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Fossil fuels’ dirty secret: Things look bad, climate action or not

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NexusMedia

Ten years ago Blockbuster CEO Jim Keyes said he wasn’t worried about digital streaming. “I’ve been frankly confused by this fascination that everybody has with Netflix,” he said.

Blockbuster’s head of digital strategy echoed this sentiment, asserting the company was “strategically better positioned than almost anybody out there.”

Not long after, Blockbuster went the way of the butter churn, while Netflix became a household fixture. Today, the movie streaming service is worth almost as much as Disney.

To most people, that’s a funny story about the hubris of a technological dinosaur.

Imagine, however, if Blockbuster had been a cornerstone of the U.S. economy, that millions of people had been employed in the manufacture and sales of Jurassic Park DVDs, that there were hundreds of cities dotting the South and Midwest where brick-and-mortar video rental was the only job in town.

Then, the collapse of Blockbuster wouldn’t be so funny. It would be a catastrophe.

This, experts warn, could be the future of fossil fuels.

Wind turbines, solar panels and electric vehicles are getting cheaper and more abundant by the day, which is hurting demand for coal, oil and natural gas.

As demand falls for conventional fuels, so will prices. Companies that laid claim to coal mines or oil wells, won’t be able to turn a profit by digging up that fuel.

They will default on their loans, pushing banks to the brink of failure.

Prices are likely to crash before 2035, costing the global economy as much as $4 trillion, according to a new study published in the journal Nature Climate Change.

The projected global power mix if countries meet their commitments under the Paris Climate Agreement and the price of renewables continues to decline.
CCS stands for “carbon capture and sequestration.” Source: Carbon Tracker

“Traditionally, fossil fuel companies have been considered very safe and very profitable industries with high returns, if you were to invest in their shares.

“Now, this may be changing,” said Jean-Francois Mercure, professor of energy, climate and innovation at Radboud University in the Netherlands and lead author of the study.

“It requires institutions to properly reassess the risk in their portfolios,” he said. “This transparency needs to start to happen, because they need to know what their money is ultimately invested in.

This really reminds us a lot of what happened in 2008 with the financial crisis, where there was a lot of repackaging of assets, and people didn’t really know what they owned until they realized those assets weren’t paying off.”

Mercure and an international team of economists and policy analysts modeled the future of fossil fuels under a variety of scenarios, examining what will happen if countries hew closely to targets of the Paris Climate Agreement, and what will happen if they don’t.

What’s remarkable is that fossil fuels are likely to go bust whether or not countries take climate change seriously.

The rapid pace of technological progress will transform the energy sector.

Researchers say the only way to guard against the impending collapse in the price of conventional fuels is to accelerate the transition to clean energy, ensuring investors and fossil fuel firms aren’t caught flat-footed when oil, gas and coal bottom out.

If this seems hard to believe, consider that renewables will drive down the price of fossil fuels long before they become our primary source of energy.

By taking over a small, but significant share of the market, they will force producers to slash costs to stay competitive. People will buy electric vehicles, meaning they will no longer need gasoline to fuel their cars.

They will buy electric heat pumps, meaning they will no longer need natural gas to heat their homes. They will buy solar panels and home batteries, meaning they will no longer need to buy power from a coal- or gas-fired power plants.

The projected road transport mix if countries meet their commitments under the Paris Climate Agreement and the price of electric cars continues to decline. AFVs are alternative fuel vehicles. EVs are electric vehicles. ICEs are internal combustion engines. Source: Carbon Tracker

As with everything, there will be winners and losers. Countries that import large volumes of fossil fuels — namely China, Japan and much of Europe — would likely be better off, having transitioned to cheap, renewable power and electric cars.

They would likely also be spending more money on clean technology produced at home and sending less money to fossil fuel producers overseas.

On the other hand, countries that produce and export a lot of oil, coal or gas — namely the United States, Canada, Russia and much of the Middle East — would face economic upheaval.

Canadian tar sands and American shale oil operations, which produce the most expensive oil, would be hardest hit.

Middle Eastern countries, which produce the cheapest oil, would likely fare best. Mercure expects OPEC countries would meet most of the remaining demand for oil.

A sudden and dramatic drop in the price of fossil fuels would lead to mass unemployment. Jorge Viñuales, a professor of law and environmental policy at the University of Cambridge and co-author of the study, warns this could fuel “public disenchantment and populist politics.”

He pointed to U.S. coal companies, which have struggled to compete with wind, solar and natural gas.

Many coal workers have thrown their support behind President Trump, who has tried to keep the industry afloat, most recently by moving to stay the shutdown of coal-fired power plants.

Researchers caution against subsidizing fossil fuels — a strategy akin to forcing Netflix users to rent movies from Blockbuster.

The only viable strategy, they say, is to reduce the systemic importance of fossil fuels by accelerating the transition to clean energy. Mercure recommends retraining coal, oil and gas workers for jobs in clean energy.

Source: Carbon Tracker

Viñuales laid out five goals for investors and policymakers.

“First, don’t invest more resources in fossils,” he said. “Second, if you have fossil fuels already invested, try to divest them, at least significantly.

Third, if you’re a fossil fuel company, try to diversify as much as you can while you’re still alive.

Fourth, if you’re a policymaker, don’t adopt policies that are conducive to more investment in fossil fuels, because that is going to be bad for your country.

Fifth, if you are in the geopolitical game, you have to consider what could happen to you.”

Viñuales said a collapse in the price of fossil fuels would likely strengthen China and weaken the United States. China has a lot of incentive to ramp up renewables.

It wants to create jobs and cut pollution, but it also wants to gain an edge over its chief rivals, Russia and the United States. Driving down the cost of renewables would undercut the U.S. fossil fuel sector.

“The only thing that the United States could do would be to massively invest in renewable energy to be a competitor in the economy of the future,” Viñuales said. Continuing to invest in fossil fuels will only make the United States more vulnerable.

“There is no walking out from the energy transition,” he said.

Notably, predictions of this study stand at odds with the forecasts of the International Energy Agency (IEA), which has been more bullish on fossil fuels, predicting the price of oil will peak in 2040, at the earliest.

However, the IEA has consistently underestimated wind and solar historically, and many leading financial experts have long warned of fossil fuels going bust.

In a 2015 speech, Mark Carney, governor of the Bank of England, warned that meeting the goals of the Paris Agreement would require leaving as much as 80 percent of the world’s proven reserves of oil, gas and coal underground, which would alter the economics of fossil fuels.

Now, it seems that in the absence of ambitious climate policies, the growth of renewables will have a similar effect.

There is, however, a bright side. As Carney noted, the shift to clean energy “is a major opportunity for insurers as long-term investors.” He added, “The more we invest with foresight; the less we will regret in hindsight.”

Jeremy Deaton writes for Nexus Media, a syndicated newswire covering climate, energy, policy, art and culture. You can follow him @deaton_jeremyReproduced with permission.  

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  • George Darroch

    Good. Investors with money in fossil fuels are idiots and deserve to take a haircut.

    • George Darroch

      And if you have your money in a super or investment fund that invests in everything (as most do), get it out and put it with smarter people who don’t invest in dying industries. You probably don’t deserve to lose your money.

    • Nick Kemp

      Any one who holds in a down trend deserves a haircut – the trend is your friend.

  • DevMac

    I was thinking about this concept in regards to the potential Trump order to subsidise coal energy production in the US to keep it viable:

    How much does it cost to maintain the status quo?

    Delaying the inevitable will only make the inevitable come at far greater cost and on a much steeper gradient: picture a cliff face cross-section. Rather then a subtle transition, it will become a crash.

    • nakedChimp

      It’s even worse.
      By pushing into the wrong direction they are setting up more people for disenfranchisement than without it.
      If they’d embrace RE the cost for energy would come down and sure, their revenue/profits as well, but people would still stay with them as a distributed system is still way more hassle than just having a grid connection.
      By disgruntling people and ratcheting costs up they just create more and more that want to get out asap and maybe even at higher costs.

    • Ken Dyer

      Damn! You mentioned that five letter word, Trump. If that useless lump would stop tweeting about inconsequential bullshit such as american footballers not wanting to meet him, and the media slavishly following his every word, then maybe, just maybe they would find something else to write about, something important.
      Can you think of a problem that will affect the lives of the whole population of the World, and not some turd who gets off whenever his name is mentioned?
      I can.

  • RobertO

    Hi All, I wonder how many of the coal ash group, RWNJ’s (including cow poo choice) realise that coal is a dying industry. I know that the shock jocks / jocketts will not understand the losses they are pushing, “there is no such thing as RE and we do not need to change anything”by allen be joan’s” on TV this morning.

    • Joe

      …and we’ve still got to build all those High Emissions Low Efficiency ( HELE ) Coalers to keep The MCA pouring the moolah into COALition HQ’s election money pot.

      • RobertO

        Hi Joe, We must need 5 of those things by now (surely NOT) but some of our elected officials still have ostrich syndrome.

    • Michael G

      Friend interned in a big oil co. last Summer. She was surprised everyone there was very gloomy about the prospects for the co. A lot of the older employees were wondering if they would make it to retirement. They aren’t as stupid as their PR indicates.

  • Arthurx Xtra

    I doubt that it will hurt the whole economy.
    People will be investing more in their cars, solar panels and batteries.
    Which will deliver future savings.
    So the car industry can take a bit of all the money which flows nowadays to the petrol industry.

    • RobertO

      Hi Arthurx Xtra, If we as a nation had some sort of leadership in RE we could build all sorts of goodies for the country. Make jobs for the country rather than exporting jobs. Even just processing minerals to a value added stage is better than just exporting raw minerals.

      • Ian

        Well said.

      • rob

        Hey Roberto I couldn’t agree with you more….cheers rob

      • Greg Hudson

        This is already happening with Lithium miners refining the raw mineral into Lithium Carbonate (I thinks that’s what it is called). Whatever the name, it is what the battery producers need…

  • Adrian Ingleby

    Urgent memo !

    Dear PM., Turnbull if you read REneweconomy, then please note this article and Professor Mecure’s fourth point:- “If you’re a policymaker, don’t adopt policies that are conducive to more investment in fossil fuels, because that is going to be bad for your country.”

    So PM., maybe the Adani Carmichael Coal mine and your proposed $1 billion loan for its rail link is not such a good idea?

    If the PM doesn’t read RE maybe one of RE‘s readers in his “Wentworth electorate” could tap him on the shoulder.

    • Joe

      Two Tongues Turnbull is out in his brown leathers again, this time patrolling the drought stricken farmlands and what does he volunteer to the media posse and cameras….its climate change. But I didn’t catch any hard questions from the media about what SERIOUS actions ( forget this half arsed 26-28% reduction affair ) he / The Fed. Government are taking in mitigating the climate change. Nope, its business as usual and keeping the ‘Coal wet dream’ alive.

    • MaxG

      “Dear PM”; what a kindergarten business… the clowns should be hung, or at least put in front of a court for crimes against humanity.

  • Ken Dyer

    It is not stopping banks from ramping up lending for fossil fuels

    http://priceofoil.org/2018/03/28/report-banks-ramped-up-fossil-fuel-finance-2017/

    This means that just as in 2008, the world is heading for another GFC within the next two decades, this time led by banks going broke because they have exposed themselves to stranded fossil fuel assets, and no doubt have “Bespoke Tranche Opportunities” (BTO) tied to them.

    Remember CDO’s or junk bonds? That is what a BTO is by another name. Watch for the hedge funds starting to shortsell, and the end will be nigh.

    https://www.bustle.com/articles/136706-what-is-a-bespoke-tranche-opportunity-the-big-short-ends-with-a-big-warning

    Yep, a fossil fuelled depression is coming to any country that has exposure to fossil fuels. No wonder the neo-liberals are fighting hard to keep coal.

    • nakedChimp

      It’s closer than 2 decades.
      Way closer.

  • nakedChimp

    And now imagine what a free market capitalism with actual competition should be doing for the cost of all the other products – driving them down to marginal cost – not just energy. Think food, housing, anything.
    This also means no monopoly/cartel profits via patents or other shenanigans to keep the shareholders happy.

    Then what capitalism?

    Products at marginal cost.
    No profit, unless for really new stuff for as long as competition hasn’t brought that one down as well..
    Saturation.
    No shortages anymore.
    No scarcity.
    No profits.
    Everybody would be happy and could spend more lifetime with stuff that he enjoys..
    The loosers?

    Shareholders!
    People that earn their living and more by owning a monopoly or cartel and hold everyone else ransom.
    Knowingly or unknowingly.
    The elite, the 1%, the rich, .. the few lucky ones.

    And all just because we have FIAT currencies with a little flaw – the zero lower boundary interest problem.
    Cure that and the economy won’t have a problem with stuff like is being described in the article EVER.

    • MaxG

      You’re right; and for that reason alone it won’t happen. 🙂

  • Tim Forcey

    HEATING YOUR HOME WITH PUMPS

    “They will buy electric heat pumps, meaning they will no longer need natural gas to heat their homes…”

    Well I like that!

    People interested in operating their homes without using fossil fuels can join the discussions at My Efficient Electric Home, now with 3,500 members. New Members welcome!
    Link: https://www.facebook.com/groups/996387660405677/

    • Mike Westerman

      Would love to Tim but I don’t FB – I see it as a form of alien mind control!

    • James Hansen

      Follow your good information here, so please continue to do so as I am not on Facebook.