World economy unlikely to stop relying on fossil fuels: Study

Technological progress, such as the development of hydraulic fracturing and the ability to extract oil from tar sands, is at least partially responsible for a long-term pattern of consistent worldwide growth in fossil fuel reserves. Looking at the average growth rate of these reserves, the study shows that both oil and natural gas grew at a steady rate of 2.7 percent. While coal reserves fell consistently through the late 1990s to 2008, they too have since taken a fairly consistent turn upward; further, there are currently roughly more than 100 years of reserves.

“As long as markets fail to account for the environmental damages from using fossil fuels, there will always be incentives to develop new techniques to more efficiently access these resources,” said Thomas Covert, an assistant professor of microeconomics at the University of Chicago’s Booth School of Business. “It seems unlikely that our technological abilities to recover fossil fuels should stop improving any time soon. With continually improving technology, the world will likely be awash in fossil fuels for decades and perhaps even centuries to come.”

UoC notes that the study’s authors also found that technology has improved significantly in cleaner energy sources. This is encouraging because cheaper clean technologies would reduce demand for fossil fuels. Unfortunately, the trends in clean technology progress are not yet strong enough. For example, the levelized cost of solar power fell from nearly $450/MWh in 2009 to $150/MWh in 2014. Though the downward trend continues today, the cost of natural gas-fired power is still cheaper, even when accounting for the cost of climate-related damages.

The story is similar when looking at alternatives to fossil fuels in the transportation sector: namely, battery-powered electric vehicles. At the current battery cost of $325 per kWh, the authors find that the price of oil would need to exceed $350 per barrel before an electric vehicle would have a lower cost of ownership than an equivalent gasoline powered vehicle. Unfortunately, oil traded at an average of $49 per barrel during 2015 and is currently trading below $30 per barrel. Thus, batteries need to be much cheaper before electric vehicles could cause reductions in demand for fossil fuels.

“While alternative sources of energy and energy storage technologies have vastly improved, lowering costs, they still have a long way to go before they are cost competitive with fossil fuels,” said Chris Knittel, the William Barton Rogers Professor of Energy Economics at the MIT Sloan School of Management and director of the Center for Energy and Environmental Policy Research. “To change this, governments should put a price on carbon emissions and start injecting more money towards the basic R&D that is critical to making these technologies more cost competitive.”

— Read more in Thomas Covert et al., “Will We Ever Stop Using Fossil Fuels?” Journal of Economic Perspectives 30, no. 1 (winter (2016) (DOI: 10.1257/jep.30.1.117)