Oil Companies Are Set For An Utterly Gargantuan Loss
They are finally waking up to the reality of net-zero.
We need to reinvent how our society works to save the planet from our self-made apocalypse. The core pillars that have driven the Industrial Revolution and post-WW2 development, namely fossil fuel power and modern mass agriculture, need to be completely phased out and replaced in only a few decades. Otherwise, we will face a global catastrophe. The companies and establishments that comprise these core pillars have actively undermined and avoided this necessary change, but their efforts can only hold off the truth for so long. Their Luddite inaction and archaic mantras are now coming back to bite them, as they face to lose trillions of dollars in the coming years. While this might feel like a story of climate karma, it isn’t, as you will likely be one of the billions who pay the price, not those responsible.
This comes from a recent IEA article titled “Oil and gas industry faces a moment of truth — and opportunity to adapt — as clean energy transitions advance.” You see, even though renewable energy is now more profitable than fossil fuels, fossil fuel companies are refusing to adopt the new technology at any meaningful pace. Instead, they are trudging along with their old ways. Not only is this simply a bad business practice, but it is slowing down our progress to net-zero, which means these businesses are at serious risk of being squeezed into bankruptcy by upcoming basic climate legislation.
The IEA’s analysis found that the current valuation of private oil and gas companies could fall by 25% from $6 trillion today if all national energy and climate goals are reached, and by up to 60% if the world gets on track to limit global warming to 1.5 °C. So, even in a best-case scenario, where we only enforce our current climate legislation, which will cause 3 degrees Celsius of global warming by 2100 and a global crisis on orders humanity has never experienced before, oil companies will lose $1.5 trillion in valuation. If, however, we get our act together and limit climate change by 1.5 degrees Celsius, which would mitigate the vast majority of climate damage, they could lose up to $3.6 trillion in valuation!
Why? Well, quite simply, the demand for oil will diminish as we adopt alternative technologies that don’t destroy the planet. This will not only impact the profits of oil companies but also mean that billions of dollars worth of their infrastructure will become stranded assets, lumbering them with immense levels of debt they simply have no way of paying off.
Stranded assets are those that lose value or become liabilities before their expected economic life ends. As fossil fuel industries use debt to pay for their assets (such as critical infrastructure like drilling platforms, refineries, ships and pipelines) across their entire expected lifetime, if they become stranded assets, they will have debt with no viable way of being serviced. This financing model has made sense over the past century, as oil and gas demand has remained incredibly strong despite recessions and disasters. Hence, the chance of them becoming stranded assets was basically zero.
Sadly, these oil companies have failed to recognise they need to change their financing model to be more robust. As such, climate legislation threatens to burden them with hundreds of billions of dollars of stranded assets and debt.
For example, the Global Energy Monitor recently found that from January to July 2023, the capacity of new oil and gas fired power stations under development worldwide grew by a massive 90GW, which works out to a 13% growth. This 90GW of oil and gas plants currently being developed will require a capital expenditure of $611 billion. Sadly, these plants have a typical life expectancy (and therefore debt period) of 40–50 years and don’t break even for many years after completion. Yet climate legislation threatens to close these plants down within the next 10 to 15 years, so these companies stand to lose hundreds of billions when these new plants become stranded assets.
And this is just power plants. There are also new oil and gas drilling sites, refineries and logistical infrastructure, all at risk of becoming stranded assets as demand for these planet-destroying fuels diminishes to practically zero over the coming decades.
So, climate legislation will cause vast losses to those who caused climate change. Not a shocking bit of news, but one that feels like a natural bit of karma. But that isn’t the real problem here. The question you have to ask is, who funds these assets and gives these companies loans? Because the answer shifts who is ultimately responsible for these losses.
Well, banks, governments and your pensions. About 15% of US bank debt and 10% of UK pension funds are invested in the fossil fuel industry. In fact, back in 2017, Greenpeace found that The UK government has provided fossil fuel companies with £6.9 billion in loans since 2000. The same is pretty much true for all developed nations.
This is a massive problem for two reasons. Firstly, as I said earlier, fossil fuels aren’t as profitable as they once were, and renewables are, in fact, now more profitable. A recent study found that if US public pensions diversified from fossil fuels a decade ago, they would now be worth $21 billion more! The same is likely true for many other developed nations’ pensions. So this determination to carry on investing in fossil fuels is actually making every day people, who have no idea about this, poorer.
Secondly, it means that when these companies’ valuations and profits start to tank, it will take down our financial institutions and pensions. For some sense of scale, the subprime mortgage crisis, which kicked off the 2008 crash, was linked to less than $700 billion in dodgy debt. In 2023, the debt-to-equity ratio of the oil industry was calculated at 0.5. In other words, this $3.6 trillion in predicted lost valuation (also known as equity) could lead to $1.8 trillion in unserviceable debt to our banks, governments and pensions. Well over twice the amount of unserviceable debt that caused the 2008 crash!
Yet, despite all of this, oil companies aren’t investing heavily in new alternative technology to transform their business model towards sustainable energy. Instead, they are investing in scapegoats, like carbon offsets. In the process, they are putting our livelihoods at serious risk. What’s more, as the 2008 crisis showed, our governments are more than happy to bail out these major companies to the tune of hundreds of billions of dollars and effectively force the general public to pay the price of these corporations’ mismanagement. Meanwhile, those responsible didn’t have to pay a dime and not only got to keep their jobs but were still paid millions in bonuses each year. Make no mistake; this IEA analysis isn’t a warning to oil businesses; they know they are like the banks in 2008, as they are still a core part of our government and financial system, and this means they will be bailed out by you, the taxpayer when shit hits the fan.
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