What came out of these models was demand for oil is going to grow, and grow dramatically and consistently, on a straight-line basis, like it has done for the last 80 years. They completely missed the growth of solar, for example. They didn’t just get it wrong once, and every year solar kept growing.
Carbon Tracker concluded there was a big problem with this demand model. We said “How do we model this in a smarter, more effective way using a more realistic set of assumptions?” We worked with Imperial College in London, which does the energy demand models for the UK Government, and updated a lot of those assumptions, particularly the price data.
This was in our “Expect the Unexpected” report, where we concluded that the likely growth of solar and electric vehicles would be much more robust than the fossil fuel industry would have you believe, and that would have quite an impact on demand for oil, gas and coal, or fossil fuels in general. It would create demand destruction and we concluded would lead to a peak in demand for coal in 2020 and probably a peak in demand for oil in 2020 that would plateau to 2030 and then drop off dramatically. It will be bit further out before gas peaks.
This means that these companies still have a big business going forward for the next 30 years, but it’s an ex-growth business. It will no longer look like it has before. And there’s a very high risk that these companies will get in financial difficulties and effectively destroy value if they continue in this growth mindset.
We believe something quite dramatic has happened, which is that fossil fuels have lost their monopoly on energy generation. We’ve been in these technology transitions before and the incumbents never understand how to make the leap forward. They resist and lobby, and they probably slow the process down, but they can never stop the transition once a new technology is out of the bag.
Ellis: Carbon Tracker’s latest projections for the future demand and supply of energy is focusing on how projected growth in solar PV resources and electric vehicles could affect the supply/demand factors, is that right?
Hobley: The changes in demand don’t have to be big to have a massive financial impact on the companies. For example, a 10 percent drop in demand for coal has pretty much wiped out the coal industry in the U.S. and caused 30 coal companies to go into bankruptcy. This hasn’t necessarily registered across the big portfolio players, because coal as an industry is quite small, so it’s only a small percentage of the portfolio.
Oil and gas, however, are a big percentage of portfolios and would have a much bigger impact on investment portfolios. There was only a 2 percent increase in the supply of global oil that led the oil price to come down from $125 to $26 two years ago. Global growth in demand for energy is 1 percent annually, and already clean energy and non-fossil fuels have half of that growth and are poised to produce 60 to 70 percent of that growth over the next few years. There is very little global growth left for fossil fuels.
Paul Ellis founded Paul Ellis Consulting to work with financial advisors who want to integrate sustainable and impact investment strategies for their clients.