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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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New Technology Could Wipe Out Trillions In Fossil Fuel Investment

We are living in a carbon bubble with trillions of dollars held in oil, gas, and coal assets that would be wiped out before long as technological advancements in all sorts of industries quickly undermine fossil fuel demand.

This is the gist of a recent study led by the University of Cambridge, which involved macroeconomic simulations, with the researchers concluding we are on the brink of a much worse financial crisis than the one from 2008 as between 1 and 3 trillion worth of fossil fuel investments turn into stranded assets. For context, the authors note that the 2008 crisis was sparked by losses to the tune of US$250 billion.

The fast pace of technological progress in renewable energy and elsewhere that is producing higher levels of energy efficiency is the driver of the crisis. To avoid it, the study authors say, the world needs to deflate the bubble carefully before it bursts. Otherwise we might see a global crisis compared to which the Great Recession was a picnic.

The researchers ran repeated simulations with different scenarios as researchers tend to do in such studies and concluded that the worst case would be continued fossil fuel production in the context of falling demand, which is actually a conclusion one doesn’t need macroeconomic simulations to make.

“If OPEC nations maintain production levels as prices drop, they will crowd out the market,” says one of the authors, Hector Pollitt from Cambridge Econometrics and EENRG. “OPEC nations will be the only ones able to produce fossil fuels at the low costs required, and exporters such as the US and Canada will be unable to compete.” Related: Oil Sinks Deeper On OPEC Concerns

But this will be just the start. As demand declines, by 2035 oil—and other fossil fuels—will sell so cheap that even large, low-cost producers will not be able to enjoy their revenues. Social and political tumult could ensue as jobs are lost and disgruntlement grows. Ironically, the push for more and stricter climate change policies will only aggravate the situation, unless it is accompanied by parallel action in fossil fuels, namely, winding down investments in their production.

This sounds decidedly questionable when you compare it with warnings from, say, OPEC’s secretary-general Mohammed Barkindo that oil prices could soar unless more money is spent on new production, but the researchers are not the only ones sounding the energy efficiency alarm.

A recent report from Norwegian quality assurance and risk management provider DNV.GL has forecast that global energy demand could plateau by 2050 thanks to energy efficiency improvements. The firm goes as far as to say that the world economy’s energy intensity will decline faster than the economy grows over the next 30 years. Related: New Iraqi Lawmakers Want Out Of OPEC Deal

The gains in energy efficiency, DNV.GL says, will in fact contribute a lot more to the energy transition that the world is undergoing than solar, wind, and electric vehicles taken together. At an average energy efficiency improvement rate of 2.5 percent annually until 2050, it is the single most important factor that could bring the world closer to meeting the Paris Agreement targets.

Energy efficiency and the technologies behind it don’t get as much headlines as solar, wind, or especially EVs. But it may turn out that it is, as the Norwegian firm calls it, the unsung hero of the energy transition.

By Irina Slav for Oilprice.com

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  • Bill Simpson on June 05 2018 said:
    What the world should be worried about isn't having stranded oil & gas assets. It is not being able to supply every barrel of oil the users want to buy to get business done. Ask an American alive at the time what the Arab Oil Embargo was like, and what it did to the US economy. Ever hear of stagflation? And it didn't last that long. A permanent oil shortage would be orders of magnitude worse.
    These professors don't take into account how fast the world is developing, and that richer people use a lot more energy than poorer people. That alone will drive the demand for oil up for at least another couple of decades.
    An oil shortage will be the problem, not an oil surplus. A shortage is far more dangerous than most people can imagine because it is permanent, which forces the economy to contract because it moves virtually everything in commerce. We would need trillions of batteries to replace that oil. But we need oil to build the batteries, a lot of oil. Better start soon.
  • Albi Donald on June 06 2018 said:
    More psychic predictions of what might be in 20 years time, when in fact the most likely outcome is that oil demand will be more than double what it is today if the population keeps on growing the way it is.
  • Steve on June 06 2018 said:
    Simulations are not fact. Renewables are unreliable and will likely always be.

    This was how global warming and the ozone "hole" myths were started: by using computer simulations.
  • Kr55 on June 06 2018 said:
    Won't happen overnight of course. Lifetimes of a lot of easy to get production will deplete over the next 10-15 years. No one will produce for free, players will walk away. No one knows what will actually happen to oil prices. Could very well end up that technically infinite sources like oilsands are able to dominate the remaining market as the enhanced recovery for very old fields just become too expensive to bother with anymore.
  • Lee James on June 07 2018 said:
    Hard to imagine a rapidly declining demand for oil.

    In other news, my state planned to construct five (5) nuclear plants to meet anticipated demand for electric power. Then the whole PNW region committed to energy efficiency as the preferred choice for new power. Demand dropped; four plants were canceled and never put online.

    I find a lot of surprises for those in the business of meeting energy demand. Today, electrical demand in the U.S. continues to drop.

    Surprises happen. Oil will meet its match. Or maybe it won't.
  • David Jones on June 08 2018 said:
    I've said something along these lines a few times already. You don't need advanced computer modelling to come to this conclusion, just an average sized brain, sufficient information and some basic logic.

    Also, to those of you here that think computer modelling is fairy tales, think again. Much of the technology you use today was made possible through mathematical modelling. If it had no real-world value, it would not be utilized by so many industries. The dismissal of computer models as useful, albeit not perfect, predictive tools is a consequence of ignorance.

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