What’s the Energy Equation?

Today, we can start to imagine what the future of transportation might look like. More and more of us are regularly calling an Uber or a Lyft to get to work or to the train station. In the next decade or two, many may decide it isn’t necessary to own a car at all and instead use a hand-held device to summon a self-driving vehicle when one is needed. It sounds convenient and possibly cheaper. Is it also more environmentally sustainable?

Uber CEO Travis Kalanick says that Uber is already having a positive environmental impact, with fewer cars on the road and more of those cars being low-emission vehicles. But the real question is whether ride services will reduce the total number of vehicle miles that each of us travels. Early studies are mixed. One suggested that having access to a ride service makes people more likely to use public transportation, because they are confident that they won’t get stuck if they work late. Another found that a small but significant group of Uber riders would have otherwise stayed home, suggesting that the services could actually lead to more travel.

Kate Hardin ’96 has spent the last two decades analyzing the energy industry; during much of that time, she was based in the former Soviet Union, where she witnessed firsthand the privatization of its energy infrastructure. Today, she’s part of a project examining the changing transportation landscape and its potential impact on energy. She spoke with Yale Insights about transportation, the role of oil in Russia, the prospects for the Arctic, and the future of energy.

Q: You’re involved in a project at IHS Markit to look at how autonomous vehicles and electric cars will impact the future of the energy sector. What do you see coming?

Transportation is a key piece of this whole puzzle. The character of future cars and how people use them—and changing values—will have profound impact across the global economy, for the auto industry itself, for oil and gas and chemicals, and for electric power. Just to give an example, 56% of world liquids demand is from the transportation sector currently. In our study, Reinventing the Wheel, IHS Markit is looking primarily at light duty vehicles—personal automobiles and light trucks. We are trying to provide a roadmap to the future and to the different ways in which it may evolve. That includes quantifying the penetration of electric vehicles and the consequent displacement of gasoline demand. The key factors we are accounting for in our modeling include advances in battery technology and the development of autonomous vehicles.

Our research is proving to be very timely, indeed to have a high urgency to it, as many of our clients across the energy spectrum are grappling with this nexus of mobility, connectivity, and consumer preference. Through this study we are working on the impact of these changes on oil demand and also on our electric power systems.

Q: How do autonomous vehicles factor in?

The rise of autonomous vehicles is very interesting here, because we are evaluating the impact on vehicle miles traveled and the number of car rides that people are taking. For example will people choose autonomous vehicles and ride hailing over public transportation? Or will we see the same number of miles traveled but with fewer vehicles that operate more efficiently?

Q: Does the introduction of ride sharing necessarily decrease the number of cars on the road?

In our view it will vary by country. One of our auto experts pointed out that in India, ride sharing has had the opposite effect. As we look at vehicle sales data in India, it continues to grow, partly because vehicle owners are now able to buy a car and then pay for it by picking up passengers who pay for their ride. So a car is not just the family vehicle; it can also be a business.

Q: Even in the United States or in Europe, even if I no longer own a car, if I call up a robot Uber every time I need a car, that car may be on the road just as much as I would’ve been. There may be fewer cars but there are just as many car miles going on.

That’s right, and you have to consider two separate issues when evaluating the broader impact of these changes. One issue is consumer preference and driving behavior, which will have an impact on vehicle miles traveled. The other is the impact on fuel demand over time. Right now many people assume autonomous vehicles will be predominantly electric vehicles, which would have a large impact on gasoline demand. But it is also quite possible that autonomous vehicle fleets would include efficient internal combustion engines.

Q: Given these changes in transportation, how does IHS Markit see the mix of oil, gas, and renewables unfolding over the next several decades?

Our base-case scenario indicates that the trend is toward a reduction of hydrocarbons in the overall global energy mix, and this is due to several factors. First, costs are coming down for energy technologies—batteries for automobiles, for example. Another issue, of course, is consumer preference in transportation as we just mentioned: many younger people in urban areas are deciding they don’t need a driver’s license and elderly people are deciding they would rather have ride sharing than continue to own their own vehicle. In addition, consumers and businesses in many countries are concerned about carbon emissions and opting for lower carbon alternatives where possible. We see a future over the next few decades in which there is a mix of oil, gas, and renewables. In electric power in the United States, we expect a mix of renewables and natural gas in new capacity. Oil is used for plenty beyond transportation—think about the chemical industry and all the plastics and cosmetics which most of us use daily.

Q: You have spent a lot of time in Russia over the years—energy is a big part of the Russian economy. What happens in that part of the world when energy prices go down as they have?

Yes, Russia’s exports of oil and gas, now east to China as well as west to Europe, are very important to their state budget. Russia is currently the world’s largest oil producer and the Russian ruble is highly correlated to oil prices. But when oil prices drop, because of the tax structure in Russia, the pain is actually not felt as much by the oil producer as by the state. Most of the upside before the price collapse went to the state. In other words, the producers have felt like they’re operating in a world of lower oil prices for some time, and that’s actually helped them through sanctions and through the oil price decline. In addition, their costs are in rubles, which also protects them.

Q: You’ve also been involved in a project looking at Arctic development as climate change and new technology change the equation for energy production and trade. What should we be looking for?

Yes, I am currently involved in a Council on Foreign Relations task force on the Arctic. I am often asked about Russia and the United States potentially competing in the Arctic, competing for resources or in terms of military issues and national security. But the point to remember is that the Arctic has historically been an area of real collaboration—both in terms of search and rescue and also through scientific data sharing. Because the Arctic is such a challenging place to operate, there has been real cooperation over time. And the recently formed Arctic Coast Guard Forum is a good building block for further cooperation between Russia and the United States and, indeed, all of the Arctic nations.

Increasingly, we are seeing quite a bit of commercial interest in Arctic development from countries that are not Arctic nations. Some Asian countries have joined the Arctic Council as observers because they understand that as the sea ice continues to melt, eventually new sea routes will open and new commercial opportunities will be available. One of the shortest routes, of course, will be across the top of Russia, so this is interesting to Chinese companies, who would use it for commercial purposes.

Russia has done quite a bit to develop its Arctic regions, as much of its oil development and metals and mining is located in its Arctic regions. Russian ships are the bulk of traffic along the Northern Sea Route, carrying Russian oil and nickel to their Arctic ports. In my view Russia is thinking well ahead in terms of its commercial and business infrastructure development in the Arctic.

Q: Are there energy reserves in the Arctic that are going to become accessible? Are those big enough to change the equation when it comes to energy prices?

The resource base there is considerable, but it will be a while before we see that development, if we see it at all. There are a couple of reasons for this. First, it’s very expensive to develop those resources, particularly now. These projects are large and complex and require additional measures for safety and environmental protection—and they can take a long time. Second, in the current, lower-oil-price environment, many of these projects aren’t economically feasible. Moreover, the balance between oil and natural gas is not clear.

But it’s important to note that we are already seeing commercial interest in the Arctic in areas other than oil and gas: aviation, telecoms, renewable energy are all industries in which investment is expected to increase in the coming years.