Q&A: Professor Ryan Kellogg on "The End of Oil" and the Future of the Global Energy Market

 Professor Ryan Kellogg studies energy and environmental economics and policy, often exploring specific questions surrounding supply and demand, as well as how energy markets work and how firms behave. 

With a changing energy landscape due to the Inflation Reduction Act of 2022 and new market realities, we sat down with Kellogg, who was recently named the Ralph and Mary Otis Isham Professor at Harris, to hear more about his new research study “The End of Oil.” We also asked him about something called the Green Paradox, his perspective on energy markets in the future, last-minute actions made by the Biden administration, and what to look for in the second Trump presidential term.

What is the “green paradox”?

Imagine that you’re an oil producer, and you suspect that “green” policy is going to become more stringent in a couple of years, or that electric vehicles will become much more prevalent, causing demand for oil to go down. Imagine, at the same time, that you still have a big vat of underground crude oil that you could extract and sell. As an oil producer, wouldn’t you want to pump more of that crude oil now, while demand is still high – rather than wait for a future that doesn’t look as lucrative?  

Therein lies the problem for the policymaker: future stringent green policies might have the perverse impact of increasing fossil fuel production today, rather than decreasing it. This counteracts what society is trying to achieve on emissions. This is called the “green paradox,” and academic economists studying climate have been worried about this possibility for more than two decades.

What should be done to counteract the green paradox, then?

First, we must determine whether the green paradox will actually take place. If you talk to people in the oil industry or read the trade press, they don’t think so. They talk about something very different:  disinvestment.

The story they tell is something along these lines: Imagine once again that you’re an oil producer: you’ve invested in oil platforms, built oil pipelines, and drilled wells. These are huge capital assets, worth billions of dollars, and they have long lifetimes. If oil demand and prices fall in the future, however, these extremely costly assets will be worth less and generate less revenue. 

And not only are these oil-related assets now devalued, but you also have lost your incentive to invest in new assets: why build a new oil platform or drill a new well when the market for oil is shrinking? Instead, you quite rationally start to become active in the market for other products and services that you predict will be desirable in the future – not necessarily green technologies, but any market that seems to be on the upswing.

This scenario, which we’ll call disinvestment, is at odds with the green paradox, because it causes oil producers to decrease near-term production, not increase it. I wanted to disentangle these two theories, which my new study “The End of Oil” helps to do.

What does your paper find oil producers do?

In the paper, I model a decline in the demand for oil down to zero by 2100 – a steady decline in demand over the course of roughly the next 75 years. And I find that, with some notable exceptions, disinvestment is the answer.  That is the phenomenon that will accelerate the decrease in oil production that is induced by a  downward trend in oil demand. At the end of the day, the green paradox does not come to fruition in a large way.

OPEC is an exception to the disinvestment theory, however: They are relatively patient, and will wait for other parts of the world to drain their reserves. OPEC is more geared toward the future, so they’ll drill now, but be willing to sit on their supply until they can charge higher prices. But keep in mind that OPEC doesn’t have the kind of market power it once had: the United States currently produces more crude oil per day than any country ever.

Is the end of oil on the horizon?

Oil demand globally is still on an upward trajectory. We are seeing reductions at which the rate of oil production is growing, however. China drove much of the demand growth in the early 2000s but that period is largely over: first, because China’s economy is not growing as quickly today, and second, because today half of all cars sold in China are either fully electric or plug-in hybrid electric.

Will this global change continue, though? It’s hard to say. While China’s overall demand is lessening, India’s is growing. Other lower- to middle-income countries’ appetites may also start growing, but will that growth be fueled by crude oil and gasoline, or will EVs change the global picture?  

What about the United States’ oil demand? Will we see a difference as we transition from former President Biden to President Trump?

The short answer is, probably not.

Oil production in the United States has been increasing since the fracking boom started in the early 2010s – almost nonstop through the Obama, Trump, and Biden administrations. The U.S. is producing 13 million barrels a day of oil. That’s more than anyone has ever produced before.

President Trump has stated a desire to promote more fossil fuel extraction and oil extraction. I don’t see that bearing fruit, however, at least with respect for crude oil: the U.S. is already producing so much, largely on privately-owned land where the federal government doesn't have leasing jurisdiction. As a result, the new administration lacks leverage to move the needle very much in terms of U.S. crude oil production – perhaps it can be boosted by a few hundred thousand barrels a day.

In the waning days of the Biden administration, it announced a ban on drilling in certain federal waters. But it won’t have much of an effect either: there has been hardly any active exploration and drilling in those areas anyway – either because those regions are not considered prolific, or because oil drilling has already been discouraged there by the states.

And what about renewables, or electric vehicles?

That’s where we will possibly see some shift, although I don’t expect it to be drastic. The Inflation Reduction Act included EV subsidies – what will happen with them? Will Congress do something to change the tax credits? I think we'll have a pretty good idea of where that stands by the end of year one of the administration. There will likely be some disagreement within the Republican Party on doing away with clean energy projects, as many of those projects take place in areas represented in Congress by Republicans.

Another thing to watch is what happens around imports of EVs from other countries, particularly China. I fully expect the Trump administration to continue the Biden administration's policy of a massive tariff on any EV made in China. Biden increased those tariffs to 100%, and I cannot see Trump doing away with them.

What’s next for you?

I'm spending time on a project exploring why oil and gas drillers in the United States became so productive during the shale boom. For years it was assumed that it was too expensive to extract the oil that was tied up in shale rock deep underground. Then they found a way to do it, and they’ve gotten much better at doing it in the past 15 years. There has been continuous innovation, including in fracking technology, that has allowed firms to keep extracting this oil even though prices today aren't as high as they once were. 

Was this boom a story of productivity and technology? Or was it simply a story of geology – that firms found very good locations? If it’s geology that led this increase, the industry has a potential problem.  They cannot always bet on continuing to find additional good places to drill.