“Fossil fuels to peak in 2023” (not just another report on peak oil demand)

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Another report from NGO Carbon Tracker predicting peak oil demand and massive stranded assets?

I must confess I had almost skipped this one, published on 11 September, and entitled 2020 Vision: why you should see the fossil fuel peak coming.

Carbon Tracker are the people that popularized the concept of the “carbon bubble”, which has had a huge influence on the debate around the future of fossil fuel companies. The idea was as brilliant as it was simple: just calculate how much CO2 the world can still emit in a 2-degree scenario, and then calculate how this will impact the assets of oil, gas and coal companies.

The result, according to the NGO, was that the fossil fuel sector would be faced with massive stranded assets.

Naturally, fossil fuel companies all denied that their assets would be impacted, but they couldn’t deny the overall impact on the sector.

Over the past few years, Carbon Tracker has produced a whole series of reports spelling out the consequences of the carbon bubble for various sectors and companies, all with predictably alarming results.

I did not think the latest report could add anything new – but I was wrong. It does offer interesting new insights.

What Carbon Tracker have done this time is to try to identify when fossil fuel demand is likely to peak. They are by no means the first to have tried this of course. The IEA, DNV GL, Shell, ExxonMobil, BP and many other organizations project energy demand into the future and have thereby implicitly made a projection of peak fossil fuel demand.

But Carbon Tracker has taken a different approach – which leads to a very different outcome. “Most analysis of the future of fossil fuels seeks to make a detailed calculation of energy demand by country and product far into the future”, notes the report. “It requires a huge number of assumptions, and not surprisingly there is considerable disagreement.”

However, it says: “we are asking a much simpler question: when will fossil fuel demand peak? Because the peak of fossil fuel demand is in the near future, this question requires far fewer assumptions. Given that we are in a time of disruptive change in the energy sector, the smaller the number of assumptions the better.”

The way Carbon Tracker has calculated peak demand is simply by looking at the likely growth trajectory of renewables and then calculating to what extent renewables could meet total energy demand. Since the world is likely to prefer renewables to fossil fuels, because they are cleaner and increasingly cheaper, only the demand that can’t be met by renewables will be met fossil fuels, according to Carbon Tracker. “Fossil fuels”, notes the report, “are best seen as the residual source of energy supply. The fuel that you use when don’t have enough of the alternatives.”

Following this reasoning, what is the outcome?

When projecting global future energy supply, there are two key variables, notes Carbon Tracker:

• The growth rate of global energy demand. In 2017 this was 2.1%27, the highest it has been since 2011, in part thanks to cyclical factors. Over the last five years it has averaged 1.4%. The IEA forecasts a long-term growth rate of 1% in its NPS scenario.

• The growth rate of solar PV and wind supply. As we have seen, both industries are on well-established S curves of growth. The maths of S curves is simply that percentage growth rates are maintained at high but falling levels over time. Over the last decade the growth rate of solar PV and wind has fallen from 29% in 2007 to 22% in 2017.

“If we make assumptions for these two factors”, writes Carbon Tracker, “it is possible to calculate the date at which fossil fuel  demand peaks. We illustrate this below, assuming total energy demand growth of 1.3% (assuming a slight fall from the 5-year average) and solar PV and wind supply growth of 17% (assuming a continued S curve of supply growth, with growth ratees falling over time from the current level of 22%). The date of peak fossil fuel demand is then 2023.”

Of course the growth rates for energy demand and solar PV and wind could turn out differently. Assuming 1-1.5% demand growth per year and 15-20% supply growth of solar and wind, gives a range of between 2020 and 2027 for the peak demand date, notes the report.

This means, says Carbon Tracker, that “under the most likely scenarios demand for fossil fuels will peak in the 2020s. For this reason, we believe that the 2020s should be called the peaking decade.”

You may think: how can this make sense? We all know that fossil fuels will remain dominant for decades and that the share of renewables is still very small, and likely to remain so for a long time. But that is not the point!

As the report points out, “At the tipping point when total fossil fuel demand peaks, the challenging

technologies of solar PV and wind will be 6% of total energy supply….”

This seems counterintuitive, and yet it is not so strange at all. For example, the report notes that “In the famous transition from horses to cars, the number of non-farm horses in the US peaked in 1910 at 4 million when there were only 100,000 cars. Cars were thus just 3% of the number of their competitor.”

Another example that cuts even closer to home is the transition from fossil fuel-based electricity to renewables-based electricity that is going on in Europe. Here the demand for fossil fuel electricity generation in Europe has already peaked in 2007! At this time renewables represented only 3% of the supply.

The consequences of this transition were dire for the incumbent industry: $150 billion of assets were written down.

In the same way the consequences of peak fossil fuel demand for the oil, gas and coal sectors will also be dire, warns Carbon Tracker.

Until recently, oil companies could and often did argue that they would be much less impacted by peak fossil fuel demand than coal companies, not only because coal emits more CO2, but also because coal is used mostly in the electricity sector, where there is direct competition from renewables, whereas oil is mostly used in the transport sector, where renewables did not compete.

However, as the Carbon Tracker report shows, now that the EV revolution is gathering steam, the latter argument is not credible anymore. Oil is now coming into direct competition with renewables. As a result, the report projects oil demand to peak already in 2025, later than coal (2015) and earlier than gas (2035), but in any case very soon.

Thus, investors face increasing risk from investments in fossil fuels, argues Carbon Tracker. It points out that there is a lot at stake for the world: “the fossil fuel sector has the largest built asset infrastructure in the world, with an estimated build cost of $25 trillion, according to Shell.” 

This is divided as follows:

A number of countries that are dependent on fossil fuel exports face huge risks, notes Carbon Tracker. The most vulnerable countries are, not surprisingly, to be found in the Middle East – Kuwait, Iraq and Saudi Arabia make up the top three.

But western countries also face upheaval: “Directly impacted sectors compose up to a quarter of equity indices. In debt markets, fossil fuel and related sectors make up nearly a quarter of the total corporate bonds followed by Fitch and a little more of the bonds covered by Bloomberg.”

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