IRA’s Hidden Effect – Destroying Fossil Demand

August 20, 2022

Zeke Hausfather on Twitter:

The biggest climate impact of the new IRA bill is also one of the most under-appreciated: demand destruction for fossil fuels.

US oil and gas consumption has almost always gone up. Now we are quickly moving toward a world where clean energy is so cheap, demand will peak and fall 

Even before the IRA a number of analysts (including some oil majors) were projecting peak oil demand between 2025 and 2030; (above) this will help further accelerate a global transition away from fossil fuels.

Falling US oil and gas demand substantially changes the equation going forward. It means that fossil fuel prices will likely fall as demand declines, which in turn has big implications for supply. 

Even though the IRA bill unfortunately includes provisions opening up areas for fossil fuel development, an oil company today is going to have second thoughts developing high-cost offshore drilling that might take seven years to come onto the market. 

In other words, the (much stronger) parts of the IRA that make clean energy cheap effectively undermine the provisions that enable additional fossil fuel supply, as supply will only be developed if enough demand exists to make it cost-effective. 

And while the US will make up for some reduced domestic demand through additional fossil fuel exports, our export capacity for gas is limited and the dramatic growth of EVs globally will disadvantage relatively high-cost US oil. 

So while I wish we didn’t have some provisions in the bill that support oil and gas development, I’m a lot less worried about them because the parts of the bill that reduce demand for fossil fuels are so strong. 


2 Responses to “IRA’s Hidden Effect – Destroying Fossil Demand”

  1. J4Zonian Says:

    “supply will only be developed if enough demand exists to make it cost-effective”

    Or if enough corruption exists to keep or even increase subsidies and externalities that are keeping fossil & fissile fuels going now. (As if there’s not 10 times more corruption than needed for that.) Cancel those subsidies, and subsidies-by-another-name, and fuels would stop the next day. But of course neither party will ever do that.

    Gov. Sec. Rick Perry’s opposite-day conclusions from the study that showed “baseload” wasn’t needed, the $30 million bribe for keeping coal and nukes alive instead of efficiency and renewables in an efficiency and renewables bill in Ohio, corruption in Illinois, Texas, Kentucky, a dozen other states we know about. It won’t change until we change who has power in the US.

    • rhymeswithgoalie Says:

      I was hoping (still am) for a “gold rush” mentality for investing in RE like the tech bubble of the 1990s. This would include some large amount of losses as those hoping to get rich on the transition bet on the wrong horse.

      My boring advice is go after the companies who make the picks and shovels. That is, invest in companies that provide resources that any chemical battery would need.

      (The flip side is investing in companies that provide things like seawater pumps or fireproof house- and car-wrappers for all of the adaptation.)

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