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Fossil fuels are finished – the rest is just detail

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It’s time to make the call – fossil fuels are finished. The rest is detail.

The detail is interesting and important, as I expand on below. But unless we recognise the central proposition: that the fossil fuel age is coming to an end, and within 15 to 30 years – not 50 to 100 – we risk making serious and damaging mistakes in climate and economic policy, in investment strategy and in geopolitics and defence.

fossil-fuel-future

I’ve written previously about 2015 being the year the “Dam of Denial” breaks, referring to the end of denial that climate change requires urgent, transformational economic change. While related, this is different. It is now becoming clear we’ve reached a tipping point where fossil fuels will enter terminal decline, independently of climate policy action.

Given climate policy action is also now accelerating, fossil fuels are double dead. To paraphrase Douglas Adams, “So long and thanks for all the energy”.

I understand this is a very big call, especially in regards to timing. There are many drivers that lead me to this conclusion, but it’s their integrated impact that makes me so confident.

Think of energy like you think about an iPhone

The first and most important driver is the argument I first made early in 2014, in a paper with RenewEconomy editor, Giles Parkinson. For over 100 years, energy markets have been defined by physical resources, supplied in large volumes by large, slow-moving companies developing long-life assets in the context of slow-moving shifts in markets.

The new emerging energy system of renewables and storage is a “technology” business, more akin to information and communications technology; where prices keep falling, quality keeps rising, change is rapid and market disruption is normal and constant.

There is a familiar process that unfolds in markets with technology driven disruptions. I expand on that here in a 2012 piece I wrote in a contribution to Jorgen Randers book “2052 – A Global Forecast” (arguing the inevitability of the point we have now arrived at).

This shift to a “technology” has many implications for energy, but the most profound one is very simple. As a group of technologies, more demand for renewables means lower prices and higher quality constantly evolving for a long time to come. The resources they compete with – coal, oil and gas – follow a different pattern. If demand kept increasing, prices would go up because the newer reserves cost more to develop, such as deep sea oil. They may get cheaper through market shifts, as they have done recently, but they can’t keep getting cheaper and they can never get any better.

In that context, consider this. Renewables are, today, on the verge of being price competitive with fossil fuels – and already are in many situations. So in 10 years, maybe just five, it is a no-brainer that renewables will be significantly cheaper than fossil fuels in most places and will then just keep getting cheaper. And better.

Then we add in electric cars, which are now on the same path – converting a staid, slow moving industry (traditional auto companies like GM) into a disruptive technology-driven one (innovators like Tesla). Electric cars will accelerate the end of fossil fuels by joining with renewables to create a system shift, both directly by using clean power to charge them and indirectly by driving battery costs down to create storage for distributed renewables.

This all then unleashes competition across sectors bringing new players to old industries. For example utilities facing the much discussed death spiral triggered by solar, will find the motor vehicle fuels market very appealing. This would then unleash a huge political and commercial driver for growth in electric cars with the utility sector providing infrastructure to use their product, locking in customers with long-term supply deals backed by renewable power and lobbying for electric cars (to also protect the grid).

Within a decade, electric cars will be more reliable, cheaper to own and more fun to drive than petrol-fueled cars. Then it will just be a matter of turning over the fleet. Oil companies will then have their Kodak moment. Coal will already largely be gone, replaced by renewables.

The incumbents won’t respond in time. They are steeped in their analysis that they are the underpinning foundation of the economy – which of course they have been. This is so deeply ingrained in their worldview they can’t see their error. Energy is the essential foundation of the economy, but we now have a better, cheaper way of producing energy.

Fast beats slow

One of key competitive advantages the fossil fuel industry has had is the huge capital, complexity risk and high level engineering skills required to develop them.

This has two impacts. Firstly it created huge barriers to entry in the market – a disruptive entrepreneur can’t build a coal power station, drill in the deep ocean, buy an oil tanker or develop a coalmine. They can play on the edges, like shale gas, oil trading or mineral exploration, but they can’t play the main game. Secondly the industry has had huge incumbency power – it’s very expensive and politically hard to consciously and deliberately close down such a powerful industry and replace it. Thus action on climate change has stalled for decades.

Both of these benefits are gone when you combine “energy as a technology” with most growth in energy demand being in developing economies.

With renewables already competitive today without subsidy in some markets and the above trends playing out, it is inevitable that before long – maybe a decade – virtually all new electricity generation will be from renewables. Add in the need to be clean – not just for climate change reasons but for local air quality – and the choice developing countries will face will be between large, old, dirty, hard to finance infrastructure that requires heavy government support or small scale, easy to finance, more convenient, popular and clean energy and transport that will get even cheaper over time. Tough choice?

So the very thing that the fossil fuel industry had relied on for its growth – the rapidly expanding need for energy in the developing world – is the very thing that will drive the competition to wipe them out.

Implications

It’s hard to know where to begin with what this all means, because this really does change everything. Of course no one can accurately forecast the dates involved. But the assumptions pretty much everyone’s working with – that without policy intervention the energy system will be dominated by fossil fuels in 2050 and beyond – is frankly delusional. How could an incumbent, unpopular and dirty technology with increasing prices beat a disruptor that is cleaner, better, lower risk and falls in price every year?

Once you accept that, whether we stop burning fossil fuels in 15 years or 30 years is important, but it’s not the main question because either way it’s a very different outcome than most are planning for.

As I argued in early 2014, in Carbon Crash – Solar Dawn, the industry’s condition is terminal and once everyone wakes up to that reality, it will die faster because the market will discount it, taking away capital and shifting it to the future winners. This process will drive scale deployment and innovation of renewables while denying capital to fossil fuels, constraining their options.

Then the only logical strategy for fossil fuel companies will be to get their depreciating assets out of the ground as fast as possible and invest zero in exploration and development, instead paying out spare cash as dividends to shore up their stock price. With everyone doing this, prices will fall, chasing the declining market, undermining the value of the fossil fuel industry, and reducing its political influence further.

All businesses, like humans, fight death. And fight they will, with all the considerable power they have. So it will be messy and chaotic, and not consistent around the world. But in the end, the fossil fuel giants have no strategy that involves fossil fuels which makes any business or economic sense.

Other companies like utilities and auto companies, meanwhile, have great options – like taking away a large share of the oil industry’s market with renewable powered electric cars. They know that today we spend around twice as much on motor transport fuel as we do on electricity.

But big oil versus big utilities aligned with big auto is not the only disruptive impact for investors. There’s a whole range of industries that will benefit and join the party that will dance on the grave of fossil fuels: battery manufacturers, copper and lithium miners, electronics producers, software developers, electric engine makers, smart grid builders and, of course, solar and wind power manufacturers, installers and financiers. Shell and Exxon don’t see Google and Apple as competitors, which is just why incumbents so often lose. In combination, these forces will unleash the predictable pattern of technology driven market disruption.

If you think this is all far into the future, think again. In the USA, coal companies have lost around 75 per cent of their value in the past few years, while the Dow Jones went up nearly 70 per cent! And electric car maker Tesla, producing less than 40,000 cars per year, is valued at over half of GM, which produces 9 million cars per year! The market can smell death and knows that fast beats slow.

For climate advocates and policy makers, nothing changes in their approach, but everything changes in the result – and their level of confidence and influence.

With fossil fuels on the run, that industry’s support will evaporate. Governments are much more inclined to regulate when what they seek is already happening, but needs speeding up. So as fossil fuels are falling off the cliff, governments will give them a kick so they can claim credit.

Climate advocates, whose main challenge is speed of action, don’t need to change their approach. Their strategy is working: make fossil fuels harder, make solar easier. The only change, now, is that victory is at hand. Everyone loves a winner.

In conclusion, I will summarise my argument:

• The fossil fuel energy industry is now entering terminal decline and will be all but gone within 15-30 years. The key driver is not what most see as their greatest threat – future climate change policy. It’s that competing energy products of renewables and batteries, in a system with electric vehicles, will behave as a disruptive technology always does, delivering ever lower prices and ever higher quality in a decades’ long period of innovation and deployment, which fossil fuels can’t match.

• Because of the nature of this transformation, there will be a wide variety of new business players entering the market from the side, profoundly changing the market. The obvious example is utilities promoting electric cars as an enormous new market opportunity, which will assist them in avoiding the “death spiral” threat posed by the end of centralised generation.

Joining already are companies like Apple and Google who are both developing battery and car opportunities, with a close eye on the technology integration opportunity. Together this will form a powerful economic force both driving disruption and advocating climate action, undermining the historically dominant political and economic resistance of the fossil fuel companies.

• In combination these forces will unleash the predictable pattern of technology driven market disruption. The incumbents will stay in denial and fail to respond to what’s coming, despite it being obvious. They will hold on and fight against change as long as possible, but in the end will be wiped out by nimbler, new players without the cultural or asset baggage of the old. There will be an unknown tipping point – I think before 2020 – at which time the momentum will rapidly accelerate.

• The key difference in this transition, versus previous technology-driven change, is that it has the added dimension of climate change, making the resulting transformation a very high priority for policy makers and an unbeatable source of public support for the disruptors.

Fossil fuels are dead. The rest is detail.  

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  • Amen

  • howardpatr

    Try telling this to Mad Monk Abbott and the Luddites that he surrounds himself with.

    • Petra Liverani

      Perhaps I’m overly optimistic but I’m not sure we have to. In due time, Abbott’s irrelevance will become very clear – at least as far as getting off fossil fuels is concerned … and hopefully in relation to other things too although, of course, you never can tell. Awful things have happened in history that you’d think wouldn’t have been able to.

    • Paul Gilding

      Yes to Petra’s comment in regard to climate action. Abbott won’t be convinced, ever, as it’s against his core beliefs. But in the end Australia will have to follow the global market and won’t have the choice to stay behind.

  • strewthmate

    Referencing once more Douglas Adam’s brilliant “Hitchhikers Guide to the Galaxy”, Prime Minister Abbott’s climate change policy pronouncements remind me of and are about as popular as the Vokon Captain’s poetry recitations! Call a double dissolution Tony…. puhleeze. More importantly, we need a WWII-scale global mobilization to fight climate change. The Pledge to Mobilize is a political platform and social movement to get us there. Check it out! http://www.TheClimateMobilization.org/jayw

    • Ken Dyer

      Strewth Mate, genius site! Read this: http://theclimatepsychologist.com/?page_id=378. It tells us that that those who deny publicly are really worried privately:
      “(The power of truth) does not reside in the strength of definable political or social groups, but chiefly in a potential, which is hidden throughout the whole of society, including the official power structures of that society. Therefore this power does not rely on soldiers of its own, but on soldiers of the enemy as it
      were—that is to say, on everyone who is living within the lie and who
      may be struck at any moment (in theory, at least) by the force of truth (or who, out of an instinctive desire to protect their position, may at least adapt to that force).
      It is a bacteriological weapon, so to speak, utilized when conditions
      are ripe by a single civilian to disarm an entire division…. This, too,
      is why the regime prosecutes, almost as a reflex action, preventatively,
      even modest attempts to live in truth. (1978, emphasis added.)”

      Kind of says it all, don’t it? Tony Abbott and co, can only live in denial for so long, can’t they?

      Coal is dead, that is the truth. It just has not been buried (or left in the ground) yet.

    • KD

      well apparently we don’t – the thesis of the article is that decarbonisation is inevitable…and only a generation away.

  • Phil Patterson

    This is so, so very encouraging to a very concerned, angry and quite terrified person of the possible future ahead. Can we get a sense of how certain these sort of predictions are likely to come to fruition? Is this the consensus of other leading economic and business minds?

    • Paul Gilding

      Phil. I’d say it’s emerging rather than clear. Giles has for example reported on Tony Seba’s work on “Clean Energy Disruption”. Many argue it’s not correct, like the Shell and BP. But the debate is largely about timing not (15-30 vs 50-100 years) not the core argument.

      • Phil Patterson

        True, and the issue now is that time is the most important thing, timing really is of the essence now with regards to this shift. It does sound though, from your experience and involvement in this field for this long, that we’re talking 40 years or so max until we’re fossil-fuel free, if we’re being highly conservative.

  • Julian Crawford

    Great summary Paul. Can’t lay it out much more clearly than you have…

  • Chris Fraser

    Excellent. There’s also a big parallel between this piece and Jeremy Legget’s rationale. The war is won on price not ideology. When faced with disruption, the sad denial of incumbents make you want to shake your head in embarrassment for them.

  • Pedro

    The next fight will be to make sure the government does not try to prop up the FF industry with corporate welfare.

    • MaxG

      Already happening…

  • mick

    I stumbled across this little gem that about sums it up: “it must be considered that there is nothing more difficult to carry out,nor more doubtful of success,more dangerous to handle,than to initiate a new order of things.for the reformer has enemies in all those who profit by the old order and only lukewarm defenders in all those that would profit by the new order,this lukewarmness arising partly from fear of their adversaries who have the laws in their favour and partly from the incredulity of mankind,who truly do not believe in anything new until they have experience of it.” Machiavelli.

    • nakedChimp

      Very nice gem, thanks for posting it.

      • mick

        the same weakness self serving traits about after 500 years makes you think

        • KD

          “the incredulity of mankind,who truly do not believe in anything new until they have experience of it.” – rightly or wrongly, the rationale for the highly topical CEFC

  • john

    I do not think 2020
    However the basic analysis is correct.
    Price and efficiency will always win out.
    On every measure of cost to society RE has points abundant in its favour.
    In the scheme of things Australia and especially which every government is in power is more so irrelevant.
    In 30 years time this period will be forgotten and not in any way marked in history as having any notable achievements of note.
    A poor myopic outlook period of no consequence a mere dot on the map of change.

  • JustThink4Once

    As we have already seen, the fossil fuel lobby will fight this tooth and nail to their death. Draconian legislation is on the cards, via the resident political puppets, to make renewables as expensive as possible for consumers. Witness Spain’s “sun tax” or moves by some American states to have compulsory grid connection as examples. Ultimately though, the wallet is mightier than any political affiliation. This fact spells death for the LNP, as the swinging voters wake up to the reality of cheaper electricity bills, were it not for the blatant sabotage of renewables. The fear of a carbon tax is nothing compared to a future fear of LNP ideological meddling .
    Tony Abbott may believe he’s won today’s battle, but it’s cost him his party’s future…

  • Scotts Contracting

    valid points and it’ll be an interesting ride I look forward to.

  • pmagn

    The problem is the underlying form of destructive capitalizing. The system has gone haywire and we r abusing our resources on all levels including our waste output. As the pope says the earth is a pile of filth!

    Hopefully we will sort out the underlying reasons also or else switching to renewables wont make the difference.

    On top of that we will be very lucky not to collapse in to chaos due to disruptive climate and ocean food collapse. I think this is the likely outcome. Gaia will enforce her limits.

  • guest

    Warmists are delusional.

    • Kevin Laughlin

      To Guest, your comment comes from your inability to comprehend. I suggest you place your comments on sites more suited for your simple mind. I leave you with these words of wisdom ” Do not stray to far from the heard”

  • James Moylan
  • Marcel

    Well written, the old argument that fossil fuels are cheaper than renewables was flipped on its head.

  • Smurf1976

    I agree with the basic premise that the days of fossil fuels are numbered but I don’t agree with the timing. Take electric cars as one example. It will likely take at least 20 years for sales of electric vehicles to reach the point where petrol / diesel is an extreme minority. It will then take another 20 years to turn over 95% of the vehicle fleet. So that’s 40 years until there are very few petrol / diesel vehicles on the roads. To do it in 20 years would require that sales of petrol vehicles stop almost completely right now – pretty clearly that’s not going to happen.

    The crux of it is that energy consuming devices have a relatively long lifespan in most cases. For road vehicles in Australia it’s about 20 years (average age about 10 years = lifespan about 20 years) and that was backed up a generation ago with the switch from leaded to unleaded petrol. Leaded petrol stopped for new vehicles in 1986, it was another 20 years before sales of leaded petrol fell to the point of being trivial.

    It’s the same with most things. Oil-fired space heaters haven’t been commonly sold in Australia since about 1976, prior to which they were incredibly common. Even today there’s still some in use although after almost 40 years most are now gone.

    And so on. First we have the shift in what we build new, then it takes the lifespan of that product or infrastructure to see the new technology completely phased in.

    The only real exception is if either the old technology ceases to be workable at all prior to end of life or the new technology is just so much better than the old to the point that consumers scrap current equipment on a mass scale prior to it wearing out. So long as it’s possible to buy petrol at a reasonably affordable price, that’s just not going to happen with cars. Same with everything else – airlines aren’t going to scrap perfectly serviceable planes because they just can’t afford to, bus companies won’t dump all their diesel buses and so on just because someone’s selling electric planes and solar powered buses.

    So I’m pretty confident that we’ll be using fossil fuels until at least 2050 to some extent, although I do expect to see a peak in coal and oil use well before that time with a peak in gas after oil and coal.

    Two reasons for the later peak in gas. First because it’s incredibly entrenched via its distribution network and millions of individually small consuming devices most of which have a long remaining lifespan. It’s easier to replace one coal-fired power station with something else than to replace a few million heaters. Secondly because it’s generally seen as less of a problem (CO2 etc) than coal and oil so won’t be the priority on anyone’s list (governments, countries, business) until they’ve finished with coal first.

    It’s coming certainly, it’s really just a question of timing. I fully expect that in 2030 we’ll see plenty of electric cars on the road but BP, Shell, Caltex etc will still be selling petrol and diesel to supply the many vehicles which at that time will still be using it.

    Peak oil? Yes certainly, I’m pretty sure we’re going to see that happen but remember that it’s a peak not an end. So long as demand drops at least as quickly as available supply, we’ll still have fuel to keep remaining oil-powered cars, buses etc running until they’re eventually scrapped at end of life.

    • nakedChimp

      the power and cash flow/profits of fossil fuel companies will be gone long before the market shrinks to the levels you propose for calling “it’s over”.
      And I think that’s the point Giles points out here.. the tipping point.
      Those companies need a certain amount of cash flow to support their current operations.. if you reduce the overall consumption 10-15% they will recognize this.
      Just look at the FF power generators, we got like 10-15% of renewables on the grid and all of a sudden they’re in trouble already and fight nail and toe to avert their demise.

    • Todd McKissick

      I agree with nakedChimp that the time frame will be faster than most would predict. Certainly faster than 40 years.

      Electric cars are more of a toy of Silicon Valley than an appliance of Detroit. SV types add lots of bells and whistles as anyone can see in the Teslas. Where’s GM’s app to bring the car from parked in the garage to the front of the house? Right, it still doesn’t exist because they don’t think it even should. But iPhone and Galaxy phone sales are driven, not by failures or wear and tear but by new features. When the millions who buy into the phone frenzy find they can get a car with similar fun for similar or perhaps lower costs, they’ll jump fast. That trend will ramp up production so fast that the entire auto fleet will be turned over in less time than the standard 7 years. I would put it at 5 years after 2018 or 2023. That’s the time when 90% will be electric. The remaining 10% will just be those that don’t care about cost, features, CO2 or just live in the ‘classic’ world.

      Public pressure is going to increase exponentially and that will drive lots of change. But there’s another aspect to tech disruption and that’s when a second disruption begins before the first is complete. This may quickly happen to even electrics as hydrogen, salt water, compressed air or some other technology arrives which brings the goal posts even closer!

  • Fabio Barone

    There’s just one problem: when we’re all driving electric cars and live in houses that are all powered from renewables integrated into a decentralised, truly democratic energy distribution system, then certain people who feel it is their God-given right to make lots of money and control the world will feel, well, a little less important than they are accustomed.

    And the worst thing you can do to a really, really, really important person is to make them feel unimportant. So they will do something to make themselves feel important again… like, use existing money (before it all runs out) to influence the political process and delay the change over.

    I mean, you if can’t see that wind turbines are ugly, soul-destroying evil machines that are intent on destroying the Australian way of life, then you just are not on Team Australia.

    Some other really important people don’t bother with the politics. They just start wars whenever they start feeling unimportant.