Fossil Fuels Are Finished. The Rest Is Detail.

It’s time to make the call – fossil fuels are finished. The rest is detail.

The detail is interesting and important, as I expand on below. But unless we recognise the central proposition: that the fossil fuel age is coming to an end, and within 15 to 30 years – not 50 to 100 – we risk making serious and damaging mistakes in climate and economic policy, in investment strategy and in geopolitics and defence.

I’ve written previously about 2015 being the year the “Dam of Denial” breaks, referring to the end of denial that climate change requires urgent, transformational economic change. While related, this is different. It is now becoming clear we’ve reached a tipping point where fossil fuels will enter terminal decline, independently of climate policy action.

Given climate policy action is also now accelerating, fossil fuels are double dead. To paraphrase Douglas Adams, “So long and thanks for all the energy”.

I understand this is a very big call, especially in regards to timing. There are many drivers that lead me to this conclusion but it’s their integrated impact that makes me so confident.

Thinking of energy like you think about an iPhone

The first and most important one is the argument I first made early in 2014 in a paper with Giles Parkinson from RenewEconomy.com.au. For over a hundred years, energy markets have been defined by physical resources, supplied in large volumes by large, slow moving companies developing long life assets in the context of slow moving shifts in markets.

The new emerging energy system of renewables and storage is a “technology” business, more akin to information and communications technology, where prices keep falling, quality keeps rising, change is rapid and market disruption is normal and constant. There is a familiar process that unfolds in markets with technology driven disruptions. I expand on that here in a 2012 piece I wrote in a contribution to Jorgen Randers book “2052 – A Global Forecast” (arguing the inevitability of the point we have now arrived at).

This shift to a “technology” has many implications for energy but the most profound one is very simple. As a technology, more demand for renewables means lower prices and higher quality constantly evolving for a long time to come. The resources they compete with – coal, oil and gas – follow a different pattern. If demand kept increasing, prices would go up because the newer reserves cost more to develop, such as deep sea oil. They may get cheaper through market shifts, as they have recently, but they can’t keep getting cheaper and they can never get any better.

In that context, consider this. Renewables are today on the verge of being price competitive with fossil fuels – and already are in many situations. So in 10 years, maybe just 5, it is a no-brainer that renewables will be significantly cheaper than fossil fuels in most places and will then just keep getting cheaper. And better.

Then we add in electric cars, which are now on the same path – converting a staid, slow moving industry (traditional auto companies like GM) into a disruptive technology driven one (innovators like Tesla). Electric cars will accelerate the end of fossil fuels by joining with renewables to create a system shift, both directly by using clean power to charge them and indirectly by driving battery costs down to create storage for distributed renewables.

This all then unleashes competition across sectors bringing new players to old industries. For example utilities facing the much discussed death spiral triggered by solar, will find the motor vehicle fuels market very appealing. This would then unleash a huge political and commercial driver for growth in electric cars with the utility sector providing infrastructure to use their product, locking in customers with long term supply deals backed by renewable power and lobbying for electric cars (to also protect the grid).

Within a decade, electric cars will be more reliable, cheaper to own and more fun to drive than oil driven cars. Then it will just be a matter of turning over the fleet. Oil companies will then have their Kodak moment. Coal will already be largely gone, replaced by renewables.

The incumbents won’t respond in time. They are steeped in their analysis that they are the underpinning foundation of the economy – which of course they have been. This is so deeply ingrained in their worldview they can’t see their error. Energy is the essential foundation of the economy but we now have a better, cheaper way of producing energy.

Fast beats slow

One of key competitive advantages the fossil fuel industry has had is the huge capital, complexity risk and high level engineering skills required to develop them. This has two impacts. Firstly it created huge barriers to entry in the market – a disruptive entrepreneur can’t build a coal power station, drill in the deep ocean, buy an oil tanker or develop a coalmine. They can play on the edges, like shale gas, oil trading or mineral exploration, but they can’t play the main game. Secondly the industry has had huge incumbency power – it’s very expensive and politically hard to consciously and deliberately close down such a powerful industry and replace it. Thus action on climate change has stalled for decades.

Both of these benefits are gone when you combine “energy as a technology” with most growth in energy demand being in developing economies. With renewables already competitive today without subsidy in some markets and the above trends playing out, it is inevitable that before long – maybe a decade – virtually all new electricity generation will be from renewables. Add in the need to be clean – not just for climate change reasons but for local air quality – and the choice developing countries will face will be between large, old, dirty, hard to finance infrastructure that requires heavy government support or small scale, easy to finance, more convenient, popular and clean energy and transport that will get even cheaper over time. Tough choice?

So the very thing that the fossil fuel industry had relied on for its growth – the rapidly expanding need for energy in the developing world – is the very thing that will drive the competition to wipe them out.

Implications

It’s hard to know where to begin with what this all means, because this really does change everything. Of course no one can accurately forecast the dates involved. But the assumptions pretty much everyone’s working with – that without policy intervention the energy system will be dominated by fossil fuels in 2050 and beyond – is frankly delusional. How could an incumbent, unpopular and dirty technology with increasing prices beat a disruptor which is cleaner, better, lower risk and falls in price every year?

Once you accept that, whether we stop burning fossil fuels in 15 years or 30 years is important, but it’s not the main question because either way it’s a very different outcome than most are planning for.

As I argued early 2014 in “Carbon Crash Solar Dawn”, the industry’s condition is terminal and once everyone wakes up to that reality, it will die faster because the market will discount it, taking away capital and shifting it to the future winners. This process will drive scale deployment and innovation of renewables while denying capital to fossil fuels, constraining their options.

Then the only logical strategy for fossil fuel companies will be to get their depreciating assets out of the ground as fast as possible and invest zero in exploration and development, instead paying out spare cash as dividends to shore up their stock price. With everyone doing this, prices will fall chasing the declining market, undermining the value of the fossil fuel industry and reducing its political influence further.

All businesses, like humans, fight death. And fight they will, with all the considerable power they have. So it will be messy and chaotic, and not consistent around the world. But in the end, the fossil fuel giants have no strategy that involves fossil fuels which makes any business or economic sense. Other companies like utilities and auto companies meanwhile have great options – like taking away a large share of the oil industry’s market with renewable powered electric cars. They know that today we spend around twice as much on motor transport fuel as we do on electricity.

But big oil versus big utilities aligned with big auto is not the only disruptive impact for investors. There’s a whole range of industries that will benefit and join the party dancing on fossil fuels’ grave – battery manufacturers, copper and lithium miners, electronics producers, software developers, electric engine makers, smart grid builders and of course solar and wind power manufacturers, installers and financiers. Shell and Exxon don’t see Google and Apple as competitors, which is just why incumbents so often lose. In combination these forces will unleash the predictable pattern of technology driven market disruption.

If you think this is all far into the future, then think again. In the USA, coal companies have lost around 75% of their value in the past few years while the Dow Jones went up nearly 70%! And electric car maker Tesla, producing less than 40,000 cars per year, is valued at over half of GM which produces 9 million cars per year! The market can smell death and knows that fast beats slow.

For climate advocates and policy makers, nothing changes in their approach but everything changes in the result – and their level of confidence and influence.

With fossil fuels on the run, that industry’s support will evaporate. Governments are much more inclined to regulate when what they seek is already happening but needs speeding up. So as fossil fuels are falling off the cliff, governments will give them a kick so they can claim credit.

Climate advocates, whose main challenge is speed of action, don’t need to change their approach. Their strategy is working – make fossil fuels harder, make solar easier. The only change now is that victory is at hand. Everyone loves a winner.

In conclusion, I will summarise my argument.

• The fossil fuel energy industry is now entering terminal decline and will be all but gone within 15-30 years. The key driver is not what most see as their greatest threat – future climate change policy. It’s that competing energy products of renewables and batteries, in a system with electric vehicles, will behave as a disruptive technology always does, delivering ever lower prices and ever higher quality in a decades’ long period of innovation and deployment, which fossil fuels can’t match.

• Because of the nature of this transformation, there will be a wide variety of new business players entering the market from the side, profoundly changing the market. The obvious example is utilities promoting electric cars as an enormous new market opportunity, which will assist them in avoiding the “death spiral” threat posed by the end of centralised generation. Joining already are companies like Apple and Google who are both developing battery and car opportunities, with a close eye on the technology integration opportunity. Together this will form a powerful economic force both driving disruption and advocating climate action, undermining the historically dominant political and economic resistance of the fossil fuel companies.

• In combination these forces will unleash the predictable pattern of technology driven market disruption. The incumbents will stay in denial and fail to respond to what’s coming, despite it being obvious. They will hold on and fight against change as long as possible, but in the end will be wiped out by nimbler new players without the cultural or asset baggage of the old. There will be an unknown tipping point – I think before 2020 – at which time the momentum will rapidly accelerate.

• The key difference in this transition versus previous technology driven change is that it has the added dimension of climate change, making the resulting transformation a very high priority for policy makers and an unbeatable source of public support for the disruptors.

Fossil fuels are dead. The rest is details.