Fossil fuel profits set to collapse by two-thirds

Carbon Tracker warns that any oil or gas producers attempting to revert to “business as usual” could be risking in excess of $100trn in potential profits

That is according to Carbon Tracker, which notes that rising demand for and energy share of renewables has set demand for fossil fuels into rapid decline. The decline has also been compounded by the coronavirus pandemic.

The World Bank had valued profits from oil, gas and coal to eventually reach $39trn, but Carbon Tracker has claimed that future profits are set to collapse by nearly two-thirds to $14trn if certain criteria are met. Carbon Tracker notes that the main profit decline would be caused by fossil fuel demand falling 2% a year in line with the needs of the Paris Agreement.

Fossil fuel growth was already measuring at below 1% annually, as clean technology falls in price and improvements in efficiency to provide power across the world. However, the fossil fuel sector has been impacted by the coronavirus, with the International Energy Agency warning that demand is set to fall 9% in 2020.

Carbon Tracker warns that any oil or gas producers attempting to revert to “business as usual” could be risking in excess of $100trn in potential profits.

The impact will be felt at multiple levels. Companies across the fossil fuel system are worth $18trn in listed equity, which accounts for a quarter of the global equity market value. They also account for $8trn of corporate bonds, which is more than 50% of the non-financial corporate bond market.

Carbon Tracker warns that businesses, financial markets and nations – Saudi Arabia, Russia, Iraq, Iran, Venezuela, Ecuador, Libya, Algeria, Nigeria and Angola – are all facing financial risks by continuing to bank on fossil fuels.

Investor warning

Investors will also be hit, the Carbon Tracker noting that less capital will be available for interest payments and dividends. In the UK, for example, the oil and gas sector generated 24% of dividends from the FTSE Index in 2019.

Earlier this year, it was revealed that the world’s largest investment banks have funnelled more than £2.2tn ($2.66tn) into fossil fuels since the Paris agreement, prompting warnings they are failing to respond to the climate crisis.

Oil and gas companies have also spent £40.5bn ($50bn) on investment projects that undermine the Paris Agreement, Carbon Tracker notes, warning that major companies risk wasting £1.8trn ($2.2trn) on stranded assets by 2030.

Carbon Tracker’s energy strategist Kingsmill Bond said: “We are witnessing the decline and fall of the fossil fuel system. Technological innovation and policy support is driving peak fossil fuel demand in the sector after sector and country after country, and the COVID-19 pandemic has accelerated this. We may now have seen peak fossil fuel demand as a whole.

“This is a huge opportunity for countries that import fossil fuels which can save trillions of dollars by switching to a clean energy economy in line with the Paris Agreement. Now is the time to plan an orderly wind-down of fossil fuel assets and manage the impact on the global economy rather than try to sustain the unsustainable.”

Carbon Tracker has recently warned that China, the US, India and European nations are at risk of being burdened with uneconomic, long-term plans to stimulate their economies in response to the coronavirus outbreak by focusing on new coal capacity.

The financial thinktank analysed the underlying cashflow of 95% of operating and planned coal plants worldwide, noting that government subsidies are set to support nearly 500GW of new coal plants worldwide at a cost of $638bn. These figures could increase further, as China has already expressed an interest in building more plants to stimulate its economy following the financial slump caused by Covid-19.

Another Carbon Tracker report found that coal-fired power plants in the EU are becoming increasingly unprofitable as they have incurred losses worth €6.6bn.

Matt Mace