We are dependent on fossil fuels. We use fossil fuels by transforming them into useful products, like electricity, jet fuel, plastics, fertilizer, and pharmaceuticals (to name a few). These transformations enable our current way of life, but also emit tens of billions of tons of greenhouse gasses each year, causing climate change. In 2019 alone we burned over 35 billion barrels of oil, 8 billion tons of coal, and 4 trillion cubic meters of natural gas, and today fossil fuels supply 85% of the world’s energy. We know we need to change this. But how?
It’s tempting to think of renewable energy (e.g., solar and wind) as a like-for-like replacement for fossil fuels. But this is not the case. Fossil fuels are a commodity. Like most commodities, fossil fuels are traded and transformed across three dimensions: time, space, and form. For example, the fuel in your car started as crude oil. To get to you, it was transformed in time (extracted at some point in the past and stored through to the present), space (moved from where it was extracted to wherever you are), and form (refined from crude oil into gasoline). It’s the ease with which we can trade and transform fossil fuels across these three dimensions that make them so useful and ubiquitous.
Meanwhile, renewable power plants are producers of a single commodity: electricity. Unlike fossil fuels, electricity is very difficult to transform across time, space, and form: it cannot be stored, it can only travel across an electrical grid, and is expensive to turn into other products. In this way, the lack of transformability of electricity limits the range of applications of renewable energy in our economy. For this reason, I believe that renewable energy is unlikely to meaningfully displace fossil fuels unless we also build new infrastructure and markets to trade and transform renewable electricity across time, space, and form.
But let me go further. I think that if our goal is to merely replace fossil fuels with renewables, then we have set the bar too low. The history of our energy transitions is one of simultaneously (a) discovering new ways to harness energy and (b) applying that newfound energy to new applications, resulting in a net expansion of global energy consumption. Why should a renewables transition be any different?
Our ancestors burned woody biomass – e.g., logs – to heat their homes and power their stoves. This was laborious, dangerous, and limited their quality of life. When they discovered how to use fossil fuels, they didn’t stop at just replacing their wood stoves with gas stoves. Instead, they went beyond and invented new applications for fossil fuels, which in turn led to new infrastructure and markets for the distribution and trading of fossil fuels, feeding a virtuous cycle of increasing production and utilization. It’s these applications – i.e., transformations – of fossil fuels that created the world we live in today.
Said another way: light bulbs are more than just a replacement for candles, and the car is more than just a faster horse. The great inventors and entrepreneurs of the Industrial Revolution did not limit their thinking to replacing whatever came before them, and neither should we. Instead, we should challenge ourselves to make the transition to renewable energy expansionary, and invent new and inspiring ways to capture and use it. After all, there’s plenty to go around: in one hour, enough solar energy hits the earth to supply our civilization’s current energy needs for an entire year. We could expand our current energy usage by over 10,000 fold if we knew how to effectively harness (i.e., transform) it. Imagine what we could do with all that power.
Needless to say, expanding the market for renewable energy transformations is also a large business opportunity. How large? One proxy is the present day value of fossil fuel transformations. The world’s top 10 commodities trading firms made over $2 trillion in revenue last year (a conservative estimate; most are privately held). These firms make money by arbitraging the transformations of commodities across time, space, and form. Fossil fuels are the most valuable commodities that they trade. At today’s price of ~$40/barrel, global oil production alone was worth was worth $1.4 trillion in 2019. Thus it is no exaggeration to say that whoever figures out how to transform renewable electricity on a scale comparable to fossil fuels, let alone exceeding it, could unlock trillions of dollars in value.
Perhaps most surprising is that the technologies exist to do this, for profit, today. All that’s missing is the commercialization and mass deployment of these technologies, along with the markets – financial and commodities – to enable them.
On the production side, it’s a popular myth that renewable energy is still “too expensive”. In fact, solar and wind power plants are the cheapest sources of electricity in the world today, far cheaper than any fossil fuel power plant. In some places, during certain times of the day – e.g., a sunny day in Southern California – there’s even too much renewable electricity being made, resulting in negative prices for electricity, meaning you can get paid to store, use, or transport (i.e., transform) it.
Meanwhile, we’ve known for decades how to transform electricity and biomass into synthetic petrochemicals, including fertilizer, methanol, and even jet fuel. Any entrepreneur can license these technologies and immediately get into the business of expanding the transformations of renewable energy. As these technologies get deployed at scale, they will begin to create their own demand for even more renewable energy, resulting in the same virtuous cycle of expanding production and utilization of energy seen in all our previous energy transitions, until one day we are able to continuously store and use all available energy on our planet.
- Fossil fuels are ubiquitous because they are transformable across time, space, and form;
- To transition away from fossil fuels, we should make renewable energy as transformable as fossil fuels and expand the applications of renewable electricity in our economy; and
- We know how to do this for profit, today.