Stranded Assets
World leaders (apparently absent Xi Jinping and Vladimir Putin) will gather in Glasgow next week pledging a course for reaching net zero global carbon emissions within thirty years. As an unfortunate backdrop to COP26, as the annual summit is called, energy markets are suddenly showing signs of extreme dysfunction - the first of what could be several green-era energy crises. There are power cuts in China, coal shortages in India, surging electricity prices in Europe, and gasoline prices well above $3 per gallon in North America. Oil prices, at over $80 a barrel, are at their highest level since 2014. Spot prices for Asian natural gas have jumped nearly 1,000% over the past year. Vladimir Putin, not one to miss an opportunity for leverage, has just reminded Europe that their continued supply of natural gas is dependent on Russian goodwill.
The appearance almost overnight of these shortages seems remarkable. Recall that as recently as 2020, global energy demand fell by an unprecedented 5% as the spread of Covid -19 shut down economies everywhere. The Covid shock triggered an immediate investment cut-back in the energy industry - perhaps prematurely and inappropriately, as it turns out, as some $10.4 trillion of global policy stimulus has led to a world economy cranking back up far more quickly than most thought. The result has been dangerously low stockpiles and spiking prices. The Economist estimates that oil inventories are only 94% of normal, European gas storage 86%, and Chinese and Indian coal below 50%. The price of a basket of oil, gas and coal has jumped 95% since May.
In the past, producers of fossil fuels would have typically responded to such price signals by rapidly increasing output and investment. But not now. Climate change has changed that. Producers and investors are under intensifying pressure to move away from fossil fuels. As just one example, Shell Oil recently said it plans to actually reduce oil production by 1-2% a year until 2030. When asked what the energy price jump means for investment, Wael Sawan, Shell’s chief of oil and gas production, said, “From my perspective, it means nothing”. Here’s a second example: Dutch pension fund ABP, one of the world’s largest, has just announced it will divest some $21 billion of investments in fossil fuel producers by 2023, a marked turnaround from its position as recently as June.
At the COP26 summit, we are about to hear much more about the urgent need for green alternatives to fossil fuels. Mark Carney, the United Nations’ special envoy on climate action and finance, has noted that as the energy industry shifts its investment focus, fossil fuel assets are likely to be rendered worthless by 2030, if not sooner. Carney, when Governor of the Bank of England, first warned about the “potentially huge” risk to investors from so-called stranded assets in 2015, commenting that vast reserves of coal, oil and gas could become “literally unburnable”. This view is supported by the International Energy Agency (IEA) which earlier this year concluded, in a stunning analysis, that there should be no new oil, gas or coal development if the world is to reach net-zero fossil fuel by 2050.
Let us hope that the leaders at COP26 move beyond pledges and begin devising specific policies. Essential aspects will include strengthening support for Article 6 of the Paris Agreement calling for an international carbon market, close public/private sector collaboration, and a re-emphasis from rich countries to help finance poor countries’ existing climate strategies. Your writer’s best guess is that progress at COP26 will be at best incremental, not negligible, but not a “big leap” of the sort John Kerry, America’s climate envoy, is expecting. I hope I’m wrong, but history (all 25 of the previous COPs) says I’m not.
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