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The End of the ‘Technological Era’ of Oil, Gas and Coal

Fossil fuels face extinction says Nafeez Ahmed, but we will still need to grapple with the financial chaos of stranded assets, an unravelling geopolitical order, and dangerous climate change

Photo: Regis Martin/Stockimo/Alamy

The End of the ‘Technological Era’ of Oil, Gas & Coal

Fossil fuels face extinction says Nafeez Ahmed, but we will still need to grapple with the financial chaos of stranded assets, an unravelling geopolitical order, and dangerous climate change

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Humanity is witnessing the abrupt “end of the technological era” of fossil fuels, a process that will generate enormous economic volatility as oil and gas industries and their owners go bankrupt thanks to the coming dominance of solar power and electric vehicles.

These are the findings of a set of landmark studies by an international team of economists and earth system scientists, released via top journals published by the Nature Publishing Group.

Private investors in Europe with large stakes in the oil and gas industry will experience major losses within the coming decade due to the expected loss of value in the upstream oil and gas sector worldwide, the research shows. Major oil producers will face catastrophic revenue losses and rising political instability, with wide-ranging implications for geopolitical security. And the consequences could trigger a global economic crisis worse than the 2008 financial crash.

Stranded assets

The enaction of climate policies over the next decade will lead to lost profits of at least $1.4 trillion in the global oil and gas industry, finds a peer-reviewed analysis published in Nature Climate Change, much of which will impact private investors in Western Europe, while generating financial volatility larger in scale to the 2008 subprime mortgage crisis.

But this is likely to be quite conservative. A related earlier study in Nature Energy by the same team puts the scale of losses as high as $11 trillion (if not higher).

The driving force of the market risk to the global oil and gas sectors comes, the latter study suggests, from accelerating technology disruptions – in particular, the exponential rise in solar photovoltaics (PV) and electric vehicles (EVs).

“Private investors in rich countries have both a larger stake in continued fossil-fuel production and greater exposure to stranded assets than the literature has so far suggested”, the Nature Climate Change study concludes.

That study published in May is authored by a team of earth system scientists and economists from the University of Cambridge, the School of Oriental & African Studies, the University of Exeter, the London School of Hygiene and Tropical Medicine, Open University, and the Free International University of Social Studies in Rome.

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The process described in the study is known technically as ‘asset stranding’. This is “the process of collapsing expectations of future profits from invested capital (the asset) as a result of disruptive policy and/or technological change”.

Investments in oil and gas assets depend on their expected ability to generate profits, which in turn depends on how much they can meet demand based on production costs, reserves and anticipated market prices: “If investor expectations for total demand for oil and gas fall, some assets must become unprofitable relative to initial expectations; that is, the oil or gas price falls below the break-even price for those assets”.

When this happens, the assets become ‘stranded’ as they experience unanticipated write-downs, devaluations or even become liabilities that will no longer generate the expected return that justified the initial investment.

This means not only that investors will not make a profit, but they will not recoup their investment, and may even end up in debt.

Who Owns the Oil?

The Nature Climate Change study calculates that the upstream oil and gas sector will lose profits exceeding $1.4 trillion “under plausible changes in expectations about the effects of climate policy”.

It’s widely assumed that the biggest owners of oil and gas in the world are Middle East regimes, which hold the bulk of the world’s reserves. But the new research shows that in fact, the major owners are a small number of rich Western elites.

The research traces 43,439 oil and gas production assets back to an ownership and investment network of some 1.8 million companies, whose ultimate owners consist of “private investors, overwhelmingly in OECD countries”.

The biggest impact will hit private investors in the US and Britain, as well as Russia, China and Canada.

“Rich country stakeholders, therefore, have a major stake in how the transition in oil and gas production is managed, as ongoing supporters of the fossil-fuel economy and potentially exposed owners of stranded assets,” the study concludes. “Geographically, the US and UK financial sectors display much larger losses than other countries”.

In the US, the world’s largest asset managers “hold investments in virtually all listed oil and gas companies”, the study points out. But smaller countries viewed as tax havens, such as the British Virgin Islands and Switzerland, will also experience large losses.

Financial Crash

The study suggests that this process is likely to create global financial instability on a scale rivalling the 2008 financial crash.

Financial institutions, for instance, hold an estimated $681 billion worth of stranded assets on their balance sheets. This is higher than “the mispriced subprime housing assets estimated at $250-500 billion on financial sector balance sheets that triggered the 2007–2008 financial crisis”, the study observes.

Losses experienced by private investors may also impact stock markets, leading to a cascading process of financial collapse.

Simply selling off assets doesn’t solve the problem. Instead, assets are simply moved to new owners who can still transmit shocks from losses. Non-bank financial institutions like pension funds, for instance, have “strong exposure” to risks and are less regulated than banks.

There’s also a danger that elites in impacted sectors may lobby governments for bailouts to cushion their losses, says the study. In fact, ongoing investment decisions in the oil and gas sector could be based on pricing in the role of such potential bailouts. Perversely, oil and gas investors in the West might be incentivised to slow the carbon transition because they “benefit from more profits on oil and gas than domestic production volumes suggest”.

A key implication here is that the continued influence of fossil fuels is not really derived from rational market behaviour at all: it comes from institutional inertia resulting, quite simply, from the oil and gas sector’s dominance of the prevailing political and economic system.

Rapid Transformation

In an earlier paper published last November in Nature Energy, the same team concluded that the climate policies leading oil and gas assets to become stranded are being accelerated by a deeper process: the technological transformation of the entire global energy system.

The authors find that “the transformation of energy systems is well under way”, and will create a whole new “emerging energy geography” with startling economic and strategic implications “irrespective of new climate policies”, purely due to the exponential evolution of key technologies:

“We show specifically that, given the economic implications of the ongoing energy transformation, the framing of climate policy as economically detrimental to those pursuing it is a poor description of strategic incentives.”

The paper’s technology diffusion trajectory (TDT) scenario projects that solar photovoltaics (PV) will become “the lowest-cost energy generation technology” as early as 2025, based on current rates of adoption.

This scenario “involves a relatively rapid continued growth, at the same rates as observed in the data, of some low-carbon technologies (solar, wind, hybrids and EVs, heat pumps and solar heaters)”.

In contrast, other technologies such as coal-based electricity, diesel cars, coal fireplaces, oil boilers in houses, coal-based steelmaking technologies – continue to decline.


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But the paper also points out that current investment expectation scenarios are completely delusional. Many mainstream investors expect coal and natural gas to dominate power generation, with petrol and diesel use continuing to play a significant role in road transport. This would “translate into a steady growth of oil demand, whereas technology remains relatively unchanged for heating and steelmaking and other parts of the economy”.

But the study concludes that this “scenario projection is not likely to be realised as it features substantially lower than already-observed growth rates in solar, wind, electric vehicles (EVs) and heat pumps”. In other words, incumbent technologies are already being outcompeted.

In the TDT scenario, then, “a positive feedback of learning-by-doing and diffusion dynamics” sees solar panels becoming “the lowest-cost energy generation technology by 2025-2030… EVs display a similar type of winner-takes-all phenomenon, although at a later period. Heating technologies evolve as the carbon intensity of households gradually declines”.

Over the next three decades, this scenario suggests, primary energy harvested directly from natural resources will be “substantially lower” than what current baseline investment expectations anticipate. That’s because as we wean ourselves away from fossil fuels and onto renewables, “the relatively wasteful and costly thermal conversion of primary fossil fuels into electricity, heat or usable work stops growing even though the whole energy system continues to grow”. 

Fossil fuels and nuclear will all “peak” by 2030, with solar taking “most of the market”, followed by “biomass” used for negative emissions and wind, which is “gradually outcompeted by [solar] PV”. Other renewables such as geothermal, hydropower and so on are found to lack competitiveness.

The Technological Era of Fossil Fuels is About to End

This scenario provides compelling data showing that a rapid transformation of the global energy system is now well underway – and largely unstoppable due to fundamental economic factors. But it does not get us out of the woods. This energy system transformation is still consistent with a global average temperature rise of 2.6C, the study warns. There is also a risk of significant geopolitical volatility as this transformation unfolds:

“The transition is already underway, and some stranding will happen, irrespective of any new climate policies, in the present trajectory of the energy system, with critical distributional macroeconomic impacts worldwide”.

Exactly how fast fossil fuel energy markets peak and decline will depend on the decisions of the major energy importers – namely China, India, Japan and the European Union – who have an economic incentive to decarbonise and whose decisions will of course greatly impact exporters.

The study concludes that “fossil fuel-dominated energy geopolitics” will therefore need to be thoroughly re-evaluated. With renewable energies “capturing markets previously dominated by fossil fuels,” fossil fuel energy exporters will find themselves rapidly losing their export markets: “Revenue losses could lead to political instability in fossil-fuel-exporting economies”.

Without concrete transition plans in place, the “creative destruction effect” of energy transformation will generate local volatility in the United States, Russia, Canada, Brazil and other oil producers (the Russia-Ukraine crisis fits this analysis well).

The scale of the losses could be eye-watering. The study estimates total stranded assets for fossil fuels to be somewhere between $7 and $11 trillion.

The authors thus propose the need for “comprehensive plans for regional redevelopment… along with economic diversification towards new technology sectors, which include low-carbon technology exports.”

If economic diversification and fossil fuel divestment are “not quickly addressed in those countries, the low-carbon transition could lead to a period of global financial and political instability, due to the combination of deep structural change, widespread financial loss and reorganisation in financial and market power worldwide”.

This coming energy transformation will unravel the foundations of geopolitical stability. It will also create new winners and losers across the global economy.

As these tectonic shifts make fossil fuel producers obsolete, societies and businesses that find themselves most locked into the fossil fuel system will face relentless losses: “Addressing economic diversification away from fossil fuels is complex but necessary to protect economies from the volatility characteristic of the end of technological eras”.

The economic dynamics of technological transformation will make fossil fuels obsolete far more rapidly than conventional analysts believe possible. But this alone won’t eliminate the threat of dangerous climate change. We will need to accelerate the transformation and make the right societal choices to leverage and distribute the benefits.

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