The Good News of the Recession Tomorrow
Recession looks to be arriving ahead of schedule this year. To the US, Europe and perhaps soon the world. It isn’t here yet, but the signals are bad and getting worse. The good news is that the energy transition remains on track, and if the economic downturn worsens — as seems likely — it too may arrive early.
Yes, the cost of renewables is up a bit. But they are getting cheaper relative to ever costlier gas- and coal-fired power generation. And electric vehicles (EVs) are flying off the internet sales pages as quickly as they get made.
Economically Speaking
The climate crisis is anything but a laughing matter. Even so, absurdism may be the best lens for viewing this crazy moment, when the pro-growthers imagine growth that isn’t there, and degrowthers doubt the feasibility of stopping growth even as it grinds to a halt.
For example, we’re told in the business press that it’s really not so bad that US GDP unexpectedly shrank last quarter. The bottom-line number came out at a negative 1.4% for first-quarter GDP only because the US imported more and exported less, and because businesses didn’t build inventories much. However, consumer spending continued to rise! We’re still buying plenty of stuff. Who cares if we buy more from other parts of the world and sell less? Or if the economy is still skating on thin “just-in-time” inventories? The job of the US in the Great Global Economy is to consume, not produce, and we’re doing a great job of that.
The Europeans still managed to pull off some economic growth last quarter, if you call 0.2% growth. But everybody now concedes that full cutoff of Russian natural gas would mean big-time recession, and Russia’s cutoff of Poland and Bulgaria is a reminder this could happen at any time.
Manufacturing indices fell sharply in China in April, which is bad, since China’s job in the Great Global Economy is to produce, not to consume. In fact, pretty much everything in the Chinese economy was down except construction and the country’s Dynamic Zero Covid policy, both of which are the purview of China’s ever-optimistic government. “The fundamentals of China’s long-term economic improvement have not changed,” the stated with its usual confidence.
Back in the USA, the Federal Reserve Board next month will almost certainly announce the first of many interest rates hikes. Its stated aim is to reduce inflation, which sounds good. But how do higher interest rates do that? One way is to make credit-card payments higher, so that people have to buy less. Remember how strong consumer spending was what made economists optimistic about avoiding a recession? Well, the Fed is changing that.
Another thing the Fed wants to change is “wage inflation.” There goes the low unemployment the economists cite as the other strong support plank for the US economy. Still the ever-optimistic Fed says it can engineer a “soft landing” in which inflation is defeated without collateral damage to the economy.
Energetically Speaking
In plumbing the depths of all this data in search of a bottom line, let’s recall that there isn’t enough energy available worldwide right now — at least not in the right places — to fuel current levels of economic activity. Nor will there be for another year or more. That means economic activity has to shrink, another way of saying there has to be a recession. The more, and more quickly, Russian energy purchases are cut, the deeper the recession will be — and the more, and more quickly, fossil fuel use will fall.
In the meantime, oil and gas prices are high, and politicians are calling for more oil and gas now but, confusingly enough, not later, when it could become available. Much is being made by oil industry supporters of the notion that such calls imply a brighter future for fossil fuels. This is akin to the oil industry saying, “See, you need us after all. Aren’t you sorry you said such nasty things about us?”
It’s an odd argument in many ways, driven as much as anything by hurt egos — by people used to thinking of themselves as the durable underpinnings for the global economy, not as the expendable villains of a Climate Crisis. In fact, when the euphoria fades, most in the industry are well aware that the need for more fossil fuel is temporary. They know that the transition to renewables will be sped up, not slowed, by higher oil and gas prices and by painful reminders of how risky reliance on imported oil and gas can be.
Renewably Speaking
Much is also being made of the rise in costs for renewable generating equipment as a result of high prices for metals such as nickel, copper, steel and lithium. Solar and wind project costs went up slightly in 2021 after years of falling and may rise by another 25% or so this year, by International Energy Agency reckoning. However, this is not nearly as great as the rise of 100% or more in highly volatile prices for coal and gas, the two fossil fuels still heavily used to generate electricity.
As a result, the cost advantage renewables gained over gas- and coal-fired power in most of the world in recent years has not only held, it has grown, according to “levelized cost of energy” (LCOE) data from specialized energy publishers Energy Intelligence (EI), among others. LCOE compares the estimated average cost of building and operating new power plants that use different fuels.
In Europe, the cost advantage for solar and wind is currently so huge that even if natural gas prices tumble to just one-third of recent levels and the cost of renewable equipment goes up by the forecast 25%, wind and solar will still make the cheapest electricity. In other words, even if Europeans didn’t care about climate change, they would still want to get off natural gas and coal and onto solar and wind just to save money.
Utility-scale solar and onshore wind are also cheaper than natural gas- and coal-fired electricity in the US, although not by such a huge margin. In China and India, even electricity from efficient new power plants burning relatively cheap domestic coal is costlier than solar and wind power. (Disclosure: EI was my previous employer, and I still write for them on occasion).
EV sales are running ahead of projections, too, creating a threat to future oil demand akin to the threat renewables pose to coal and natural gas. Bloomberg expects the number of EVs on the world’s roads to hit 20 million this summer and 26 million by year’s end. That’s only around 2% of all vehicles in use, but with EV sales up by over 100% last year and nearly 200% on 2019, according to , the impact on gasoline’s growth outlook could get very big very quickly.
The UN’s International Panel on Climate Change (IPCC) says greenhouse gas emissions must peak by 2025 in order to have any hope of limiting the rise in global average temperature to 1.5° C. A major recession could make that possible. Meeting the IPCC’s other requirement of halving GHG emissions by 2030 will require that GDP not bounce back — that we learn to live without growth. But that’s a topic for another day.
