Demand Doesn't Have to Decrease That Much
Europe can stop buying Russian gas. Russia might have trouble selling it because you can't build new pipelines overnight. Russian oil will find a home somewhere else by boat, rail, or truck.
It turns out a ban isn't necessary anyway. Oil and natural gas supply and demand curves are inelastic. Small changes in supply or demand move prices dramatically. It costs money to produce oil and gas. Reducing the price by 40% might reduce profits by 80%-90%. And a 2%-3% demand decrease might be enough to do the trick.
Why get into the Octagon with an MMA fighter when you can make him slip on a banana peel in the parking lot?
Local vs. Global Markets
Oil is inexpensive to transport. Producing or saving an extra barrel anywhere in the world can help the cause.
Natural gas is more difficult to transport. It has to go in pipelines or via liquid natural gas (LNG) carriers. LNG complexes take years to build under the best circumstances. It isn't practical to put a gas pipeline under the Atlantic. Europe has to handle reducing gas demand or increasing production within its borders.
Strategies
Reducing Demand
There are more options for demand reduction and substitution than supply increases.
Oil Demand
-
Electrification
The market and subsidies are already sending a massive signal to build more batteries and electric vehicles. The constraints are on the supply side. Make sure those factories and mines don't get stuck in red tape. The users that consume the most oil have the incentive to electrify the fastest. Subsidies for certain groups might increase oil demand compared to no support.
-
Cycling Infrastructure
Cycling makes a lot of sense in cities built before cars were a thing. E-bikes make cycling even better. Most people require protected lanes to consider riding. Putting up bollards is fast and easy. E-bikes use fewer batteries and can easily win a bidding war against cars and electricity storage for battery cells if infrastructure drives e-bike demand.
-
European Freight Rail
European railroads are highly regulated. Goods move on trucks much more than in the US, where freight rail is cheaper and liberalized. Freight rail uses significantly less energy than trucks. Encouraging that freight to mode switch to rail solves a lot of problems.
European Gas Demand
-
Renewables
Solar and wind farms are cheap, their construction time is less than a year, and they lower gas and coal demand. Remember, the goal is to decrease gas usage on the margin, not eliminate all gas. Build speed, cost, and output matter - not variability. I wrote previously that gas usage is here to stay even if we build a lot of nuclear and geothermal generation.
-
Batteries and Power Lines
Eventually, you have too many solar panels or wind turbines producing at once. Batteries help, especially with solar. Power lines to hydro-heavy Norway help the most with wind generation. Hydro is the best non-gas way to balance wind. Hurry up and build more of those power lines!
-
Get it Together, Spain!
Most of Europe is terrible for solar. That is unfortunate since wind and solar tend to produce at different times of the day. Sunny Spain is an exception. Its policies around energy, and especially solar, are horrible. Spain has a history of generous subsidies followed by clawbacks or recently windfall taxes on merchant solar. Let the people build solar and sell it at wholesale market prices!
-
Geothermal Heating
Geothermal electricity is expensive because its low-temperature fluid has poor efficiency in generating electricity. With home heating, this isn't an issue. Europe has lots of multi-family buildings that could use district heating. Portions of Denmark and Boise, Idaho already do geothermal district heating. One deep, vertical, and closed-loop geothermal well provides 10x more energy in the form of low-grade heat than it does making electricity.
I wrote about geothermal more here and here.
-
Heat Pumps
Aye, heat pumps. They can help but aren't as good as they seem, especially in this case.
An advantage of geothermal district heating is that it reduces volatility in gas demand. In cold weather, you have homes burning more gas and inefficient gas peaker power plants burning gas to service the electric heat homes. Natural gas prices spike, providing windfall profits to gas producers.
Russia has more freedom of movement during any big cold snap because you still pull a lot of gas to generate electricity. Increasing electrical heating on the margin is good but avoid the mandates.
Many other alternatives to heating are longer term.
-
Industrial Gas Usage
European industry already pays globally high energy prices. They are efficiency leaders, and the most energy-intensive factories reside elsewhere. Industrial gas usage is not a good place to look.
-
Nuclear
First, it was pretty dumb of Germany to shut down its nuclear plants. Onto new nuclear.
Even before nuclear regulations, plants took longer than five years to build. If you want to reduce gas demand as fast as possible, this doesn't cut it. Yes, the second-best time to plant a tree is today. Europeans are known for building expensive electricity generators before they are economical, after all. Nuclear economics are challenging.
Increasing Supply
Natural gas and oil from fracking is the only source that can respond quickly. How do you juice it?
-
Homestead Act, but for Mineral Rights
When governments own mineral rights, less oil and gas gets developed. Governments tend to lease mineral rights in large blocks to big, slow-moving companies. The NIMBYs are rampant.
Compare that to America, where mineral ownership is mostly private. Drilling competition is fierce. Mineral owners make up a powerful constituency that is pro-drilling. Governments can still collect a windfall through severance taxes.
Governments should cede all mineral rights to the landowner. The US could sell government owned land and minerals in family size blocks. A pumpjack looks a lot prettier when it helps take your grandkids to Disney World.
-
Deregulate Hydraulic Fracturing
Few reserves are available without hydraulic fracturing. Fracking in Europe matters because drillers can bring large volumes of new gas online in short periods. Periods of high prices are brief.
-
Subsidizing New Supplies
Honestly, this is a bad idea.
Acreage and drilling results are highly non-linear. If you subsidize through loans, you will get massive amounts of terrible quality wells with little to show for it. The grifters can spend money like drunken sailors faster than productive drillers find good prospects. Any attempt to prevent gaming will only hamper the market.
Widespread price supports are the other main option. The oil and gas industry is always cyclical. High prices are the cure for high prices, and low prices are the cure for low prices. Paying $20 extra a barrel to drillers only makes the market more bipolar and the subsequent crash harder. Those crashes can reverberate into bank failures, like in the 1980s.
Beating Russia
Focus on lowering the profits. Oil is a global market in a way natural gas is not. Europe has to do the heavy lifting for natural gas. There are many economical options available, especially for substitution. Increasing oil and gas supply requires massive changes in the law for European countries.
Europe has to keep investing in new gas supply and reducing demand to prevent future price spikes. Eventually, new technologies that create synthetic gas or shift industrial processes to electricity will pick up the slack. Maybe even a few nuclear power plants will get built.
Ending Russia's Hydrocarbon Windfall
2022 March 2 Twitter Substack See all postsWhat is the correct goal and what can be done quickly?
Demand Doesn't Have to Decrease That Much
Europe can stop buying Russian gas. Russia might have trouble selling it because you can't build new pipelines overnight. Russian oil will find a home somewhere else by boat, rail, or truck.
It turns out a ban isn't necessary anyway. Oil and natural gas supply and demand curves are inelastic. Small changes in supply or demand move prices dramatically. It costs money to produce oil and gas. Reducing the price by 40% might reduce profits by 80%-90%. And a 2%-3% demand decrease might be enough to do the trick.
Why get into the Octagon with an MMA fighter when you can make him slip on a banana peel in the parking lot?
Local vs. Global Markets
Oil is inexpensive to transport. Producing or saving an extra barrel anywhere in the world can help the cause.
Natural gas is more difficult to transport. It has to go in pipelines or via liquid natural gas (LNG) carriers. LNG complexes take years to build under the best circumstances. It isn't practical to put a gas pipeline under the Atlantic. Europe has to handle reducing gas demand or increasing production within its borders.
Strategies
Reducing Demand
There are more options for demand reduction and substitution than supply increases.
Oil Demand
Electrification
The market and subsidies are already sending a massive signal to build more batteries and electric vehicles. The constraints are on the supply side. Make sure those factories and mines don't get stuck in red tape. The users that consume the most oil have the incentive to electrify the fastest. Subsidies for certain groups might increase oil demand compared to no support.
Cycling Infrastructure
Cycling makes a lot of sense in cities built before cars were a thing. E-bikes make cycling even better. Most people require protected lanes to consider riding. Putting up bollards is fast and easy. E-bikes use fewer batteries and can easily win a bidding war against cars and electricity storage for battery cells if infrastructure drives e-bike demand.
European Freight Rail
European railroads are highly regulated. Goods move on trucks much more than in the US, where freight rail is cheaper and liberalized. Freight rail uses significantly less energy than trucks. Encouraging that freight to mode switch to rail solves a lot of problems.
European Gas Demand
Renewables
Solar and wind farms are cheap, their construction time is less than a year, and they lower gas and coal demand. Remember, the goal is to decrease gas usage on the margin, not eliminate all gas. Build speed, cost, and output matter - not variability. I wrote previously that gas usage is here to stay even if we build a lot of nuclear and geothermal generation.
Batteries and Power Lines
Eventually, you have too many solar panels or wind turbines producing at once. Batteries help, especially with solar. Power lines to hydro-heavy Norway help the most with wind generation. Hydro is the best non-gas way to balance wind. Hurry up and build more of those power lines!
Get it Together, Spain!
Most of Europe is terrible for solar. That is unfortunate since wind and solar tend to produce at different times of the day. Sunny Spain is an exception. Its policies around energy, and especially solar, are horrible. Spain has a history of generous subsidies followed by clawbacks or recently windfall taxes on merchant solar. Let the people build solar and sell it at wholesale market prices!
Geothermal Heating
Geothermal electricity is expensive because its low-temperature fluid has poor efficiency in generating electricity. With home heating, this isn't an issue. Europe has lots of multi-family buildings that could use district heating. Portions of Denmark and Boise, Idaho already do geothermal district heating. One deep, vertical, and closed-loop geothermal well provides 10x more energy in the form of low-grade heat than it does making electricity.
I wrote about geothermal more here and here.
Heat Pumps
Aye, heat pumps. They can help but aren't as good as they seem, especially in this case.
An advantage of geothermal district heating is that it reduces volatility in gas demand. In cold weather, you have homes burning more gas and inefficient gas peaker power plants burning gas to service the electric heat homes. Natural gas prices spike, providing windfall profits to gas producers.
Russia has more freedom of movement during any big cold snap because you still pull a lot of gas to generate electricity. Increasing electrical heating on the margin is good but avoid the mandates.
Many other alternatives to heating are longer term.
Industrial Gas Usage
European industry already pays globally high energy prices. They are efficiency leaders, and the most energy-intensive factories reside elsewhere. Industrial gas usage is not a good place to look.
Nuclear
First, it was pretty dumb of Germany to shut down its nuclear plants. Onto new nuclear.
Even before nuclear regulations, plants took longer than five years to build. If you want to reduce gas demand as fast as possible, this doesn't cut it. Yes, the second-best time to plant a tree is today. Europeans are known for building expensive electricity generators before they are economical, after all. Nuclear economics are challenging.
Increasing Supply
Natural gas and oil from fracking is the only source that can respond quickly. How do you juice it?
Homestead Act, but for Mineral Rights
When governments own mineral rights, less oil and gas gets developed. Governments tend to lease mineral rights in large blocks to big, slow-moving companies. The NIMBYs are rampant.
Compare that to America, where mineral ownership is mostly private. Drilling competition is fierce. Mineral owners make up a powerful constituency that is pro-drilling. Governments can still collect a windfall through severance taxes.
Governments should cede all mineral rights to the landowner. The US could sell government owned land and minerals in family size blocks. A pumpjack looks a lot prettier when it helps take your grandkids to Disney World.
Deregulate Hydraulic Fracturing
Few reserves are available without hydraulic fracturing. Fracking in Europe matters because drillers can bring large volumes of new gas online in short periods. Periods of high prices are brief.
Subsidizing New Supplies
Honestly, this is a bad idea.
Acreage and drilling results are highly non-linear. If you subsidize through loans, you will get massive amounts of terrible quality wells with little to show for it. The grifters can spend money like drunken sailors faster than productive drillers find good prospects. Any attempt to prevent gaming will only hamper the market.
Widespread price supports are the other main option. The oil and gas industry is always cyclical. High prices are the cure for high prices, and low prices are the cure for low prices. Paying $20 extra a barrel to drillers only makes the market more bipolar and the subsequent crash harder. Those crashes can reverberate into bank failures, like in the 1980s.
Beating Russia
Focus on lowering the profits. Oil is a global market in a way natural gas is not. Europe has to do the heavy lifting for natural gas. There are many economical options available, especially for substitution. Increasing oil and gas supply requires massive changes in the law for European countries.
Europe has to keep investing in new gas supply and reducing demand to prevent future price spikes. Eventually, new technologies that create synthetic gas or shift industrial processes to electricity will pick up the slack. Maybe even a few nuclear power plants will get built.