It’s not looking good for the global fossil fuel industry. Although the world remains heavily dependent on oil, coal and natural gas—which today supply around 80 percent of our primary energy needs—the industry is rapidly crumbling.
This is not merely a temporary blip, but a symptom of a deeper, long-term process related to global capitalism’s escalating over consumption of planetary resources and raw materials.
New scientific research shows that the growing crisis of profitability facing fossil fuel industries is part of an inevitable period of transition to a post-carbon era.
But ongoing denialism has led powerful vested interests to continue clinging blindly to their faith in fossil fuels, with increasingly devastating and unpredictable consequences for the environment.
In February, the financial services firm Deloitte predicted that over 35 percent of independent oil companies worldwide are likely to declare bankruptcy, potentially followed by a further 30 percent next year—a total of 65 percent of oil firms around the world. Since early last year, already 50 North American oil and gas producers have filed bankruptcy.
The cause of the crisis is the dramatic drop in oil prices—down by two-thirds since 2014—which are so low that oil companies are finding it difficult to generate enough revenue to cover the high costs of production, while also repaying their loans.
Oil and gas companies most at risk are those with the largest debt burden. And that burden is huge—as much as $2.5 trillion, according to The Economist. The real figure is probably higher.
At a speech at the London School of Economics in February, Jaime Caruana of the Bank for International Settlements said that outstanding loans and bonds for the oil and gas industry had almost tripled between 2006 and 2014 to a total of $3 trillion.
This massive debt burden, he explained, has put the industry in a double-bind: In order to service the debt, they are continuing to produce more oil for sale, but that only contributes to lower market prices. Decreased oil revenues means less capacity to repay the debt, thus increasing the likelihood of default.
This $3 trillion of debt is at risk because it was supposed to generate a 3-to-1 increase in value, but instead—thanks to the oil price decline—represents a value of less than half of this.
Worse, according to a Goldman Sachs study quietly published in December last year, as much as $1 trillion of investments in future oil projects around the world are unprofitable; i.e., effectively stranded.
Examining 400 of the world’s largest new oil and gas fields (except U.S. shale), the Goldman study found that $930 billion worth of projects (more than two-thirds) are unprofitable at Brent crude prices below $70. (Prices are now well below that.)
The collapse of these projects due to unprofitability would result in the loss of oil and gas production equivalent to a colossal 8 percent of current global demand. If that happens, suddenly or otherwise, it would wreck the global economy.
The Goldman analysis was based purely on the internal dynamics of the industry. A further issue is that internationally-recognized climate change risks mean that to avert dangerous global warming, much of the world’s remaining fossil fuel resources cannot be burned.
All of this is leading investors to question the wisdom of their investments, given fears that much of the assets that the oil, gas and coal industries use to estimate their own worth could consist of resources that will never ultimately be used.
The Carbon Tracker Initiative, which analyzes carbon investment risks, points out that over the next decade, fossil fuel companies risk wasting up to $2.2 trillion of investments in new projects that could turn out to be “uneconomic” in the face of international climate mitigation policies.
More and more fossil fuel industry shareholders are pressuring energy companies to stop investing in exploration for fear that new projects could become worthless due to climate risks.
“Clean technology and climate policy are already reducing fossil fuel demand,” said James Leaton, head of research at Carbon Tracker. “Misreading these trends will destroy shareholder value. Companies need to apply 2C stress tests to their business models now.”
The end of cheap oil
Behind the crisis of oil’s profitability that threatens the entire global economy is a geophysical crisis in the availability of cheap oil. Cheap here does not refer simply to the market price of oil, but the total cost of production. More specifically, it refers to the value of energy.
There is a precise scientific measure for this, virtually unknown in conventional economic and financial circles, known as Energy Return on Investment—which essentially quantifies the amount of energy extracted, compared to the inputs of energy needed to conduct the extraction. The concept of EROI was first proposed and developed by Professor Charles A. Hall of the Department of Environmental and Forest Biology at the State University of New York. He found that an approximate EROI value for any energy source could be calculated by dividing the quantity of energy produced by the amount of energy inputted into the production process.
To read more, see below…