Fossil Fuels into an economic Downward Spiral

The study showed coal potentially reaching its peak before 2020. 

(AP Photo/Matthew Brown, File)

Fossil fuels in for a downward spiral, report says

Posted in the Washington Examiner

By JOHN SICILIANO • 10/10/16 2:31 PM

Coal and oil are headed for a downward spiral in the next 20 years, when energy demand is projected to reach its peak due to government policies and renewable energy technologies, according to a major new international report.

The World Energy Council, at its annual conference in Istanbul Monday, highlighted the details of its latest energy projections, named the “Grand Transition,” which showed global demand for fossil fuels reaching their height and falling in the 2030s, with significant deterioration in the market by 2060.

“Historically people have talked about Peak Oil, but now disruptive trends are leading energy experts to consider the implications of Peak Demand,” said Ged Davis, the council’s executive chairman of scenarios. “Our research highlights seven key implications for the energy sector which will need to be carefully considered by leaders in boardrooms and staterooms.”

Those disruptions — lower population growth, new technologies, greater environmental challenges and a shift in economic and geopolitical power — “will create a fundamentally new world for the energy industry,” he said.

That could throw a wrench into U.S. prospects for increasing oil exports, or even presidential nominee Donald Trump’s hopes of increasing U.S. coal output by reversing the Obama administration’s regulations on the fossil fuel industry.

Trump said at Sunday night’s presidential debate in St. Louis that the U.S. has 1,000 years’ worth of coal reserves. The amount is debatable, but even if accurate, most of that would become a “stranded resource” with coal demand leveling off, according to the new projections.

Many of the changes in energy demand are occurring from the rapid growth in renewable and distributed electricity generation. When coupled with more efficient appliances and manufacturing techniques, the demand for electricity changes, requiring less centralized baseload power plants that use coal and other fossil fuels.

Coal use will fall while solar and wind will fill in the gaps, the report showed. It projects that solar and wind, which currently make up 4 percent of power generation, will grow to between 20 percent and 39 percent by 2060.

Fossil fuel use will contract to become “as little as” 50 percent of the world’s global energy mix, dropping by nearly 40 percentage points from 1970 to 2060, according to one of the report’s scenarios. Nevertheless, coal, oil and natural gas will be affected in different ways.

Oil, for instance, will remain a significant player in the transportation sector, with more than 60 percent of the energy mix for cars and trucks coming from petroleum in each of the report’s three projection scenarios. Natural gas will continue to increase steadily through the middle part of the century.

“By 2060, all scenarios point to an increase in demand for gas, as well as a possible peak demand for oil within the 2035-2045 timeframe,” said Nuri Demirdoven, managing director at Accenture Strategy and a report principal. “Misspending including misallocation of capital has always been a risk for energy assets, and will continue to grow due to fundamental shifts in the industry.

“Leading companies across all scenarios will be those that adapt quickly and take two urgent steps: rethink the balance of their energy portfolio, and utilize business and digital technologies to transform how they deliver work and organize and manage performance across their businesses,” he said.

Coal use depends a lot on how much of the fuel China and India use to power their economies over the next 40 years. Nevertheless, the study showed coal potentially reaching its peak before 2020. In another situation where energy security is emphasized, coal would see its peak use in 2040.

Other factors, such as meeting international climate change agreements and domestic policies to reduce greenhouse gas emissions, also will factor into fossil fuel use being phased out and renewables being phased in.

Overall, the projections see coal and oil being turned into “stranded resources” with no market. That is expected to place significant stress on economies, along with other unforeseen consequences if not confronted effectively.

“Carefully weighed exit strategies spanning several decades need to come to the top of the political agenda, or the destruction of vast amounts of public and private shareholder value is unavoidable,” the report’s summary said. “Economic diversification and employment strategies for growing populations will be a critical element of navigating the challenges of peak demand.”

CaliforniaGeo response—

There are two uses of the term “stranded resource” in the feature above and it’s time we understood what this means.  In business, something stranded is not close at hand and not convertible from its former status as an asset to a medium such as cash or another useful asset.  Under such conditions, as long as the resource remains stranded, the business that owns it cannot make use of it.  Therefore, it could be considered a “dead” asset.

If your company owns patents for buggy whips, you’d prefer no horseless carriages, and if you build nothing but propeller-driven aircraft, you despise jet powered airplanes.  This illustrates how and why some businesses fight hard to maintain their business model as viable instead of obsolete.  The free market can walk away from their products at some point, and/or the policies and rules established by government can diminish their use (on behalf of a majority of citizens) while elevating a replacement more in keeping with the government’s revised goals.

In the case of fossil fuels, there is a bit of both driving forces working at the same time.  The U.S. Government has recognized climate change as an existential threat to the population with greenhouse gases as the accelerating factor.  Any business is dependent upon adequate cash flow or private loans and/or the sale of company stock to raise cash and preserve its liquidity.  The problem is, when financial markets forecast lower sales of coal or other fossil fuels in the future, it becomes more difficult to raise operating capital.  This is a signal that investors pay attention to.

In addition, there are also potential divestment of institutional investors that cause stock to be sold, share prices to sink, and creditworthiness to evaporate from previous highs.  Compounding this problem for coal, even the simplest form of solar energy collection (photovoltaics) have now produced electricity more cheaply than coal-fired thermal power plants.  This drives more interest to renewable energy resources while investors reduce their exposure to what they think is a losing proposition (coal extraction, transport, fueling for power plants).

Renewable thermal and solar electric resources use fuel that is perpetually free and can be harvested without go—stop signals from markets based on pricing compared to other energy sources.  Geothermal heat pumps tap such an underground, renewable natural resource for heating, cooling, and hot water production—and they do it everywhere, including far away from the oil patch or coal seam.  They can do it at your home or work, just like they do at my house.