The Demise of Fossil Fuels
2018: A Wild Ride
Oil had quite a year. Prices opened in the $60s, and rallied through much of the year, hitting a near-five-year high in the mid $80s in early October. Higher oil prices delivered cash to fossil fuel companies, benefiting shareholders through stock buybacks and boosting dividends. Then geopolitics brought the party to an abrupt end.
OPEC and a coalition of non-member nations had agreed at the end of 2017 to cut production through 2018 to draw down the glut from growth in U.S. extraction. As supplies shrank, prices rose, accelerating in mid-2018 when the Trump administration promised sanctions on Iran. OPEC members began winding down production cuts to compensate, only to see the Trump administration grant waivers to many key buyers of Iranian oil.
This comedy of errors drove oil prices down in October and November. October was the worst month for crude prices in two years, followed by November, the worst month in a decade. Prices collapsed in the fourth quarter returning to the $50s, a double-digit loss for the year. Energy company stocks followed oil prices off the cliff.
Prices will likely continue to be affected by geopolitics. If the trade war with China causes a global economic slowdown, demand and prices for fossil energy will suffer. OPEC and non-member partners cut extraction in December and promised to reduce output again in January. The oil market is expected to stay oversupplied through the first half of 2019, though, due to a surge from U.S. companies who ramped up their plans when prices were higher.
Keep It In the Ground
The volatility we saw in fossil fuels in 2018 was driven largely by unpredictable policy decisions. Policy and politics may continue to be drivers of volatility in the fossil fuel sector in the near term, but even if policy stabilizes, the outlook for fossil fuels from an economic standpoint is bleak.
Carbon Tracker, a leading financial think tank focused on the energy transition, released its September report, “2020 Vision: why you should see the fossil fuel peak coming,” warning that fossil fuel demand will peak just four years from now, in 2023. Incumbency, the report says, will be no protection: “[d]emand for incumbents peaks early, and investors in incumbents lose money early.”
Another Carbon Tracker report from November of 2018.1 found that with the rapidly declining price for renewables, 35% of coal plants cost so much to operate that building new renewable generation capacity would be cheaper than continuing their operation. Given that 42% of coal plants globally already operate at a loss, they predict that number to increase to 96% by 2030.
Not only is demand for fossil fuels for electricity generation likely to weaken rapidly as new, cheaper renewable capacity comes online, demand for fossil fuels in the transportation sector is likely to decline as well. Globally, 2017 saw a 53% increase in sales of electric vehicles versus 2016.2 More than a dozen countries, including four of the five largest automobile markets in the world have announced some kind of ban on fossil-fuel driven vehicles.3 Bloomberg New Energy Finance predicts that by 2024 electric vehicles will be cost-competitive4 with gasoline vehicles even without subsidies or incentives.
Automobile sales are already falling: even with the US tax cuts, sales slumped.5 The news was worse elsewhere: car sales were down 33% in Sweden over the past four months6, and down 7% in the UK7, and 5.8% in China for all of 20188. Representing a quarter of all car sales in the world, China is a sign of things to come. Electric car sales are up9 dramatically in most markets, increasing 81% in the US10, and this trend is especially strong in China11, where vehicles with combustion engines may take a year to get registered, but EV’s can be registered immediately.
Whether we assess from a purely values-driven, environmental impact lens or from an economic standpoint, we reach only one conclusion: fossil fuels belong in the ground. With this in mind, investors would be well advised to heed the warning of Bevis Longstreth, former SEC commissioner: “It is entirely plausible, even predictable, that continuing to hold equities in fossil fuel companies will be ruled negligence.”12
Disclosures, Definitions, and Footnotes
1. Carbon Tracker, 42% of global coal power plants run at a loss, finds world-first study, November 30, 2018.
2. Forbes, China's All in On Electric Vehicles, May 30, 2018.
3. https://en.wikipedia.org/wiki/Phase-out_of_fossil_fuel_vehicles, last access 8/19/2019.
4. Bloomberg New Energy Finance, Electric Vehicle Outlook 2019.
5. Yahoo! News, US auto sales falter in 2018 as consumers abandon small cars, January 3, 2019.
6. Seeking Alpha, Sweden's 33% Drop In Car Sales Foretells A Coming Crash Of The U.S. Car Market, November 23, 2018.
7. This is Money, Faltering diesel demand and Brexit drags UK new car sales down 7% in 2018 - the biggest fall in registrations since the financial crisis, January 7, 2019.
8. Clean Technica, New Car Sales In China Fell 5.8% In 2018, January 10, 2019.
9. Tree Hugger, Electric car sales up 37% in Europe, 77% in China, August 9, 2018.
10. S&P Global, US plug-in electric car sales surge by 81% to 360,000 in 2018, January 10, 2019
11. PV Magazine, New plans by VW, Tesla and BYD support predictions that EV sales are set to skyrocket, December 6, 2018.
12. HuffPost, The Financial Case for Divestment of Fossil Fuel Companies by Endowment Fiduciaries, November 2, 2013.