In his Pulitzer Prize winning book, The Prize, Daniel Yergin recounts the fascinating (and sometimes terrifying) history behind the world’s most desired commodity: oil. It’s a dense read, loaded with the complete history of the adoption of the commodity – from the first Drake well in Pennsylvania up to the state of the industry in the 1990’s. If you haven’t read it and you’re looking for an opportunity to become more versed on the history of the energy industry, then I can’t recommend it enough. It will walk you through the struggles over money and power which have been seen through all of history, but the book does a phenomenal job of laying it out.
Why was oil the prize? Why not corn? Why not gold for that matter?
With it, oil brought the ability to transform a natural resource into energy, lubricants, and a huge feedstock of incredible widgets. It transformed the world. And while the lubricants and plastics industry remains about 50% of the use of oil, transforming it into energy to power automobiles, boats, shipping vessels, aircrafts, lawnmowers, electricity generators, and even rockets made it one of the most valuable commodities in the world. It remains the primary feedstock for the majority of transportation fuels worldwide, even after decades of climate change and global warming rhetoric focused on eliminating it from existence. I posit the immense value of oil (and other fossil fuels) is its intrinsic energy density. It’s valuable because it can be transported easily, it is literally everywhere, and when you light it on fire, you get an enormous amount of energy returned for the amount of energy invested (aka a ton of bang for your buck).
As large as the prize was for oil, the prize in the energy future is even bigger.
The race to cease or reverse climate change is on. Simultaneously, billions of people across the globe, from Chile to Sudan to Mongolia are attempting to lift themselves out of energy poverty. There’s political unrest and insecurity in Europe because of the Russia/Ukraine conflict, and energy is a focal point of the struggle over power. And whether it’s in 5 years or 500 years, the world inevitably knows we’re going to run out of oil. So what’s the best solution?
History reveals a continuous march from energy diffuse fuels to energy dense fuels, and the only logical step after oil and fossil fuels is to go nuclear. The energy transition is currently happening and has been slowly happening in the background for over 20 years now. In government labs and a few select factories and prototyping facilities around the world, nuclear energy has been making a comeback that is set to explode. The technologies in development now have the very real possibility of not only replacing coal, but also replacing all electricity generation from wind, solar, hydro, geothermal, and natural gas. Not only that, but the underlying physics of the fuel – the energy density of thorium, uranium, and plutonium – is so advantaged that nuclear energy stands a chance to displace oil.
How big is the market for such a disruptive technology? In short, it’s larger than most people can fathom. Every single electrical appliance, charging station, heater, air conditioner, industrial heat application, manufacturing center, shopping mall, data center, petrol fueling station, concrete mixing plant, and curling iron needs energy to function. The feedstock of all that energy can come from one source: nuclear power.
As a thought experiment, let’s explore how big the market is using some real-world numbers. We’ll answer the following questions:
- US Fossil Fuel Replacement
- How much electricity generation from coal capacity exists in the US? What would be the capital requirements to replace all of that capacity with nuclear energy? What are the long term potential price implications for energy?
- Same question, but for natural gas.
- Same question, but for oil.
- Globally, if the long term goal is to lift humans out of poverty and spread prosperity across the globe, then we need to lift them out of energy poverty.
- How much energy do we use (per capita) in the US?
- What if you could provide abundant energy to the 2 billion people currently in energy poverty? How much opportunity exists?
- How big is the global prize?
All calculations can be found in the spreadsheet at the end of the article. I include several key references for the data I collected, but most of the analysis is straightforward. If you disagree with my assumptions, download the spreadsheet and plug in your own. If you have a correction or suggestion, please reach out. I’m always happy to collaborate.
US Fossil Fuel Replacement
The Energy Information Agency really puts out some phenomenal material. Their Energy Atlas made it super easy to quickly download all of the power plant information for the US. Here’s a comparison of installed capacity versus generation capacity:
Note: a billion kWh is a TWh.
Notice anything interesting about this chart? What struck me was the capacity factors and quantities of each source. Nuclear and geothermal were nearly best for capacity factor, but geothermal is a drop in the bucket compared to everything nuclear. Natural gas is WAY under utilized, while the capacity factor on both wind and solar are 34% and 24%, respectively. Think about that. How much capacity have we overbuilt in the US to accommodate the swings in demand? What about the swings in supply?
With these data, it was relatively easy to calculate how much capacity and opportunity existed by just replacing electricity production from coal, natural gas, and oil:
Using the EIA’s data, there’s over 700,000 MW of installed coal, natural gas, and oil electricity generating capacity in the US. Altogether, it would take just over $1.275 TRILLION to replace (assuming a replacement cost of $1.8/W).
…so what are we waiting for, right? Right.
As always happens when you get one answer, you start asking more. How much revenue could be earned from that much capacity annually if the price of electricity was $40/MWh? Well, grabbing the annual consumption values, we discover there’s potentially $307 billion available in annual revenues.
Some may be asking, “WTF is the ‘Natural Gas, other’ metric?”
Notice the additional natural gas column in the chart above. While digging through the data, the amount of electricity generated didn’t match the amount of natural gas consumed by the US. There seemed to be a large disconnect – meaning we only produced about a sixth of the energy equivalent of electricity in all the natural gas we burned. While there is a thermal efficiency associated with all power plants (meaning you have to burn more energy than the amount of electricity you generate), even a 40% thermal efficiency didn’t account for the difference.
I ultimately chalked the difference up to the gas we use for heating, cooking, and other industrial processes i.e. anything BUT electricity. Notice the column is even taller than the other three electricity replacement sources combined. That means there’s actually more value in replacing the commodity and heating value of natural gas than there is in replacing the electricity.
Replacing electricity is grand, but can we stop climate change if we just replace the electricity generation and still burn oil? No. So what if we created carbon neutral fuels aka synthetic fuels out of cheap electricity made from nuclear? How big is that prize?
Spoiler alert. It’s big:
Over. Five. Trillion. Dollars.
Several -liberal- assumptions were made when performing the analysis to reach this answer. Petroleum is still 36% of the US’s energy consumption, which makes it nearly as big as the entire electricity generation market. It’s going to take a TON of energy to replace all of that.
In order to manufacture synthetic fuels, we would need to scrub the air for CO2 and separate hydrogen from water. We could then recombine the carbon and hydrogen back into hydrocarbons and create stable, liquid synthetic fuels which function identical to gasoline. The energy cost to do this is tremendous and obviously larger than the original cost of just lighting the gasoline on fire. For simplicity, I used a 2X conversion factor. In other words, I assumed putting in two units of energy to get an equivalent single unit of usable synthetic fuel energy out was a reasonable base case assumption. Because this is uncertain and varies based on process, I made it one of the primary variables in the attached spreadsheet to toggle easily.
Capital cost is one thing, but how much annual revenue could be generated from manufacturing synthetic fuels?
I took two approaches. Assuming our 2X conversion factor,
- What’s the most electricity could cost to compete with $4.00 per gallon gasoline? Answer: $23.54/MWh
- If we were able to use $40/MWh power, what would be the cost of the synthetic fuel? Answer: $6.80/MWh
This generated a low and a high case for how much could be earned annually from manufacturing and selling synthetic fuels:
Consider the implications here: the market for transportation fuels is actually larger than the entire fossil fuel electricity generation market and at least as large as the heat market for natural gas.
In other words, it’s huge.
Scaling the implications of this up from just the US to the rest of the world is huge. It’s immoral to believe just the US, members of the OECD, or other first world countries should enjoy the remarkable benefits from massive energy consumption. What if we could scale up the rest of the world to consume the same amount of energy per capita as the US? How much would that be?
The table below summarizes the calculations necessary for discovering how much capacity the world would need to have.
Over 11 Terawatts of generation. Sounds daunting, right? Kind of.
But the US already has over a terawatt installed. Multiply by 11, and we’re there.
More impressive is the fact that each person in the US uses approximately 12.5 megawatt-hours of power every year. It’s hard to fathom just how much power that is.
Scale up one more time and ask yourself, using our capital and revenue cost assumptions, how much opportunity is there globally to bring the world out of poverty? What if everyone had access to the same amount of energy as us (and they could afford it)?
Here’s the chart:
That’s $19 trillion to install the capacity necessary, and potentially almost $4 trillion of recurring annual revenue to utilize all of that installed capacity.
Find another industry with that kind of potential. With the kind of potential that literally transforms the lives of everyone it touches; potential to save millions of lives annually and billions of lives over centuries; potential to terraform the planet; potential to feed every human on earth; potential to save the environment;
Potential to take us to the stars.
Please. If you know of another opportunity that’s bigger than this, email me immediately, and let’s chase it.
You won’t. It doesn’t exist.
This is THE PRIZE. It’s trillions of dollars of opportunity, and more importantly, it’s the opportunity to transform the lives of billions of people for the better.
Let’s go chase it.