ENERGY AND THE DIGITAL FUTURE

Amy Myers Jaffe - Jun 15,2021

Innovation in energy technology has been central to US national security and global power since the days of Thomas Edison and Henry Ford. Oil played the leading role in that relationship throughout the 20th century. But the next phase of innovation, driven by digital technology and related developments, points to a declining role for oil. As current social and demographic changes drive environmental activism, digital technology looks likely to weaken the oil and national security link. As history also shows, national institutions and regulatory structures play a critical role in promoting the kind of innovations that lift nations to prominence. Fostering the US innovation culture will be vital to maintaining America’s power and influence globally at a time of rapid change. A vast array of inventions to come such as robot cars, smart device apps and home battery systems could transform the way we use energy in our everyday life, while reducing the role of oil. Here and in my book, Energy's Digital Future, I examine the far-reaching implications of these new technologies for oil markets and energy geopolitics.

We are facing such an unprecedented level of digital and technological change that the majority of larger companies need to become tech companies to survive, let alone thrive. Governments and other large institutions, including major businesses, are being reshaped, in some cases in dystopian ways. Some changes will be dramatic. This will be especially true for energy.

In the future, countries that emphasize easily accessed, energy-saving technologies could wind up best positioned in trade and the global economy. The new technologies are likely to better prepare countries to recover from extreme weather events and other calamities, offering both security, convenience, and economic benefits to their citizens. Militaries will also need to position themselves to source energy from fuels and power systems that are ample and reliable and will be best suited to fuel automated vehicles and drones.

The revolutionary changes coming in transportation, electricity and manufacturing have the potential to usher in dramatic reductions in oil use and lessen the geopolitical standing of oil-producing countries like Saudi Arabia and Russia. Historically, expectations were that oil-producing countries like Saudi Arabia, Russia, Iran and Venezuela, which sit on over a hundred of years of oil and gas reserves, would be able to leverage their coveted energy exports to gain international power and influence as alternate oil supplies became scarcer. However, digital innovation has the potential to drive the oil intensity of the US and global economy lower still. The incentive to do so exists not only for environmental reasons such as climate change but also to protect economic growth. Volatility in oil prices remains a significant determinant for the pace of global GDP and inflation.

We are on the verge of a large number of transformative technologies, such as on-demand travel services, automated vehicles, data and GPS-assisted logistics, decentralized electricity microgrids and 3-D printing, that will increase energy production and distribution while at the same time optimizing energy usage to do more with less. Big data combined with 5G communications are core technologies for logistics and self-driving vehicles, which will likely allow energy efficiencies that human-controlled vehicles cannot offer. Advanced manufacturing will shrink the use of expanded global supply chains, reducing the need for oil in shipping and freight. Telecommuting and international e-meetings have demonstrated the potential to lower personal travel, reducing demand for jet fuel and motor fuels for daily commuting.

In recent scenarios, work with colleagues from Columbia University’s Center on Global Energy Policy and University of California Davis found that if the pandemic’s effects on energy use linger, over 8.4 million barrels per day of oil demand could be wiped out between now and 2030 through green stimulus that focuses on high-tech competition between the US, China and Europe to accelerate R&D and investment in electrification technologies, low-carbon fuels and advanced manufacturing. The scenario includes a wide build-out of electric vehicle charging stations and increased development of alternative fuels for aviation, shipping and freight and e-commerce delivery trucks.

Today's vast range of digital innovation harkens back to the wave of transformation in electricity and automation in the early 20th century led by Edison and Ford, which was based heavily on oil. That era of American business innovation and entrepreneurship gave the US a technological edge over geopolitical rivals and ensured US military supremacy. Ford’s mass-produced vehicles proved critical in World War I to overcome Germany’s advantageous access to European railroad transport. Over the course of World War I, US manufacturing provided a huge percentage of allied war material, with Ford Motor Co. alone contributing more than the entire Italian national war effort. As a result of these technological changes, the US domestic oil industry constituted two-thirds of world oil production by the 1940s and was a crucial feature of Allied success against Germany and Japan.

Now, decades later, a new geopolitical rivalry is emerging among great powers seeking to dominate critical digital technologies to be applied to energy and mobility. A new race to electrified self-driving vehicles and drones, armed with artificial intelligence, machine learning, and monster data analytics are about to revolutionize warfare and change the nature of critical supply chains. But leadership in today's new digital energy technologies comes with a much smaller role for oil than in the 20th century.

Oil Market Implications

The realization that we have the technological wherewithal to sharply reduce oil use is a powerful antidote to the petro-power that defined the 20th century. Just the possibility that digital technologies could create a peak in oil demand is already influencing decision-making in the world of oil. Moreover, unlike a theoretical backstop technology, the digital technologies that could reduce the need for oil exist and are already in commercial use. That puts oil producers, like those in Opec, in a bind. Promoting too high a price of oil now might stimulate an earlier demise to oil’s revenue-generating potential later. If Opec members can no longer rest assured that future resource scarcity will bring financial rewards down the road, they must rethink their entire strategy. In a world where it could eventually lose market share to the application of digital technology, does it make sense for Opec to delay developing its vast oil reserves for a future time frame? Doing so runs the risk that a certain percentage of reserves could become “stranded.”

The whiff of uncertainty about future oil demand, whether due to a global climate agreement, due to a rapid shift to digital technologies or both has ushered in new thinking among the world’s largest private oil companies. They are actively withdrawing from high-cost oil reserves that take decades to produce in favor of producing cheaper legacy assets that can be brought to market more quickly. In a world where oil demand starts to peak, rising oil production and sales growth might not be possible for all players. Oil companies have to decide whether it makes sense to look for more oil, rather than producing the inventory of oil reserves they have already found, while pivoting to new low-carbon alternatives to oil.

Opec members are struggling with the lesson of recent years: high oil prices invite energy innovation. In essence, in energy economics terms, the digital revolution has simultaneously increased the elasticity of oil supply from non-Opec, while at the same time it has increased the elasticity of demand for oil through new technologies that might bring a peaking in oil use. Whether Opec keeps trying to hold prices up in the face of shrinking market share and a shorter, more frequent oil boom and bust cycle, or instead tries to push out more oil to monetize as many reserves as possible, the end state will likely be hard for petrostates to navigate on a budgetary basis. That will bring geopolitical drawbacks that are already starting to manifest themselves.

Geopolitical Implications for the US

The advent of energy-saving devices, the internet of things, and advanced logistics cloud the economic and geopolitical future of many petrostates. There could be potentially deleterious effects on regional and global peace and stability. It’s not in the national interest for the US to look at any declining importance of oil as an excuse to disengage. The US needs to prepare for this possible future and rethink how to find ways to create a softer landing for important oil states around the world and a more fine-tuned deterrence for oil-rich adversaries of America.

To counter increased instability in the more politically fragile oil-producing nations, the US needs a multipronged approach. It should still pursue policies designed to lower oil demand, even though it has its own oil supply. The US should pursue alternative fuels such as renewable natural gas, electricity and hydrogen in cars and trucks and regulating new technologies like robo-taxies and ride-hailing services to ensure their proliferation helps reduce oil use. Lower US domestic demand frees up more US oil for export thereby watering down the market power of other large oil producers, reducing price shocks.

But equally important, the US should also continue diplomatic efforts to assist regional institutions such as the Organization of American States to resolve internal problems in oil-producing states such as Venezuela. In the Middle East, as countries begin to feel the pinch of lower oil revenues, the US should redouble international efforts to slow the sale of arms to all parties in the region from all actors including Russia and China and to press allies to shift spending to development efforts. For the Middle East and beyond, Venezuela's predicament stands as a stark warning to other petrostates on the need to diversify away from oil in line with technology opportunities that will assist in coping with rising temperatures and water and food scarcity. The US should be part of that solution, investing together alongside oil-rich allies in the new technologies that will ensure their successful responses to climate change.

Amy Myers Jaffe is the author of Energy's Digital Future: Harnessing Innovation for American Resilience and National Security, which was released in May by the Center on Global Energy Policy at Columbia University. She is research director and managing director at the Climate Policy Lab at Tuft University's Fletcher School.

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