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April 4, 2016

The Great Energy Transition Accelerates

London, April 2016
The great global energy transition is accelerating. Who could have imagined a few years ago that global carbon emissions would stall in 2015, spurred by a rise in renewable energy? Or that the Saudi government would announce a $2 trillion investment fund to wean their nation off oil within just 20 years? Or that an electric vehicle costing $35,000 would attract over 100,000 pre-orders some 20 months before its actual launch.
That’s what we witnessed in March. And much more heading in the same direction.
The stalling emissions news made for a historic front page in the Financial Times. “Climate battle bears early fruit”, the lead headline began. Global emissions dropped in 2015 despite continuing growth of the global economy, and accelerating deployment of solar and wind energy is a key reason, the FT and others concluded.
There can be no doubt that renewables will feature prominently in the mega fund the Saudis propose. It could in principle buy all of America’s four biggest publically quoted companies – Apple, Microsoft, Google and Berkshire Hathaway – with more than $100 billion to spare. In announcing the fund, Deputy Crown Prince Mohammed Bin Salman seemed deadly serious. “Within 20 years, we will be an economy or state that doesn’t depend mainly on oil,” he said. Investments, not oil, will provide the majority of the Kingdom’s income then.
The Saudis may actually have little choice. Unveiling Tesla’s Model 3 EV, Elon Musk revealed that 110,000 people had pre-ordered the car. That would amount to revenue of at least $3.8 billion on the day of the launch. It took Apple more than six months to reach its first billion dollars from i-Phone revenues. All over the world, major corporations are lining up to compete with Tesla on battery power storage and electricity for transportation. And, of course, renewables with which to provide that electricity.
Meanwhile, the international policy driver for all this transitioning in global energy markets maintains course in key countries. The US and Chinese Presidents jointly exhorted other nations to sign the Paris Agreement on climate change with them on Earth Day, 22nd April. Governments aren’t required to to do so, under the terms of the accord agreed in December, for another year. And Canada, once the worst of foot-draggers on climate, has joined the progressive leadership. President Obama and Prime Minister Trudeau delivered a joint declaration on climate in Washington that included a major programme restraining fugitive methane emissions by the oil and gas industry. (And boy, did the American Petroleum Institute hate that. More on the vital significance of methane leakage in a forthcoming blog).
The non-carbon-fuel corporate world continues to apply parallel pressure. Bloomberg and Sky joined the 50-plus corporations already pledged to 100% renewable energy supply. The International Renewable Energy Agency released a landmark report showing good business sense behind such a move. Doubling the share of renewables in global energy supply to 36% by 2030 can save trillions of dollars, they calculate.
Regulators continue to awaken to the risk climate change poses to capital markets. The Dutch and Swedish financial regulators joined the Bank of England in urging investors to stress test their portfolios against the risks of maintaining course with fossil fuels. All three regulators make no secret of their desire, in the interests of abating climate risk to the global economy, to switch capital from fossil energy to clean energy.
The divestment movement continues from strength to strength. The latest big name fund to defect from fossil fuels is no less than the Rockefeller Family Fund, an endowment founded by John D. Rockefeller, the richest American who ever lived, founder of Standard Oil, the parent of Exxon Mobil.
This megatrend can only be expected to increase, because major pension funds are now being advised how much they could have avoided in losses had they divested from fossil fuels already. The third biggest US pension fund, New York State’s, could have made $5.3bn by divesting 3 years ago. The fifth biggest pension fund in the world, ABP of the Netherlands, could have avoided losses of €9 billion had it done the same. Others are beginning to see opportunities in investment in renewables. CalPERS, the California Public Employees’ Retirement System, is investing in two major Californian solar projects.
Meanwhile, existential threats pile up for the carbon incumbency never mind climate change. The oil and gas industry’s debt mountain trebled to $3 trillion between 2006 and 2014, on the assumption of long-running high oil prices. Since the oil price began its long fall in July 2014, investors in oil and gas have lost £2 trillion in equity value and $150 billion in bond value. Analysts have begun to speak of “nightfall” for the industry.
The much-lauded US shale boom is clearly now going bust. The debt pile stands at more than $350 billion, causing the Wall Street Journal to voice fears of mass bunkruptcy. Much of the debt is junk grade, no longer servicable even from revenues. More than 50 companies have gone bust so far. Short sellers are now piling in.
“So yes, the oil crash looks a lot like sub prime”, Bloomberg wrote in January. Much more so in March.
Like the subprime fiasco, criminal behaviour has transparently been part of the buildup. The former CEO of Chesapeake, the top US driller, was indicted for conspiracy in March. He allegedly rigged prices in land bids for fracking. He died in a fiery car crash the next day. The day after that, analysts and lawyers assured Bloomberg that his actions “aren’t uncommon across U.S. shale patch.” Other oil and gas executives are under investigation.
It looks as though lawyers are going to busy as the fossil fuel era winds down. The Attorneys General of New York and California are investigating ExxonMobil, suspecting securities fraud and potential racketeering in suppressing climate change information. In March, two more states joined them.
When it comes to the energy transition, fans of The Good Wife might consider tuning into a new drama: Real Life.
Courtesy of Commodities-Now (More from Commodities-Now Here
The Dolce Whey at Onnit.com!

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