Oil demand (and prices) set to drop dramatically as new technologies take hold

  • Oil prices are rising now but it won't last.
  • Dropping prices for solar and wind, along with new battery technologies and growing use of electric cars, will create a dramatic shift in demand for oil and gas.
  • In the next 10 years the energy industry will see more change than it has in the past 100.
Dave and Les Jacobs | Getty Images

Since the dramatic and unprecedented advances in production and manufacturing of the Industrial Revolution from the late 1700s to the early 1900s, humans have been digging up coal, oil and gas for energy.

Except for the introduction of nuclear power based on uranium in the 1950s and 60s, nothing has changed. Today, coal, oil and gas remain the primary sources of energy, fueling human activities around the world.

But the recent and rapid decline in prices of alternative energy sources like wind and solar, and the plunging cost to store them presage a very different future on the horizon – one in which fossil fuels go the way of the dinosaurs, and where in the next 10 years we will see more changes to the energy industry than we have seen in the past 100.

To begin, America only recently achieved its position as the largest producer of oil and gas; a rise made possible by hydraulic fracturing, commonly referred to as fracking.

"The drop in demand for oil and gas will, therefore, lower prices and drive out high-cost producers, including most deep-water wells and tar sands."

Controversial among environmentalists for the danger of environmental contamination many argue it poses, fracking has nonetheless revolutionized the energy industry by raising supply and lowering gas and oil prices.

This process of energy extraction involves drilling down into the earth, where previously inaccessible energy reserves can be harvested, essentially fracturing rock to release the hydrocarbons inside.

One major result of the adoption of this new technology and the dramatic drop in gas prices it has produced is the hollowing-out of the U.S. coal industry, reduced from a 35 billion-dollar industry in just 2011, to a 3 billion-dollar industry in 2017.

Using this dramatic shift as an example, we can see the role cost plays in driving the direction of the energy industry. Consider now that solar energy, which has become steadily more competitive as its scale has grown, has gone from producing electric power at $179 per megawatt hour (mWh) in 2009, to $50 per mWh in 2017.

At this rate, solar energy has already undercut gas ($60 per mWh), coal ($102 per mWh), and nuclear energy ($148 per mWh) in cost.

Similar strides have been made in harnessing wind energy sources, with onshore wind costing $40 per mWh and offshore wind sources in 2017 priced at $60.

Posing zero threat to local communities and environments, offshore wind sources are already being adopted by cities like New York, where a contract was recently signed to build an offshore wind farm off the coast of Long Island that will provide power to millions of homes in the nation's most populous city.

Dramatic price drop

Extensive use of wind and solar energy requires large-scale energy storage to handle their intermittency. The dramatic drop in energy storage costs, from $3000/kWh to $170/kWh in about 20 years, has made increased storage capacity possible, mainly through the development of the Lithium-ion battery.

For the same reason your new smartphone can hold a charge longer, wind and solar energy are fast emerging as a viable and reliable way of powering the entire economy.

Oil and gas will still have a market, though a reduced one, in supplying feedstock to the petrochemical industry for making plastics, and in air and sea transportation, where renewables or batteries are unlikely to be competitive. The drop in demand for oil and gas will, therefore, lower prices and drive out high-cost producers, including most deep-water wells and tar sands.

With power increasingly coming from a large number of intermittent sources and from energy stored in batteries, and with consumers increasingly generating their own from solar panels, the utility model is fast-changing.

The process of passing power from large generators to consumers will not support the complex power systems of the future without utilities taking a more coordinating role.

For these reasons, it is possible and increasingly likely that beyond the middle of this century fossil fuels will play little or no role in producing electric power in advanced economies. And if electric vehicles gain ground, as many in the auto industry expect, the future will be largely free of fossil fuels.

The next decade will be an exciting one for the energy industry, and for those who worry about climate change and the environmental impact of our energy use.

Commentary by Geoffrey Heal, the Donald C. Waite III Professor of Social Enterprise and a Chazen Senior Scholar at Columbia Business School. He is the author of Endangered Economies: How the Neglect of Nature Threatens Our Prosperity.

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Correction: An earlier version of this story incorrectly referred to (mWh) as milliwat hours. (mWh) actually refers to megawatt hours. An editor inserted that error.