Creative Destruction and the Renewable Age
This essay was written for an essay contest with the Fraser institute regarding Joseph Schumpeter's idea of creative destruction. This was written purely as a thought experiment and does not reflect my personal views on the matter, though I enjoyed the challenge of writing something persuasive I might not agree with.
According to recent surveys, the primary concern for Canadians regarding their future is climate change. The increase in greenhouse gas emissions worldwide has led to potentially disastrous results if not dealt with quickly. Numerous social, economic, and political solutions have been proposed, many of them involving governmental oversight and overreach, increased spending and taxes, and the collapse of the current way of life. But despite what is often espoused, the solution to climate change lies in Joseph Schumpeter’s idea of creative destruction, and in capitalism. The ever-beating heart of the market has presented and created the solution to the climate crisis, with electric vehicles, cheap and efficient renewable energy, and subsequently the decrease in oil demand. These innovations have a casualty though, the oil and gas industries. Schumpeter’s idea of creative destruction continues to prove valuable, especially for analyzing the potential demise of oil and gas, and the rise of green new renewables.
Numerous startups, entrepreneurs, and capitalistic endeavours have emerged to combat the growing climate crisis. Companies such as Tesla promise cheap and energy-efficient electric vehicles that bypass the need for oil and gas and hundreds of new green technology startups explode onto the scene often with the backing of venture capitalists and with the intent of disrupting and changing the market. Tesla for example is, as of January 2021, the most profitable vehicle stock on the market, surpassing legacy carmakers such as Toyota and Ford. And this has not gone unnoticed by those in the car industry, by 2022 there will be 500 electric vehicles available to the consumer. By 2025 electric car sales will reach 8.5 million, and by 2040 54 million sales. This unprecedented rise is helped by the lowering cost of lithium needed in the production of electric vehicles, increased consumer demand especially in first world countries, and the continuous increase in battery efficiency. It is predicted that by 2040 17.6 million barrels of oil will be displaced by electric vehicles compared to the already high 1 million barrels displaced as of 2020. This is a clear example of Schumpeter’s theory of creative destruction, as the rise of electric vehicles continues, old combustion engine vehicles are likely to become a novelty from the past along with the companies that cannot adjust to this new industry. But this explosion in electric vehicles is only made possible by the increasing cheapness and efficiency of renewable energy.
Continuous innovation lowers the cost and increases the energy output of solar, wind, and hydro. In 2019, BNEF reported that wind and solar energy accounted for sixty-seven percent of new energy production, while fossil fuels accounted for only twenty-five percent. Already countries and companies all over the world continue to find that renewable energy is more suitable to meet their needs. In Canada for example, many provinces, with the exception of Alberta, source their energy from nuclear, hydro, and in the case of Prince Edward Island wind. Canada is not an aberration, all over the world countries are expanding their renewable energies and cutting back on fossil fuels. By introducing renewable energy, Morocco promises that by 2030 50% of its power will be supplied by a single solar farm. This expansion of renewable energies is already worrying many oil companies, and many are making plans to divest from fossil fuels and move towards renewable energy before they become irrelevant.
The price of oil and gas continues to remain uncertain. Governments worldwide are deciding to distance themselves from oil. President Joe Biden ran on a platform of environmental protection and his first day in office cancelled the construction of the Keystone XL pipeline. Consumers and companies alike want less to do with the oil industry and are moving towards new green industries sprouting up. In 2020, as countries went into lockdown to combat the Covid-19 pandemic, oil plunged below zero dollars a barrel. This caused Chesapeake Oil to declare bankruptcy, and British Petroleum (BP) to report a loss of 6.7 billion dollars. In BP’s ‘2020 Outlook’ they realized that oil consumption may never reach their pre-covid levels again, and they estimated that the limited demand for oil and gas in the future will lower production by 10% in a decade and 50% by 2040. The report concludes that renewable energy, electric cars, and numerous other factors will only decrease the need and want for oil. Because of our decreasing reliance on oil, and the threat of climate change, BP has set the goal for itself to become a net-zero company by 2050 or sooner, and to help the world reach net-zero carbon emissions. The fourth-largest oil company in the world has been confronted with the reality of creative destruction, and it is only a matter of time until the rest of the oil industry awakens to it as well.
Schumpeter’s theory of creative destruction has displayed that the market is ever-changing, ever-moving forward; those that can not keep up and compete in the new environment created by innovation and entrepreneurs are doomed to fall into the dustbin of history, a fate that awaits oil companies if they cannot find new ways of producing energy. As Schumpeter said, “the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates …the same process of industrial mutation … ” (Schumpeter, 1942). The new renewable energy market represents this. It presents a new form of transportation in electric vehicles and renewable energies such as solar panels. Creative destructionism has opened new markets for energy resources and provided competition with oil and fossil fuels, as well as new organizations in the energy sector. Creative destructionism has presented the most viable solution to climate change without the need for overreaching governments and an infringement of liberties.
Capitalists the world over would do well to promote and support the renewable energy market as the only viable solution to climate change and to recognize that creative destruction is a necessity of capitalism, not something to be fought as many oil industries seem to be doing. As Schumpeter said in Business cycles published in 1939 “Taking industry as a whole, there is always an innovating sphere warring with an “old” sphere, which sometimes tries to secure prohibition of the new ways of doing things.” In this case, the ‘new’ innovating sphere- the renewable energy industry, is warring with the ‘old’ sphere of the oil industry.
Book Sources
Schumpeter, Joseph A. (1939). Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process, Volume 1 [BC1]. McGraw-Hill Book Company.
Schumpeter, Joseph A. (1942). Capitalism, Socialism, and Democracy [CSD]. Harper & Brothers.
