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Home > Legal & Financial > Introducing the ‘Carbon Bubble’

Introducing the ‘Carbon Bubble’

I’ll start with a bit of good news for a change this month. A study released last month appears to add weight to the growing evidence that the end global reliance on oil and fossil fuels is on the horizon, and we are going to be there in a small handful of years. Thanks in no small part to the Paris agreement on climate change that set in stone a global commitment to limit the rise in global temperature. The capital flowing into renewable energy has increased from a trickle, to a serious wedge these days. Over the last few years the cost of producing power from renewables has dipped below that of fossil fuels in most circumstances, piquing the interest of seriously big investors and that trickle of investment has turned into a tide. With it, no doubt, the speed of innovation in the sector will increase exponentially. Even if you are one of the few remaining climate change deniers surely the move away from a finite resource to an infinite, clean one has to be a good thing.

But…. there is always a but…. The chances are that we might have to ride out a pretty hefty financial crisis before we get there.

Fossil fuels, have been one of the biggest money spinners in global history since the day their potential was spotted. From the early days of the coal millionaires, to Rockefellers and Gettys, Abramovic to the Saudi royal family. Never have people got so rich, so quickly. The world quickly joined in and got hooked. Like any addiction, kicking the habit is not going to be easy.

Despite the end of fossil fuels being in sight, we still seem to be throwing money at it. In 2016 alone the global economy invested a further $700bn into oil, gas and coal, into pipelines oil rigs, refineries and tankers. An estimated 6% of global stock markets, are still made up of fossil fuel related businesses, with double that in the UK and US. In short the world has trillions of dollars worth of fossil fuel related assets that will, in an estimated 17 years be effectively valueless. Aside from the mines, oil wells, and extraction process there are car plants with combustion engine lines, oil powered vehicles and machinery, and so on. In addition, the available reserves of fossil fuels still in the ground have been given a dollar value and added to the company’s valuation. Most of this now seems likely to remain in the ground, so those extra billions of dollars will never materialise.

Reports out last month suggest that by 2035 1 trillion dollars will be effectively lost as valueless, ‘stranded’ assets, as useful as a Betamax video player. This figure could rise to 4 trillion if, as predicted, stricter targets on emissions are adopted. It’s called the ‘Carbon bubble’ if you want to jot that down, you are going to hear a lot more about it over the next few years. To put this into context, the global crash of 2008 was triggered by losses of a ‘mere’ quarter of a trillion dollars, chicken feed in comparison.

Oil industry experts predict, perhaps counter intuitively, a step up in oil production over the next decade or so as oil producers rush to get whatever they can sell their products for before the value collapses completely. OPEC, the cartel of mainly Middle East oil producers, historically rations supply in order to keep prices high, so they can buy gold plated Ferraris and football clubs. They can increase the supply at will, flooding the market with oil, but radically dropping the prices. Oil in the region is relatively cheap to extract, so they can live with sharp price drops, while still turning a profit. The same cannot be said of the USA, Canada, Russia, UK and others where extraction from drilling rigs, oil shales, fracking and Arctic drilling is much more expensive so requires a high oil price to make a profit. If the oil price falls as expected, these companies, and economies are likely to be the first casualties.

So what can we do about it?. The truth is that this is all but inevitable, an oil rig is always going to be an oil rig, a coal mine the same. It’s not going to be possible to repurpose these assets for anything more than their scrap value. It’s important that money still being invested in these doomed industries is diverted post haste into renewables to at least try to minimise losses and to grow these technologies that might just avert an environmental disaster.

Apart from that, perhaps shove a few quid under the mattress every month and hope for the best. Don’t say you weren’t warned.


By Phill McCoffers