Value of reserves could fall by two-thirds as Covid-19 hastens peak in demand, study shows
The coronavirus outbreak could trigger a $25tn (£20tn) collapse in the fossil fuel industry by accelerating a terminal decline for the world’s most polluting companies.
A study has found that the value of the world’s fossil fuel reserves could fall by two-thirds, sooner than the industry expects, because the Covid-19 crisis has hastened the peak for oil, gas and coal demand.
The looming fossil fuel collapse could pose “a significant threat to global financial stability” by wiping out the market value of fossil fuel companies, according to financial thinktank Carbon Tracker.
The report predicts a 2% decline in demand for fossil fuels every year could cause the future profits of oil, gas and coal companies to collapse from an estimated $39tn to just $14tn.
It warns that a blow to fossil fuel companies could send shockwaves through the global economy because their market value makes up a quarter of the world’s equity markets and they owe trillions of dollars to the world’s banks.
Kingsmill Bond, the author of the report, said: “Now is the time to plan an orderly wind-down of fossil fuel assets and manage the impact on the global economy rather than try to sustain the unsustainable.”
The report says the world is “witnessing the decline and fall of the fossil fuel system” owing to the quicker-than-expected growth of clean energy alternatives coupled with the collapse in demand for fossil fuels amid the pandemic.
It follows findings from the International Energy Agency, which forecast the Covid-19 fallout would lead to the most severe plunge in energy demand since the second world war and trigger multidecade lows for the world’s consumption of oil, gas and coal, while renewable energy continued to grow.
The world’s demand for fossil fuels has plunged by almost 10% amid the coronavirus lockdown, and many energy economists believe it may fail to recover from the crisis.
Bond said fossil fuel companies and their investors had failed to realise the current decline of the fossil fuel industry may prove terminal.
“The bizarre thing is that the fossil fuel incumbents have been so resistant to the idea of change for so long, and put out so much bogus PR, that they risk falling victim to their own rhetoric,” he said.
“There is far more risk inherent in the fossil fuel system than is conventionally priced into financial markets. Investors need to increase discount rates, reduce expected prices, curtail terminal values and account for the clean-up costs.”
Not for the first time, let’s wonder how much Vladimir Putin and Crown Prince Mohammed bin Salman really know what they’re doing.
Oil has crashed to $35 a barrel thanks to a sudden feud between Russia and Saudi Arabia, which comes amid the Covid-19 shock to the global economy. The upshot could bankrupt a lot of U.S. shale companies, if that’s either man’s thinking. But their equipment would survive, the drilling rights would survive. Employees would retain their skills. All would end up in hands of lenders who have every incentive to preserve value and keep applying technology to lower the price at which operations become profitable again.
The U.S. has deep pools of entrepreneurial capital. It has highly sophisticated private equity that can scoop up bargains and bring assets back into play in a way that, as has been happening for a decade, tends to cap any cyclical rebound in oil prices that the Saudis and Russians may be hoping for.
More important, the U.S. may be the world’s biggest producer but oil is a tiny share of its economy. What America loses in terms of oil-industry wages and profits it gains in lower gas prices for consumers and energy costs for downstream industries. Plus our political system at all levels is geared to assuage unhappiness from dislocated industries. We have a national election coming up in which bums can be thrown out and new bums installed.
The strongmen’s desperation is understandable but nothing else about their feud is: Saudi Arabia and Russia have zilch to offer the world except oil and gas. Their political systems are poorly designed to handle the shocks coming their way. Russia needs an estimated price of $50 a barrel to keep its budget afloat given limited borrowing options under sanctions, and that $50 price hardly sustains the millions of Russians not directly on the government’s payroll.
MBS’s role at least can be explained: His legitimacy is obviously in question judging from this weekend’s arrests of members of the royal family amid accusations of a coup plot. To be seen surrendering the Saudis’ role as price leader to the Kremlin right now would hardly strengthen his claim to the throne he wants to inherit from his father.
Mr. Putin rode an oil boom to power 20 years ago but the degree to which he has mastered the energy politics of even his own country is debatable. He has often seemed at a loss and fearful of taking sides in oligarchic disputes, even when they threatened his carefully prepared come-hither to Western oil companies such as Shell and BP. His crushing of Yukos and its impresario in 2003 took care of a personal threat from a democracy promoter but also began the slow strangulation of ties with the West, which has been costly to him and his cronies. It took only a flick of Donald Trump’s finger recently to scuttle Mr. Putin’s precious Nord Stream 2 pipeline as it neared completion.
No part of Mr. Putin’s plan was provoking an oil price collapse on the eve of Tuesday’s carefully scripted parliamentary kabuki. Valentina Tereshkova, an 83-year-old lawmaker and throwback to the glory days of the Soviet Union as the country’s first female cosmonaut, proposed a constitutional change to let Mr. Putin serve in de facto perpetuity.
“The president is the guarantor of the constitution,” said Mr. Putin in a speech accepting the idea, his sentence structure apparently confusing subject and object.
These changes must pass a Russian court in a system where judges are beholden to Mr. Putin, and a plebiscite that may test even Mr. Putin’s highly accomplished election rigging. His popularity has been eroding in polls of voters who don’t kid themselves that their phone calls aren’t monitored. A heavy ding to oil revenues that account for 30% of gross domestic product will not improve his standing. Remind yourself what it was about the 2014 Ukrainian revolution that so threatened Mr. Putin: a post-Soviet public standing up against a corrupt and impoverishing dictatorship.
But, ironically, it’s the authoritarian states that are most hurt by the retreat. China is dependent on the world to absorb its superfluity of manufactured goods. Russia and Saudi Arabia are economic pygmies that need a fast-growing global economy to buy their oil. A retrenching world would be less prosperous and harmonious but in such a world you would also rather be the United States than anybody else.
When the son of the president of a desperately poor country starts buying mansions and sportscars on an official monthly salary of $7,000, Charmian Gooch suggests, corruption is probably somewhere in the picture. In a blistering, eye-opening talk (and through several specific examples), she details how global corruption trackers follow the money — to some surprisingly familiar faces.