Fossil fuel demand could peak as early as 2023, according to a pair of studies released this month. The shift has the potential to put “trillions at risk for unsavvy investors oblivious to the speed of the unfolding energy transition,” Carbon Tracker, a nonprofit think tank that studies the impact of climate change on financial markets, predicted in a report last week.
Demand for coal, oil and gas is “stalling” as the costs of clean energy and battery storage fall and governments shift away from fossil fuels in pursuit of their pledges under the Paris climate agreement, the London-based think tank found. Moreover, it describes an “emerging market leapfrog,” in which developing countries move directly to renewables and bypass costly fossil fuel projects.
“The motor of change now lies in the emerging markets, which is where all the growth in energy demand lies,” the report reads. “They have less fossil fuel legacy infrastructure, rising energy dependency, and are anxious to seize the opportunities of the renewables age. We believe it highly likely therefore that emerging markets will increasingly source their energy demand growth from renewable sources, not from fossil fuels.”
Overall, Carbon Tracker expects a 1 to 1.5 percent annual growth rate in global energy demand over the next decade, while the global deployment of wind and solar power increases by 15 to 20 percent each year. If that happens, “fossil fuel demand will peak between 2020 and 2027, most likely 2023,” according to the study.
“Fossil fuel demand has been growing for 200 years, but is about to enter structural decline,” Kingsmill Bond, new energy strategist for Carbon Tracker and author of the report, said in a statement. “Entire sectors will struggle to make this transition. They can expect price declines, greater competition, restructuring, stranded assets and market derating.”
The fossil fuel sector has invested an estimated $25 trillion in infrastructure, much of which could be put at risk if demand begins to fall, and energy firms are far from the only ones in the danger zone. The energy transition will directly affect sectors that compose up to a quarter of equity indexes and debt markets, ranging from banking and capital goods to transport and automotive, according to Carbon Tracker.
Bond and his team also warned that fossil fuel exporting countries will suffer potentially destabilizing shake-ups in the wake of a transition, as fossil fuel leases account for 10 percent or more of GDP in 12 countries, including Russia and Saudi Arabia.
A second report released by DNV GL came to a similar conclusion. The Norwegian risk-management company predicted that global energy demand will decline from 2035 onward, hastening the shift away from fossil fuels. Fossil fuel spending will drop by around a third by 2050, as investment in renewable energy triples, according to DNV estimates.
“Fossil fuels will play an important if reduced role in our energy future with its share of the energy mix set to drop from around 80 percent today to 50 percent by the middle of the century, with the other half provided by renewables,” Peter Lovegrove, media relations and video production manager for DNV, wrote on the company’s blog.
DNV expects oil to peak in 2023 and natural gas to become the single largest energy source by 2026, with wind and solar “set to meet the majority of new electricity demand.” Coal is already on the decline, having reached its peak in 2014. “The transition is undeniable,” Remi Eriksen, group president and CEO of DNV, said in a statement. “Last year, more gigawatts of renewable energy were added than those from fossil fuels.”
These peak projections differ substantially from what the fossil fuel industry expects. Shell says it could peak in the late 2020s only under the “most aggressive” and unlikely scenario for electric car growth, the Times U.K. reported. ExxonMobil projects growth to 2040 as sectors like shipping and aviation continue to depend on oil, reports the Guardian.
With these numbers in mind, it’s no surprise that some in the industry are unconvinced by the recent studies. In a Fortune op/ed published this week, the CEO of one of America’s largest privately-owned oilfield services companies said the 2023 peak forecasts “should be viewed with caution.”
“The energy transition will happen over the coming decades, but an array of political, economic and social considerations will determine how long it actually takes to ‘de-carbonize’ the entire global energy system, if ever,” Canary CEO Dan Eberhart wrote in Fortune.
Even as countries switch away from fossil fuels for their energy needs and electric vehicles continue to take hold in the transportation market, oil demand is expected grow in other sectors, including trucking, aviation and petrochemicals, Eberhart argued. He also pointed out that most oil companies sit on vast natural gas reserves that will keep them relevant and competitive for decades to come.
Still, Eberhart’s argument that full-fledged decarbonization is necessary to reach peak oil remains in dispute. “Even though complete decarbonization is far off into the future, the peak occurs early on in the transition,” energy reporter Nick Cunningham wrote on Yahoo Finance. “Once the peak is hit, the troubles start to accelerate. Demand starts to fall, so fossil fuel companies face lower prices for their products, lower valuations and ultimately stranded assets.”
Notably, demand often peaks when up-and-coming competitors still represent less than 10 percent of total sales in a sector, said Bond and his team at Carbon Tracker. They used Europe’s thermal energy sector as an example. There, demand for thermal energy peaked in 2007 when renewables made up just 3 percent of total energy supply. As demand fell following the financial crisis and renewables continued to grow, the thermal industry was forced to write down $150 billion in assets.
“We have seen a similar pattern in many energy transitions, from electricity, coal and cars in recent years to horses and gaslights in the past,” Bond argued. “Demand for incumbents peaks early, and investors in incumbents lose money early on.”
Carbon Tracker predicts that the tipping point for fossil fuel demand will come when solar and wind power make up around 6 percent of total energy supply—far below levels of penetration in many European countries. But these forecasts are far from certain, especially if more countries follow the United States’ lead and drop out of the Paris agreement or weaken their commitments. In Brazil, presidential candidate Jair Bolsonaro has already pledged to pull his country out of the agreement if elected.
“If more and more countries start to take Paris less seriously, that will have some effect on how quickly the energy transition happens,” Sebastian Ljungwaldh, an energy analyst at Carbon Tracker, told the Guardian.
While the exact timing remains to be seen, the potential risks for investors and industries tied to fossil fuels are undeniable—and those folks are likely paying attention, even if the fossil fuel sector is not. “Investors anticipate, so they will typically react even before companies see peak demand,” said Bond of Carbon Tracker. “This is what happened recently in the coal and European electricity sector transitions. We believe that investors will start to react faster as the energy transition works its way through the world’s capital markets. As each sector is impacted, it becomes easier for the market to anticipate something similar happening to the next sector.”
Image credit: Flickr/Walter