greater momentum in the shift in battery technology rather than acting as a constraint on the pace of which electric cars can grow.  The other, perhaps the point that we found and we can talk about in the fiscal review -- these materials like cobalt and lithium count for a very small fraction of the total cost of electric vehicles.  So, even if their prices rise very substantially, the overall cost implications that has for electric cars and the competitiveness of electric cars is pretty small.

 

So, I genuinely didn’t know what the answer of that question was when we started collecting these data.  The answer may change as we go forward.  And the nice good thing now is the statistical review provides a ring side seat for people to be able to watch this type of question and many other types of questions unfold as we see the energy transition continue.

 

[00:36:42]

Jason Bordoff:  We’re already over time, but just close us out with two things.  We didn’t touch much on natural gas and questions about the role it plays in an energy transition.  Others have said maybe it will sort of get squeezed, but very strong policy support for renewables and not inadequate, say carbon price and if we have strong coal growth, also nuclear power.  And is it -- where is it growing, where is it declining and what the economics look like?

 

[00:37:10]

Spencer Dale:  Okay.  So, let me -- for the listeners, Jason just gave me that look which he says you stop saying such long answers and do it quite short.  So, for natural gas, 2017 was a bumper year.  Strongest growth we had seen in natural gas for seven or eight years, much of that driven by China and that switch from coal to gas also supported by the increasing growth of liquefied natural gas, LNG which is increasing the accessibility of gas around the world leading to more competitive integrated gas markets.

 

And I think that all serves well for the role of gas going forward is becoming more accessible, more competitive -- increasingly globally integrated market and that will hope to underpin the role of that to natural gas going forward.  Nuclear energy grew relatively weekly by 1% last year.  So, its share within the power mix declined a little bit.  I think what’s going on with nuclear energy is a sort of story of two very contrasting trends.

 

If I look in much of the conventional markets for nuclear energy, so the U.S., parts of Europe, both the economics and the politics of nuclear energy are quite challenging.  So, over the next 15, 20 years, you’ll see more and more existing nuclear reactors come up to hit their time scales and will start to be decommissioned.  And we don’t see the levels of new investment going in to those nuclear parts to keep up the overall levels of capacity and generation.

 

On the other hand, is China and China is growing very strongly in their nuclear program.  They brought online, I think two nuclear reactors last year.  I think they have something like 19 nuclear reactors currently being built in China.  They have a very strong program and are trying to grow nuclear energy as well as renewables as well a natural gas is part of that attempt to reduce the share of coal within the economy.

 

I think the potential upside here is as China develops its program and they do roll out more and more nuclear reactors, they get better and better at doing it.  And some of those learning gains spill over in terms of reduced costs of nuclear reactors and that makes them more competitive in other parts of the world.  Perhaps not in Europe and U.S. but you can think of the Middle East Africa where you may see increasing demand for nuclear energy if we can see improvements in its relative cost competitiveness.  So, a potential upside risk if you like that.

 

[00:39:50]

Jason Bordoff:  And just a very quick follow up on natural gas, you said it as a bumper year and driven by these policy -- pollution policies in China.  What does that tell us about where it’s headed?  Is that replicable?  I mean are we going to continue to see this kind of level of strong growth or does a shift like that tell us this was maybe kind of a one or two year thing?

 

[00:40:06]

Spencer Dale:  I think the particular example of China, we saw the pace of that growth and just the level of demand would lead to quite severe strains within China, wholesale and retail prices in the winter of last year peaked very significantly.  We saw widespread rationing of the role of gas.  Some of that was just to the pace of the growth.  But I think some of it reflected problems of infrastructure in China, distribution, pipeline distribution still quite incomplete in China, very importantly is storage capacity in China.

 

So, effective storage capacity of China is around 3% of total gas consumption there.  To give you a sort of rough rule of thumb, if you look in Europe or the U.S., it’s closer to 20%.  And you need those types of storage capacity to deal with the seasonal fluctuations, as particularly, as the winter comes and heating demand increases, you need to be at a draw down on those storage facilities.  They just don’t have those in China at the moment.

 

They have programs to build them, but that takes time.  Even in China, it takes time.  So, I think that sort of massive growth we saw in gas demand in China last year growing by over 15%, I think in the calendar year 2018, we will also see strong growth because much of it has spilled into the first quarter of this year.  But when I go to 2019 and 2020, I think we can carry on seeing robust growth in Chinese gas consumption.

 

But the extent of that growth last year, I’m not sure would be immediately repeated because we got sort of these infrastructure issues that need to be ironed out first.

 

[00:41:39]

Jason Bordoff:  We went a bit -- excuse me, over our normal time.  But it’s a podcast, so we can do what we want and people can listen or turn it off.  And even then, we didn’t get to everything.  So, hopefully we can have you back often on the podcast and at Columbia to continue this conversation.   Spencer Dale, thanks for joining us today in New York.  Thanks to all of you for listening. Until next time, I’m Jason Bordoff.

 

[00:42:04]