Beginning of the end for fossil fuels? Panic sweeps global markets

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Well, we can’t say we weren’t warned. Panic selling swept major global stock-markets on Tuesday in what could be a foretaste of things to come, as investors suddenly woke up to the fact that the game has changed. Fossil fuels and their associated investments are in decline, and the world is heading rapidly towards new and cleaner technologies.

A bunch of big stories this week highlight what is going on: VW, Shell, Glencore, BHP, Origin Energy and AGL. All linked by a common thread – their exposure to fossil fuels. It prompted a warning on the financial risks of climate change by Mark Carney, the governor of the Bank of England.

vw windThe biggest news, of course, was VW. As we reported on Monday, the VW cheating scandal, where it sought to defraud regulators and millions of consumers on a massive scale over the level of its diesel car emissions, could likely signal the demise of the diesel engine. But it could go further than that: it could see the rapid demise of the petrol engine too, and the use of fossil fuels in passenger vehicles altogether.

As more diesel car manufacturers came under scrutiny overnight, Fitch Ratings, an international credit agency, said the dominance of the internal combustion engine could come under pressure from a fundamental change in consumers and regulators’ attitude toward emissions and fuel efficiency.

“The Volkswagen scandal could therefore accelerate the underlying growth of vehicles with alternative powertrains, including fuel cells, electric and hybrid engines,” it said in a new report. That means the demise of both petrol and diesel cars, and the emergence of electric vehicles.

This is what the stock market is already telling us: Overnight, VW – a bastion of the Germany economy and the “made in Germany” brand, lost another 4 per cent of its value, taking its total decline in the past fortnight to 44 per cent, or more than $A50 billion.

The world’s biggest car-maker is still worth around $A72 billion, but as Alex Pollak writes in the SMH, it has $200 billion in liabilities, backed by the value of their vehicles. Those values are now under question.

Meanwhile, the share price of Tesla, the upmarket electric vehicle manufacturer that has become one of the world’s most valuable brand names, despite producing a fraction of the number of vehicles than its bigger rivals, is now worth $A44 billion.

The market is telling us a similar story about the coal industry. The plunge in the value of the world’s biggest non-government coal miner, Peabody Coal, has been well documented. It is down more than 90 per cent in the past year, but even this fact hadn’t quite registered with the mainstream investor.

That was until this week, with the release of an Investec analyst’s report on Glencore that suggests that its equity value could be nil, and its Australian coal export business worthless. Others pointed to Glencore as potentially the commodity equivalent of Lehmann Bros.

Glencore and Peabody are particularly vulnerable because, like other companies, they are essentially financial constructs. Glencore in particular is a corporate put together by some very clever financiers. But when finance is leveraged at the top of the market, collapsing commodity prices can prove terminal for highly geared global structures.

As Greenpeace analyst Marina Lou writes in EnergyDesk,  When Glencore purchased Xstrata two years ago in the biggest mining merger ever, chief executive Ivan Glasenberg commented,  “To really screw this up, the coal price has got to really tank.”

Well it did. And many had predicted exactly that.

“Most coal companies did top of the cycle peak priced multi-billion dollar debt funded acquisitions, including Peabody, Glencore, Adani Enterprises,” adds Tim Buckley, from IEEFA. “These strategic errors have come back to haunt their shareholders with crippling share price declines.

The dramatic fall in Glencore – already down 77 per cent in a year – in turn triggered a slump in energy stocks, in which Australian gas companies such as Origin Energy and Santos were hit particularly hard. Why? Because there is a real question – following the fall in international oil prices – about whether the $200 billion invested in LNG export projects will ever deliver suitable  returns.

Origin Energy, whose share price has slumped more than half in less than a year, announced it would raise $2.5 billion in a heavily discounted share offer (25 per cent), to shore up its balance sheet. It said it had to act quickly to ensure debt remained at sustainable levels.

As if on cue, Shell abandoned its search for oil in the Arctic. As Karel Beckman writes today, Shell is dumping the idea because of the “high costs” of the project, and the chance that regulators and governments might crack down on the idea.

As Beckman points out, neither of these can have come as a surprise. Critics have been warning for a long time that the costs of Alaskan drilling are prohibitive, and the “regulatory environment” in this part of the world will inevitably be unpredictable. Still, Shell went ahead and dropped $A2 billion on the idea.

And as HSBC and others have pointed out, it is not the only asset that is likely to be stranded. At current prices, trillions of dollars ($30 trillion in fact) of fossil fuel reserves will not be economic, and not exploited. The market has been given the numbers, it just seems that it is only now that it is paying attention.

Far from being peopled by “lefties” and “greenies”, many of these think-tanks have hired leading financial analysts and investment bankers, dumped by their international institutions because green research wasn’t making them enough money.

coal-is-goodTheir research has been ridiculed by vested interests in the mining industry, particularly the Minerals Council of Australia, and the ideologues within Australia’s Coalition government. But last night they were endorsed by the Bank of England’s Carney, who warned that investors face “potentially huge” losses from climate change action that could make vast reserves of oil, coal and gas “literally unburnable”.

Carney focused on the “carbon budget” – a concept promoted by Australia’s Climate Change Authority, Carbon Tacker and others, but ignored by the Coalition government and most in the fossil fuel industry. It suggests that only one fifth to one third of the world’s proven reserves of oil, gas and coal could be safely exploited.

“If that estimate is even approximately correct it would render the vast majority of reserves ‘stranded’ — oil, gas and coal that will be literally unburnable without expensive carbon capture technology, which itself alters fossil fuel economics,” Carney said, pointing to the upcoming Paris climate talks as a catalyst.

“A wholesale reassessment of prospects, especially if it were to occur suddenly, could potentially destabilise markets,” he said.

Emma Herd, the new head of Australia’s Investor Group on Climate Change, says: “The need to evaluate investments against a commitment to limit warming to two degrees Celsius must now be embedded in mainstream financial decision making”.

Which is why other companies considered to be in the firing line are busy shoring up their defences. Origin did this by announcing a $2.5 billion equity raising, while BHP, whose share price is at the lowest level since the global financial crisis, is insisting that its portfolio will withstand any great move away from fossil fuels, even “extreme” and sudden shifts that could be precipitated by Paris.

BHP said its portfolio would remain robust if emissions decline to levels consistent with a 2°C world after 2030, as well as in a stress test that models the implications of more rapid change. But it is assuming higher demand for uranium, and for gas, at least in the short term, and carbon capture and storage.

It also describes the UN’s ability to get the world on course to meet the 2°C target by 2030 as a “shock event” that is “unlikely and extreme”. But it insists that its portfolio is strong enough to resist that too.

This “shock event,” BHP says, describes an initial delay in coordinated climate change action followed by a faster than expected move to a largely decarbonised world.

“It simultaneously considers the impacts of several significant technology developments, such as rising renewables and battery penetration, increasing energy efficiency and ambitious climate policies to put the world on an accelerated track to achieve the 2°C goal.”

That may come as a “shock” to BHP, but some would say that is the most likely outcome.

AGL, too, under new leadership, is trying to convince investors that it has matters in hand. On Wednesday, its chairman was forced to defend the multi-billion buying spree in the last few years that has made AGL the largest owner of coal-fired generation in Australia.

Gerry Maycock said the handsome profits from the coal generators would be used to invest in renewables “if and when” the investment climate for renewables improved. Of course, AGL had been the country’s biggest investor in renewable energy before those coal purchases, but such investments have slowed dramatically since AGL and other utilities pushed the Coalition government to cut or even remove the renewable energy target altogether. You reap what you sow.





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  • Peter Campbell

    “As if on queue…” – cue.

    • Pete

      While we’re on the subject, Giles needs to understand the difference between economic and economical. It gets to me every time!

  • Rob G

    Rio Tinto have also pulled out of coal projects in the Hunter Valley. They’ve sold out to New Hope coal – more like ‘No Hope!’, as reported in SMH. Funny the business section keeps talking about the current oversupply of coal as being the only problem coal faces, with the positive outlook that things will pick up. They cannot accept that it’s over for coal.

    • Jouni Valkonen

      the problem is that no one owns coal assets. They are owned mostly faceless entities such as pension funds. Therefore there is no long term plans, but are only interested what is the profitability of business in next quarter.

  • Chris Fraser

    Let’s hope Loy Yang, Bayswater, Liddell are a big millstone around their necks. Who’s going in later to clean up ?

    • Zvyozdochka

      This seems to be the next series of problems, already appearing.

      • ben

        It will be the taxpayer of course!

    • nakedChimp

      who’s to clean up is not clear yet, but who will pay for that clean up is very certain.

  • Mick Perger

    Well it looks like the shit is hitting the fan ….wonder if we`ll ever see a rehabilitated mine ? ( that we don`t have to pay for )…….Haven`t seen one yet …..Anybody know of one ?

    • nakedChimp

      Over in Germany they have some rehabilitated open cut mines.. the ones underground are still causing large area sinking/shifting and groundwater problems for decades to come..

    • Bob_Wallace

      Turn them into pump up hydro storage. That’s being done with an abandoned rock quarry outside Chicago and an old open pit mine is being proposed for PuHS in Canada.

  • Well done Giles and RenewEconomy on putting this story together and out.
    Penny is beginning to drop now: –

    • Tony Hardy

      yes totally agree, great work Giles!! Just as a side note: we run our home on 100% solar during day (no gas), wind at night and our car is electric (cost $14k 2nd hand). 🙂 Super has been switched to Future Super !!

  • The ‘panic-issue’ now becomes this: – how big is the ‘supply the gap’ that opens with ‘demand-as-usual’ versus the ‘climate-damage/fossil-collapse’ rates and can renewables fill it or are we finally at the limits to growth?

    • nakedChimp

      The Saudis must think it’s not very big and have the taps open wide 😉

      • Parker

        The Saudis are trying to sell as much as possible while there is still any demand. Better to get a lower price than get nothing for it sitting underground, right?

      • JonathanMaddox

        Probably their motives are a little more strategic than all that (undercutting competitors in the US, Iran and Russia for instance, just because they can, and probably also to reassert their dominance over the OPEC cartel so they retain the option to collude with enough other large producers to *restrict* output in future years) but yes.

    • Miles Harding

      A very good question..

      I would say that renewables must fill the gap, but this will be complicated by other limits. The CBAT chart may overstate the total energy demand, particularly if those other parts of the limits scenario are included (water, agriculture, debt and non-energy resources etc.), which show great potential for raining on the parade as important components become exhausted.

      Oil is an concerning case. World consumption is still increasing but supply has outpaced it by a small margin – one to two million barrels per day. This has had a major impact on the oil price, from $100 to $40 per barrel, apparently the exporter nations can’t turn off the taps without risking their own financial well being.

      With low prices, exploration is suppressed – the likes of Shell can no longer afford to go looking in the few remaining areas, so the supply imbalance must swing back to shortage in the next few years — what then?

      Even though 2007 showed us that demand is inelastic, it is not clear that it is possible to return to $150 per barrel prices, simply because debt burdened consumer economies can’t afford it and will limit the price. Chaos is heading our way.

      Of course, that’s only oil. Perhaps we should be looking sideways at the other limits players (water, copper, zinc …) for the next episode in the long emergency?

      • Demand for fossil fuel will collapse as the message from CBAT Domain
        4 gets through

        And yes you are right, renewables *must* fill the gap (the point of CBAT Domain 3). So I guess in that sense we can can agree with the point that supply equals demand.

        CBAT Domain One is intended to help calculate the rate of the policy-response UNFCCC-compliance.

        As can be seen here the ‘gap’ between what’s on offer from ‘INDCs’ to COPP-21 and what’s needed for compliance is significant: –

      • marysaunders

        In some quarters, it has become fashionable to throw in phosphorus for good measure, even though many smart low-resource people know how to get this one delivered organically.

    • JonathanMaddox

      There is no gap. Supply *equals* demand.

  • Mark M.

    Sure, because those batteries that run Tesla’s cars, and every other other hybrid/electric car are SO clean to manufacture. Tell me another story….

    • Miles Harding

      You have a better alternative?

      • Mark M.

        Ride a bike.

        • Bob_Wallace

          A workable alternative?

          I’m going to the grocery store today. It’s roughly a 120 mile round trip. I’ll be bringing back two weeks groceries and other supplies.

          • Mark M.

            Never said “Don’t have a car”, now did I? Use the car for necessary trips. A bicycle is viable for just about everything other than truly long trips, or hauling large amounts of supplies and/or cargo.
            I can get get a weeks worth of groceries in my trailer, and pull it behind the bike. No problem.
            A car is sometimes a need, but not always.

          • Bob_Wallace

            Mark, you know that a bike is an alternative for only a small portion of the population and then only part of the time for them.

            You gain nothing but not directly addressing questions.

    • JonathanMaddox

      They’re somewhat dirty, but significantly less dirty than the extraction, refining and burning of the fossil fuels which they displace. Overall, an improvement. Of course it would be better still to travel less and to share vehicles (trains, trams, buses and equivalents, plus taxis/car-share concepts) when we need to travel, than to drive personal vehicles. With the exception of teleworking, those changes are more matters for urban planning policy than for private-sector industry innovation.

      • Mark M.

        Maybe you should research the materials that go into the batteries, how they are mined, refined, and then turned into batteries.

        • Bob_Wallace

          Do you have a comparative study for EV batteries and ICEV engines in terms of mining, refining and manufacture?

        • JonathanMaddox

          I reject your imputation that I have not already researched the materials that go into the batteries, how they are mined, refined and then turned into batteries. Have a nice day.

          • Mark M.

            So you reject it, but you don’t refute that the batteries are produced in a manner that’s dirty, harmful to the Earth, and the environment. Good job! Good luck in Law School with rebuttals like that.
            And we’ll ignore the fact that full electric vehicles must be plugged in, which requires electricity. You know, the stuff that’s produced by coal burning power plants? @ 50% of electricity is produced by coal plants…
            But you go ahead and believe the marketing…

          • Bob_Wallace

            And about half of the electricity is not produced by coal plants. Plus that half is growing while coal’s role is shrinking.

            Argonne National Laboratories produced some ‘cradle to grave’ comparison numbers for ICEVs and EVs charged with electricity using various input mixes.

            These greenhouse gas calculations are well-to-wheels. In other words, ALL energy expenditures are included such as drilling, transporting of crude, refining, and transportation to the pump, etc, etc.

            Let me list the ones that apply to this discussion. The units are grams of CO2 equivalent per mile….

            Conventional ICE gasoline……451
            Diesel ICE……………………….386
            HEV gasoline……………………323

            Electricity EV (100%) Coal…………….579
            Electricity EV U.S. Mix……….333
            Electricity EV CA Mix…………172


            The numbers are a couple years old so both US and CA mix numbers should be lower today. And should continue to drop over the next 10, 20, 30 years.

  • Just_Chris

    “It also describes the UN’s ability to get the world on course to meet
    the 2°C target by 2030 as a “shock event” that is “unlikely and

    Finally something I think we can all agree with, don’t get me wrong I’d give my right ball to reach an agreement that put us on a sustainable footing but I think “unlikely and extreme” sum up the probability of success.

  • Just_Chris

    Further to my comment below, I don’t think that we need to get to that agreement to mean that a lot of the fossil energy companies will go bust. A 5-10% drop in demand is enough to crush prices and destabilize companies with turn overs bigger than some nations.

    I figure that we are in a cycle now for a few decades:

    new tech comes in

    new tech becomes established

    old tech becomes unstable – weak old tech dies

    strong old tech thrives for a few years

    shit hits fan as strong old tech starts to die but new tech isn’t fully deployed

    new tech explodes as prices spike and governments push to get it in quicker

    old tech fights back removes subsidies or government policies – old tech wins!

    new tech takes over whilst old tech is dancing around thinking it has won

    Everyone forgets about it and starts writing stories about the next new tech and how its too expensive, not particularly green, will result in some horrendous side effect, etc..

    Every heavy engineering and commodity sector will change dramatically between now and 2050. This isn’t software, we’re talking about the next industrial revolution….. hopefully.

  • Jouni Valkonen

    i wonder how many million middle class people will lose their pension savings when fossil fuel industry collapses?

    • Bob_Wallace

      I doubt there are many people invested solely or even heavily in only fossil fuels. Most people know to diversify.

      If you’re well diversified you can have one sector fade away but that will be offset by another sector taking up the lost business.

      • Jouni Valkonen

        That might be right. The growth of renewable sector will probably offset the loss of stranded assets at fossil fuel sector. Therefore diversified portfolio could go through the turmoils. Typically it is just that the middle class people are the ones who are taking the most damage.

  • wideEyedPupil

    “Far from being peopled by “lefties” and “greenies”, many of these think-tanks have hired leading financial analysts and investment bankers, dumped by their international institutions because green research wasn’t making them enough money”
    Who does ‘these think tanks’ refer to and who is referred to by ‘dumped by’. This is an odd sentence.

  • daharja

    Thanks for a great article. The sooner the world divests from fossil fuels the better. I believe we *can* do this.

  • Radbug

    The “Least Wanted” Quintet: Glencore, Trafigura, Mercuria, Vitol & Noble Group. All clones. If one’s trouble, they’re all in trouble. And they’re big, very big. That means very big trouble. The killer lies in their books of complex OTC derivatives. They could take down the BHP & Rio.