July 28, 2020
by Randall Morton, Founder of The Progressive Forum, the Oilfield Breakfast Forum, and Randall Morton International, Inc.
A depression is a good time to start a business. This is what I learned in Houston’s 1985 oil bust. After losing my job in an oil supply company, I was overwhelmed by the shock of insecurity and grief, and lingered in an emotional limbo for months.
Getting busy was the tonic, as was my discovery of Houston’s special qualities for self discovery and enterprise: Friendly strangers ready to meet about new ideas, an enormous city with talented, risk-taking people who had also moved here for business, and one of the world’s largest international business communities. The 1985-1986 depression created massive dislocations of capital and new managements looking for answers. While anxious and distressed, I learned to reach out and stumble into opportunity. After some freelance projects, I landed a sustaining client for my new market communication practice, a leading tubular connection company with a new CEO, Hydril, which had sadly laid off 13 people in its communication department. I found even more business with my unique knowledge of downhole tubular products and served steel mills in Japan and Mexico. Over 30 years, my practice grew to include Halliburton as my largest client.
I learned even more fundamentals about Houston in two lecture series I started, The Oilfield Breakfast Forum and The Progressive Forum, which engaged the great minds of the energy industry as well as the progressive movement. I learned that Houston’s open-minded and thoughtful leadership has a history of translating passages of pain into big opportunities and smart renewal. As a city that accepts failure and responds with change, Houston is a place where big things are possible.
I’ve worked with Houston’s inventive minds capable of scaling-up vast engineering and technological systems. From grounded experience, I know we are uniquely qualified to lead the world’s transition into renewable energy and solve three important crises at the same time: Climate, inequality, and economic recovery. We are capable of creating a Houston renaissance over the next 10 years as other cities have done after their originating industries collapsed. They still make steel in Pittsburgh and cars in Detroit. Oil is still part of my hometown of Tulsa, the former Oil Capital of the World. But visionary leaders renewed Tulsa and Pittsburgh. FDi Magazine named Tulsa number eight for cities of the future, and The Economist named Pittsburgh the second most livable city in the United States. However, Detroit was forced into bankruptcy in 2013. Houston has a choice. If Houston leaders don’t get organized and drive the renewable energy transition, Silicon Valley will, and Houston could become more like Detroit.
Instead of the Energy Capital, we can become the New Energy Capital. Let’s create a unique think tank and foundation, an organization directed by proven Houston stars, not just for research and ideas, but for steering resources into the community to catalyze a new era of economic and cultural growth. We could call it HAT for Houston Area Transition. Leaders of HAT should be Houston’s demonstrated innovators, the pioneering icons of finance, technology, renewables, nonprofit, environment, government, labor, education, healthcare, emotional health, arts, youth movement, science, business, racial equality movements, and more. HAT would focus on driving opportunities with actionable ideas and projects. Its website-hub would offer transparency and opportunity for continuous community input. HAT values should be defined by environmental sustainability, widely shared prosperity, health and quality of life, and leadership in national security. According to James Baker’s article in this May/June issue of Foreign Affairs magazine, “The winner of the emerging clean energy race will determine the economic and geopolitical balance of power for decades to come. The United States should lead the way.” And so should Houston. It’s time to put our HAT on.
This Oil Bust Isn’t Like Past Cycles
This oil bust isn’t like past cycles when we waited for prices to rebound. What’s different this time? Investors pivot resolutely toward growth, and clear evidence shows investors have committed to surging growth in renewables. Moreover, COVID-19 is accelerating the transition, upending fossil fuel demand by historic proportions and capsizing petroleum’s reliability as a place to invest. “Five years ago, fossil fuels were the cheapest baseload,” reports Carbon Tracker. “The collapse in renewable costs means that for 85% of the world, renewable electricity is the cheapest source of new baseload.” The Economist says, “Oil producers should see COVID-19’s turmoil for what it is: Not an aberration, but a sign of what is to come.”
Financial Markets Determine Transitions: Whale Oil to Petroleum to Renewables
For example, before petroleum refining, in the origin story of the petroleum industry, investors spurned a shrinking whale oil industry to embrace growth technology in petroleum refining. The whale oil industry was the energy incumbent, dominant for decades providing fuel for lamps. But the transition went fast when, in the 1850s, inventors created technology to refine crude oil to produce kerosene for superior and cheaper lamp illumination. The first modern oil well in Titusville, Pennsylvania, in 1859, led the way in scaling-up refining and production. Simultaneously, the American whaling fleet was decimated, much like today’s drilling rig count. The whaling fleet had been growing for 50 years until its peak of 199 ships in 1858. In eight years, the fleet declined to only 105 ships, and by 1876 to 39 ships. Kerosene technology generated a lucrative market for lamp oil until 1909 when demand from gasoline-powered automobiles exceeded it. Today, transportation still consumes most of the oil production in the United States today.
This same financial dynamic is repeating today in another energy paradigm shift. According to The Economist, “Energy was the worst-performing sector in the S&P 500 index in four of the past six years.” By contrast, a report by think tank BloombergNEF reported, “Renewable investments in the U.S. … went up 28% last year to a record $55.8 billion. … Between now and 2050, renewable power will be the fastest-growing source of electricity.” The New York Times reported that “renewable energy sources are set to account for nearly 21% of the electricity the United States uses for the first time this year, up from about 18% last year and 10% in 2010 … even as oil, gas, and coal companies struggle financially or seek bankruptcy protection.” Goldman Sachs reports they raised their own target to “$150 billion in capital deployment for the clean energy sector by 2025.”
The pandemic is fast-tracking the transition. While many figures in this article were prior to COVID-19, the economics have been set. Investors are pulling out of petroleum’s volatility and its “long-term solvency issues” according to the Institute for Energy Economics and Financial Analysis. In this year’s first quarter, while oil and gas demand tumbled, “Renewables were the only source that posted growth in demand … and demand is expected to increase,” according to the International Energy Agency. While BloombergNEF says 2020 installations of wind and solar will scale back by 12% and 8%, respectively, long term, “the world’s renewable power supply will grow by 50% over the next five years, adding new power generation equivalent to the entire electrical capacity of the United States.”
Whether oil and gas prices go up or down, the outcome is positive for renewables. Rising prices would hasten the transition as renewable electricity prices become even more competitive. And if prices lower? According to BloombergNEF, “lower oil and gas prices can cause short-term challenges for clean energy alternatives … but in the context of broader structural changes … this drop in demand may mark a fundamental tipping point for the petroleum industry.” Whether gas goes up or down, McKinsey & Company points out, the competitive costs of “renewables are only going in one direction: Down.”
We’re living in a historic turning point that mirrors the transitions of horses to cars, sails to steam, and landlines to cell phones. These transitions typically occur when the impact is felt in financial markets, according to Kingsmill Bond, author of 2020 Vision: Why You Should See the Fossil Fuel Peak Coming. He writes that the tipping point occurs when investors realize “renewables supply all the growth in energy demand.”
The Future of Gas: Investors Are Turning Away From Gas Power, Fearing Stranded Assets
Most natural gas is used to generate electricity, about 38% according to the IEA, whose share grew during the shale revolution of the last 20 years. Gas was supposed to be the bridge fuel toward renewables, but investors and regulators are skipping gas and going direct to renewables.
For example in 2019, GE cited “economical considerations” when it announced it was closing a $1 billion gas power plant in Southern California, the Inland Empire Energy Center, only 10 years into its planned 30-year life cycle, because of surging lower-cost competition from renewables according to the IEEFA. The institute reported that “GE’s bet on future sale of natural gas plants has been a costly mistake … driven largely by the mistaken assumption that demand for gas … would continue to grow.... GE’s gas turbine sales dropped from 102 in 2017 to just 42 in 2018.”
In several states, regulators are choosing renewables over natural gas. According to World Resources Institute, Indiana regulators rejected a proposal by the state’s electric utility to replace a plant with an 850 megawatt gas-powered plant, concerned that “such a major gas plant investment could become a stranded, uneconomical asset in the future …” They are pushing the utility “to consider more decentralized, lower-carbon resources such as wind, solar, and storage that would offer greater resource diversity, flexibility, and cost effectiveness.” This transition to renewables is striking in a state like Indiana in the heart of coal country.
WRI also reports that Arizona called for a moratorium on new gas plants and is considering a mandate to source 80% of its power from renewables. Colorado’s largest utility announced in 2019 it would replace 660 megawatts of coal-fired generation with the biggest package of renewable energy projects ever proposed in the United States, more than 1,800 megawatt of wind, solar, and battery storage.
Renewables are quickly replacing natural gas in the same way gas replaced coal (which has nosedived from about 50% of power generation to 23% in about 13 years).
Utility-Scale Batteries Are Solving the Intermittent Power Problem
Grid-scale battery storage is a key developing breakthrough. So far, “the average utility-scale lithium-ion battery storage system is 1.7 hours but it can reach 4 hours,” according to the Department of Energy. Experts say that as battery storage is “co-located” with wind and solar and becomes cheaper, 4 hours of charge is increasingly solving the problem of intermittent power when solar and wind aren’t producing, making systems of solar-wind-storage viable, a storage capability that’s destined to get better and cheaper. Last month, BloombertNEF reported, “Solar PV and onshore wind are now the cheapest sources for new-build generation for at least two-thirds of the global population … in locations for peaking purposes (up to 2 hours of discharge) in … regions like Europe, China, and Japan.”
BloombergNEF also wrote that since 2018, costs have halved for average battery storage systems with a 4-hour duration.
In Texas, as reported by the Houston Chronicle, “Renewables are growing so quickly that solar power is expected to generate 61% of new power capacity coming online in Texas between now and 2023, according to the state grid manager, the Electric Reliability Council of Texas. Wind represents another 27% of new capacity.” But for "natural gas … Texas is expected to add only 5% of new capacity in the next three years.” The Chronicle reported that Texas has become a leader in grid storage, ranking fourth among states for installed battery capacity. The article cites Steve Vavrik, CEO of Broad Reach, an energy storage company based in Houston and supported by private equity firms: “Growth in battery development should make Texas a prime location for data centers, manufacturing and pharmaceutical companies looking to expand operations by providing affordable, clean power.”
What about Houston’s other gas-related industries? Regarding gas pipelines, Rocky Mountain Institute says for “capacity presumed to serve new power plants … decline in throughput will lead to rising costs for … utility customers,” which would be unacceptable for consumers. Petrochemical profits face headwinds from mounting backlash against plastics and long-term uncertainty for product demand, especially jet fuel. For LNG companies, “The financial value of LNG may turn out to be overhyped,” reports IEEFA. As recently as a year-and-a-half ago, gas sold for as much as $12. But this July 19, the price was only $1.69 per MMBtu.”
The Future of Oil: Expanding Electric Transportation Is Undermining Demand
What about oil? Most of it goes for transportation, about 60% according to IEA. But today, you can buy a new electric car for the average price of a new American car even without tax incentives. That’s about $36,000, according to Edmunds. While Prius, Tesla, and Leafs used to be a tiny niche, in 2018, global EV sales increased 63% over the prior year, according to IEA. BloombergNEF predicts that global EV sales will shrink this year, falling 18%, but sales of combustion engine units are set to drop even faster, by 23%. Long-term prospects for EVs remain undimmed as BloombergNEF forecasts sales at 5.4 million in 2023, up from 1.7 million today. And by 2040, more than half of all new car sales globally will be EVs.
Big Oil’s conventional thinking, its basic economic model for viability, contends that fossil fuel demand will grow as developing countries grow their GDP. However, McKinsey reports that energy demand is “de-coupling” from GDP growth because of “continuing shift from industrial to service economies … marked increase in energy efficiency … and growing use of renewables. Renewables, including wind, solar, and also hydro power, will provide more than half the world’s electricity by 2035.”
Houston’s Special Opportunity for Premium Jobs
In Houston, renewables promise a more prosperous and secure future than petroleum, whose workers were continually upended by volatile oil prices. A fact sheet published by the Environmental and Energy Study Institute said that “globally, the renewable energy sector employed 11 million people in 2018, 700,000 more than in 2017.” In the United States, "jobs in energy efficiency experienced significant growth—the sector now employs more then 3 million people" in the U.S. According to NEUVOO.com, a job search site, renewable energy workers earn an average of $46.15 an hour. “The transition to a lower-carbon future can drive significant near-term job creation while increasing economic and environmental resiliency. And with near-zero interest rates for the foreseeable future, there is no better time than the present for such investments,” according to McKinsey.
Houston has the talent and money to take advantage of what McKinsey calls “radical new opportunities” to do things like connect “billions of devices” to “capture opportunities from energy efficiency, electrification, or decarbonization” when “energy systems take on aspects of networked economies,” as we “sharpen our partnership paradigm with technology providers … financial companies … and the public sector.”
According to the Greater Houston Partnership, our “region offers access to more engineers than any other U.S. metro” plus “more than 100 solar related companies, 30 wind related, 136 online wind projects in Texas, and $3.7 billion in cleantech venture capital funding.” This is not to mention our stellar assets in healthcare, biomedical research, aerospace, and manufacturing, all of which our vibrant community has grown since the 1985 oil bust. Getting wealthy with renewables would also help Houston cut carbon emissions by 40% by 2030, the goal of Houston’s new Climate Action Plan, which should be updated to factor the quickening opportunities driven by COVID-19.
Houston’s Massive Green Assets
In this decade, let’s awaken to our massive green assets, a verdant endowment comprising a major part of the North American central flyway of migratory birds, which we urban dwellers are hardly aware of. Tulsa learned to tap its green assets it calls “Green Country” of Northeast Oklahoma, creating a park of such splendor that National Geographic featured it in photographs. It’s called Gathering Place: A Park for Everyone. But the Houston region has even greater opportunities with green assets. Pioneer thinkers at Rice University are modeling markets to pay meaningful money to owners of our ranches, wetlands, and prairies to sequester carbon and water to solve our climate and flooding crises.
The Texas Triangle, a Progressive Strength
Let’s develop our unique regional opportunities. In the next 10 years, as the Texas Triangle expands, it will offer untapped potential for economic and ecological partnerships. An editorial in the Houston Chronicle by Henry Cisneros, former Mayor of San Antonio, and William Fulton, director of the Kinder Institute, explained that Dallas, Ft. Worth, San Antonio, Austin, and Houston should grow to the equivalent of metro London or Beijing. The editorial said the Texas Triangle now comprises “66% of the state population and 77% of the state’s gross domestic product.” As an urban coalition, we should push progressive state legislation for clean energy like Texas did for wind, which became a leading world model for the type of scale needed to solve the climate crisis. The mega-urban metro could send and receive delegations from places like Pittsburgh and Copenhagen to grow business in renewables and civic renewal.
Houston Leadership in National Security
Renewables will become essential to America’s national security, according to top strategic leaders, and Houston can further its role as the national energy innovator. This May/June issue of Foreign Affairs features the landmark article by our own James Baker of the Baker Institute, who served as both Secretary of Treasury and State under Ronald Reagan. He and co-authors George Schultz and Ted Halstead describe a practical business-political path in the article entitled “The Strategic Case for U.S. Climate Leadership: How Americans Can Win With a Pro-Market Solution,” which is now an even more important opportunity for Houston’s economic recovery, saying, “A fundamental paradigm shift is occurring. Climate action and economic growth, far from being mutually exclusive, are not only compatible but also increasingly interdependent.”
Not only do renewables make a superior business case versus fossil fuels, they make a superior case for governmental investment toward economic recovery. Nobel laureate Joseph Stiglitz was co-author of a report just issued by Oxford University, which said as far as “investment in renewable energy production … in the short term, clean energy infrastructure construction is particularly labor intensive, creating twice as many jobs per dollar as fossil fuel investments.” The authors studied more than 700 economic stimulus policies in 53 countries since the 2008 financial crisis and concluded the COVID-19 pandemic offered an important opportunity to “build back better” to solve the climate crisis.
Let’s rouse the business opportunities at our feet. The next decade is an opportunity to generate a Houston renaissance by taking the most practical economic course. While still works in progress, post-industrial cities like Pittsburgh and Tulsa are proven examples of hope. This common-sense direction is also the path to solve our three major crises: Economic recovery, inequality, and climate. The pain of our current passage, the common suffering of rich and poor, the common suffering of politically right and left, are driving common support for dynamic business answers. The bottom line: Profitable investments toward renaissance and resilience are better than endless trillions for rescue. Let’s put our HAT on.