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Fossils Face $25-Trillion Loss as Coronavirus Drives Industry’s ‘Decline and Fall’

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The world’s fossil companies stand to lose US$25 trillion in profits as the coronavirus pandemic triggers a terminal decline in demand for oil, gas, and coal and drives down the value of fossil fuel reserves by two-thirds, according to a report released yesterday by the London, UK-based Carbon Tracker think tank.

“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 $39 trillion to just $14 trillion,” The Guardian writes. “It warns that a blow to fossil fuel companies could send shock waves 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.”

“We are witnessing the decline and fall of the fossil fuel system,” said report author and Carbon Tracker new energy analyst Kingsmill Bond. “Technological innovation and policy support is driving peak fossil fuel demand in sector after sector and country after country, and the COVID-19 pandemic has accelerated this,” meaning that “we may now have seen peak fossil fuel demand as a whole.”

That reality translates into a “huge opportunity for countries that import fossil fuels which can save trillions of dollars by switching to a clean energy economy in line with the Paris Agreement,” he added. “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.”

But Bond warned that fossil and executives and investors seem not to appreciate the terminal risk they face.

“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.”

Carbon Tracker notes that “companies like Exxon are still forecasting continued growth in demand for fossil fuels, and the fossil fuel system as a whole has been investing $5 trillion a year on new supply and demand infrastructure. But Shell’s recent dividend cut, Repsol’s decision to write off €4.8 billion of assets last year, and growing bankruptcies in the U.S. shale oil sector, are all symptoms of an industry undergoing structural change.”

That shift “could threaten the stability of petrostates—countries whose economies rely on oil export income,” the think tank adds. And “companies worth $6 trillion are particularly vulnerable because they are operating in sectors expanding the fossil fuel system, from builders of LNG facilities and oil pipelines to makers of conventional car engines and gas turbines.”

Carbon Tracker’s summary of the report points to renewables as “the cheapest form of bulk energy production in 85% of the world,” adding that “electric vehicle batteries are comparable with the cost of conventional car engines. Electricity companies are rapidly switching to renewables while carmakers are shifting production to electric vehicles. This is significant because electricity consumes more than a third of global fossil fuel production, and the greatest demand for oil comes from the automotive sector.”

A separate analysis released Tuesday by the International Renewable Energy Agency shows solar and wind increasingly competitive with fossils in head-to-head price comparisons. “More than half of the renewable capacity added in 2019 achieved lower power costs than the cheapest new coal plants,” Reuters reports, citing the release. “Auction results also suggest that the average cost of building new solar photovoltaic (PV) and onshore wind power [is now] less than keeping many existing coal plants running, reinforcing the case for phasing out coal.”

PV Magazine says world-wide solar energy costs are down 82%, from an average of 37.8¢ to just 6.8¢ per kilowatt-hour, since 2010. “The same amount of money invested in renewable energy is producing far more new capacity today than it was 10 years ago,” IRENA wrote.

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Matt Chester's picture
Matt Chester on Jun 8, 2020

“We are witnessing the decline and fall of the fossil fuel system,” said report author and Carbon Tracker new energy analyst Kingsmill Bond. “Technological innovation and policy support is driving peak fossil fuel demand in sector after sector and country after country, and the COVID-19 pandemic has accelerated this,” meaning that “we may now have seen peak fossil fuel demand as a whole.”

What about the fossil fuel industry is it that has the current situation lead to losses they can't come back from vs. other industries in the sector that are also hurting but will be able to bounce back? Or is it just a matter of clean energy investments being seen as an opportune way to economically bounce back and that comes at the cost of the fossils industry?

Edouard Lotz's picture
Edouard Lotz on Jun 9, 2020

A recent study published by the Imperial College showed that on the last 10 years, the average return per year to investors for renewables was 11% while the one for fossil fuel was only 7%. 

The rethoric of saying that renewables are great for the planet but fossil fuel are the way to go if you want to make money seems utterly wrong at the moment. Oil&Gas companies will probably face some troubles in the year ahead.

More details here: https://www.forbes.com/sites/davidrvetter/2020/05/28/just-how-good-an-in...

 

Matt Chester's picture
Matt Chester on Jun 9, 2020

The rethoric of saying that renewables are great for the planet but fossil fuel are the way to go if you want to make money seems utterly wrong at the moment

This surely used to be true, but unfortunately that 'conventional wisdom' persists in some circles despite change circumstances that flip the script (that, or those circles are already heavily invested in the fossils so they need to scream loudly the financial advantages so enough people believe it and keep the money rolling in!)

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