Value of reserves could fall by two-thirds as Covid-19 hastens peak in demand, study shows
The looming fossil fuel crash could pose a significant threat to global financial stability, say experts. Photograph: Matthew Brown/AP
The coronavirus outbreak could trigger a $25tn (£20tn) collapse in the fossil fuel industry by accelerating a terminal decline for the world’s most polluting companies.
A study has found that the value of the world’s fossil fuel reserves could fall by two-thirds, sooner than the industry expects, because the Covid-19 crisis has hastened the peak for oil, gas and coal demand.
The looming fossil fuel collapse could pose “a significant threat to global financial stability” by wiping out the market value of fossil fuel companies, according to financial thinktank Carbon Tracker.
The report predicts a 2% decline in demand for fossil fuels every year could cause the future profits of oil, gas and coal companies to collapse from an estimated $39tn to just $14tn.
It warns that a blow to fossil fuel companies could send shockwaves through the global economy because their market value makes up a quarter of the world’s equity markets and they owe trillions of dollars to the world’s banks.
Kingsmill Bond, the author of the report, said: “Now is the time to plan an orderly wind-down of fossil fuel assets and manage the impact on the global economy rather than try to sustain the unsustainable.”
The report says the world is “witnessing the decline and fall of the fossil fuel system” owing to the quicker-than-expected growth of clean energy alternatives coupled with the collapse in demand for fossil fuels amid the pandemic.
It follows findings from the International Energy Agency, which forecast the Covid-19 fallout would lead to the most severe plunge in energy demand since the second world war and trigger multidecade lows for the world’s consumption of oil, gas and coal, while renewable energy continued to grow.
The world’s demand for fossil fuels has plunged by almost 10% amid the coronavirus lockdown, and many energy economists believe it may fail to recover from the crisis.
Bond said fossil fuel companies and their investors had failed to realise the current decline of the fossil fuel industry may prove terminal.
“The bizarre thing is that the fossil fuel incumbents have been so resistant to the idea of change for so long, and put out so much bogus PR, that they risk falling victim to their own rhetoric,” he said.
“There is far more risk inherent in the fossil fuel system than is conventionally priced into financial markets. Investors need to increase discount rates, reduce expected prices, curtail terminal values and account for the clean-up costs.”