A Warning to Investors: Fossil Fuels Nearing Peak

March 16, 2019

Excerpt from long piece that’s worth a read.

Bill McKibben in New York Review of Books:

“Kingsmill Bond” certainly sounds like a proper name for a City of London financial analyst. He looks the part, too: gray hair expertly trimmed, well-cut suit. He’s lived in Moscow and Hong Kong and worked for Deutsche Bank, the Russian financial firm Troika Dialog, and Citibank. He’s currently “new energy strategist” for a small British think tank called Carbon Tracker, and last fall he published a short paper called “2020 Vision: Why You Should See the Fossil Fuel Peak Coming.” It asks an interesting question: At what point does a new technology cause an existing industry to start losing significant value?

This may turn out to be the most important economic and political question of the first half of this century, and the answer might tell us much about our chances of getting through the climate crisis without completely destroying the planet. Based on earlier technological transitions—horses to cars, sails to steam, land lines to cell phones—it seems possible that the fossil fuel industry may begin to weaken much sooner than you’d think. The British-Venezuelan scholar Carlota Perez has observed that over a period of twenty years, trains made redundant a four-thousand-mile network of canals and dredged rivers across the UK: “The canal builders…fought hard and even finished a couple of major canals in the 1830s, but defeat was inevitable,” as it later was for American railroads (and horses) when they were replaced by trucks and cars.

Major technological transitions often take a while. The Czech-Canadian academic Vaclav Smil has pointed out that although James Watt developed the coal-powered steam engine in 1776, coal supplied less than 5 percent of the planet’s energy until 1840, and it didn’t reach 50 percent until 1900. But the economic effect of those transitions can happen much earlier, Bond writes, as soon as it becomes clear to investors that a new technology is accounting for all the growth in a particular sector.

Over the last decade, there has been a staggering fall in the price of solar and wind power, and of the lithium-ion batteries used to store energy. This has led to rapid expansion of these technologies, even though they are still used much less than fossil fuels: in 2017, for instance, sun and wind produced just 6 percent of the world’s electric supply, but they made up 45 percent of the growth in supply, and the cost of sun and wind power continues to fall by about 20 percent with each doubling of capacity. Bond’s analysis suggests that in the next few years, they will represent all the growth. We will then reach peak use of fossil fuels, not because we’re running out of them but because renewables will have become so cheap that anyone needing a new energy supply will likely turn to solar or wind power.

Bond writes that in the 2020s—probably the early 2020s—the demand for fossil fuels will stop growing. The turning point in such transitions “is typically the moment when the impact is felt in financial markets”—when stock prices tumble and never recover. Who is going to invest in an industry that is clearly destined to shrink? Though we’ll still be using lots of oil, its price should fall if it has to compete with the price of sunshine. Hence the huge investments in pipelines and tankers and undersea exploration will be increasingly unrecoverable. Precisely how long it will take is impossible to predict, but the outcome seems clear.

This transition is already obvious in the coal markets. To understand, for example, why Peabody, the world’s largest private-sector coal-mining company, went from being on Fortune’s list of most admired companies in 2008 to bankrupt in 2016, consider its difficulties in expanding its market. India, until very recently, was expected to provide much of the growth for coal. As late as 2015, its coal use was expected to triple by 2030; the country was resisting global efforts like the Paris Accords to rein in its carbon emissions. But the price of renewable energy began to fall precipitously, and because India suffered from dire air pollution but has inexhaustible supplies of sunlight, its use of solar power started to increase dramatically.

“In 2017, the price in India of wind and solar power dropped 50 percent to $35–40 a megawatt hour,” said Tim Buckley, who analyzes Australasia/South Asia for the Institute for Energy Economics and Financial Analysis. “Fifty percent in one year. And a zero inflation indexation for the next twenty-five years. Just amazing.” This price drop occurred not because India subsidizes renewable energy (it doesn’t), but because engineers did such a good job of making solar panels more efficient. The cost of power from a newly built coal plant using Indian coal is, by comparison, about $60 a megawatt hour. If you have to import the coal, the price of power is $70/megawatt hour. And solar’s $40/megawatt hour price is guaranteed not to rise over the thirty-year life of the contract the suppliers sign—their bids are based on building and then running a facility for the life of the contract. No wonder that over the first nine months of 2018, India installed forty times more capacity for renewable than for coal-fired power.

Even “cheap” natural gas is now starting to look expensive compared to the combination of sun, wind, and batteries. In an essay for Vox, the energy reporter David Roberts listed all the natural gas plants—many of them designed to provide quick bursts of “peaking power” on heavy demand days—whose planned construction has been canceled in recent months, as utilities and banks began to figure out that over the projected forty-year life of a new plant, there was a good chance it would become an uncompetitive “stranded asset” producing pointlessly expensive electricity. The chief executive of one US solar company said in January, “I can beat a gas peaker anywhere in the country today with a solar-plus-storage power plant. Who in their right mind today would build a new gas peaker? We are a factor of two cheaper.”

You get some sense of the future from the stunning fall of General Electric. “They were the world leader, the thought leader, the finance leader, the IT leader,” said Buckley. “And their share price is down 70 percent in the last two and a half years, in a market that’s up 50 percent. It’s a thermal power–reliant basket case.” That’s in large measure because manufacturing turbines for coal- and gas-fired power plants was a significant part of the company’s business; in 2015, it hugely expanded that capacity by buying its largest European competitor, Alstom. But then the bottom dropped out of the industry as proposed new generating plants couldn’t find financing. GE makes wind turbines, too, but that’s a lower-margin business with many more competitors. The fall in GE’s stock has meant “hundreds of billions of dollars of shareholder value reduction,” according to Buckley. Last June, after more than a century, General Electric was dropped from the Dow Industrial Index, replaced by a drugstore chain.

 

11 Responses to “A Warning to Investors: Fossil Fuels Nearing Peak”

  1. dumboldguy Says:

    Kingsmill freaking BOND? That’s the real name of a “City of London financial analyst”? One of those geniuses who have brought us regular economic crashes down through the years and have bankrupted whole countries? Part of the “finance” sector that does nothing of real value except make money for the greedy rich who already have too much? One of those “economists” that when you ask how many of them are needed to change a light bulb, the answer is “seven, plus or minus six”?

    And such a nice video clip, with such nice graphs, especially the one at ~3:10 that oh-so-blithely predicts what will happen in 2030, 2050, and 2100. Such horseshit!

    I have on my bookshelves a tidy little paperback of 200 pages titled “Beyond Oil: The View from Hubbert’s Peak” published in 2005 and written by Kenneth Deffeyes, who also wrote “Hubbert’s Peak: The Impending World Oil Shortage” (2001), which was based on the work of M. King Hubbert in the 1950’s and 60’s. Deffeyes is a petroleum geologist and his book is an excellent survey of all fossil fuels—-where they are found, how they were created, how they are “mined” and used, what impacts they have on the environment, etc—-it’s worth reading for that alone.

    However, the preface to this latest book states “world oil production passed its peak on December 16, 2005”, so the author has proven to be no better than another economist changing a lightbulb. He never anticipated fracking. The same goes for McKibben’s talk about railroads replacing canals and the other “transitions” like cars replacing horses. “Major technological transitions often take a while”, McKibben says—-Yep, and neither he not BOND not anyone else has any idea of how long “a while ” may be. In the meantime, the unknown tipping points are getting closer.

    We are faced with a huge global crisis with the burning of fossil fuels and the increase in GHG (and subsequent global warming and climate change). We are NOT cutting fossil fuel use fast enough and it’s wishful thinking and bright-sidedness to continue to yammer on about the IF’s and MAYBE’s when fossil fuel use is declining so slowly and COAL particularly is still being burned in such STAGGERINGLY large quantities.

    I know, McKibben and the others don’t want to scare anyone and drive them into the depths of despair and a fatalistic response of “we can’t do anything—it’s too late—so let’s just burn more fossil fuel and enjoy the good life while we can”.

    PS Deffeyes also reiterates the famous Boulding quote after the title page—-“Anyone who believes that exponential growth can go on forever in a finite world is either a madman or an economist.”

    • Sir Charles Says:

      One of the best comment I’ve read here so far. At the end we didn’t leave the stone age behind us because we were running out of stones. In the 1980s the financial market had about the same value as the real market (goods et al). Nowadays, after decades of printing money, the financial market is valued umpteen times the goods (and services) we’re producing and buying. The whole bubble system is designed to burst, and it had burst in the past. I’m just waiting for the big bang. All what’ll be left will be poverty, a poisoned environment and catastrophic climate change. Bon appetit!

      => 11 Years Left

      => International Rebellion: A guide for participants

      • chucksterweb Says:

        Minor correction and a big kudos to you for repeating it.. “The stone age didn’t end because…” Not ONE OF the best comments ever but in my humble opinion THE best comment ever. It’s the reason I came to comment and I’m glad someone else said it first. Repeat this loudly and clearly for all to hear in every venue you can and as often as you can. It cannot and doesn’t stand alone as the only argument nor should it. But as a bumper sticker it’s powerful precisely because it gets directly to the main point without wasting words. So i’ll take my own advice right hear and repeat “The stone age didn’t end because we ran out of stones.” Forgive me – or not – for not putting that in all caps.

        • dumboldguy Says:

          Yes, it does make a great soundbite, but beyond that it really doesn’t make much sense if you think about it.

          http://raylong.co/blog/2013/10/17/the-stone-age-analogy-is-the-dumbest-analogy-overused-by-smart-energy-people

          An excerpt from the link——

          “The “Stone Age” analogy irks me for two reasons. First, “Stone Age” refers to the materials used by ancient man for their tools, it doesn’t refer to energy production. Yes, they moved on to the Bronze Age in time, but then did it ONLY because bronze was better, they faced no impending supply issues of stone. Which leads to the second problem, people that use this analogy are taking an example of something that had nothing to do with supply scarcity and using it to describe something that does (oil depletion) in a way to pretend that supply scarcity doesn’t matter, or is something that will inevitably be dealt with easily…..We won’t get to the future we desire by shrugging our shoulders, saying that “The Stone Age didn’t end for lack of stones…” and claiming that things always work out in the end because it makes us feel good to pretend that they always have and always will. If you think Peak Oil has anything to do with “running out” then I’d suggest that you don’t properly understand Peak Oil. Likewise, if you’re using the Stone Age analogy, I’d suggest that you don’t properly understand energy.”

          • dumboldguy Says:

            PS If we’re going for best ever quotes to make bumper stickers out of, I nominate Pogo’s WE HAVE MET THE ENEMY AND HE IS US, which dates back to 1970 and the first Earth Day.

            Another favorite is the old Chinese proverb, as modified to fit various needs like moving to RE—-“The best time to plant a tree was 20 years ago. The second best time is now.”

    • Sir Charles Says:

      Re Kenneth Boulding:

      There is a simple formula: 70 divided by the percentage of annual growth equals to doubling time in years. So a “modest” growth of 3.5% means doubling all 20 years. Means quadrupling after 40 years, 8x after 60 years, 16x after 80 years, 32x after 100 years, 64x after 120 years….

      China has been called being in a “recession” since growth fell under 7%. Well, do we want to buy a new mobile phone twice a day, a new car twice a week, a new TV three times the week, a new house every fortnight, by the end of this century? That’s what exponential growth is looking like. And when you still think half the world is still there to be exploited (which isn’t true), then it’ll be gone in just one period, and you’d need an entire planet B just for the next one.

      Our system is based on growth, even if you just want to keep economy flat. Such a system is designed to collapse. And the longer we stick to that system the deeper the fall, the louder the explosion will be.

      The only way out of this insanity is a steady state economy.

  2. smurfix Says:

    Oil investors already see the wriing on the wall. Cf. their pumping of money into astroturf PACs fighting wind turbines.

  3. dumboldguy Says:

    “Energy Execs’ Tone on Climate Changing, But They Still See a Long Fossil Future”

    https://insideclimatenews.org/news/15032019/energy-oil-gas-industry-climate-

    “In speeches that would have been unimaginable just a few years ago, executives from some of the world’s largest oil companies said the future is low-carbon and the industry needs to reinvent itself or risk becoming irrelevant as the world turns to cleaner energy.

    “Yet at the same time, their peers talked about a future where oil and gas demand would remain strong for decades. They spoke of natural gas not as a bridge to some fossil-fuel-free world but as a “forever fuel.”change-ceraweek-shell-bp

    “The U.S. Energy Information Administration projects oil production to continue growing through much of the next decade before leveling off and eventually declining, while gas output is expected to grow through 2040, though its forecasts have drawn criticism for underplaying the rise of clean energy. This same scenario has carbon dioxide emissions remaining steady to 2050.

  4. dmarioclark Says:

    A great read-insightful, valuable and helpful. Thanks for the additional links. Long read but worth it:-)


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