The Great Unravelling

Three years ago Tim Morgan, global head of research with Tullett Preborn, the interdealer broker, published what I still think is one of the most prescient macroeconomic studies of recent years. Called Perfect Storm – energy, finance and the end of growth, it pinpoints what’s gone wrong with our society. Since the 1980s, Morgan says, we have succumbed to a “relentless shift to immediate consumption”, a “cult of self-worship” in the “pursuit of instant gratification.”

That socio-ethical critique is not really Morgan’s primary focus however. His specific target is something called EROEI: energy return on energy invested. This comes under the category ‘dull-sounding but vital’. He offers a sobering thought: “the critical relationship between energy production and the energy cost of extraction is now deteriorating so rapidly that the economy as we have known it for more than two centuries is beginning to unravel”. In other words: we increasingly can’t afford to pay for the energy we’re producing – all the low-hanging fruit has been plucked. A similar report, with equally perturbing conclusions, was published by the UK’s Department for International Development, also in 2013.

These aren’t cheering reads; but forewarned is forearmed.

Wherever you look today there are symptoms of a structural malaise in the fossil fuel industries. A slew of diabolically poor quarterly results have been reported by an array of oil giants, with warnings of more bad news to come; the number of oil and gas drillships and semi-submersible floating rigs (globally) has collapsed from 251 in September 2014 to 169 today. Earlier this year Deloitte forecastthat 65% of independent oil producers may go bankrupt this year and next.

Their problem? They all imagined the future would be rather like the past, with oil prices steadily climbing. Instead of that, the oil price is less than half what it was at the start of 2012. On top of which oil and gas companies have, globally, saddled themselves with an estimated $3 trillion of debt. To service this debt, they need to continue selling oil and gas; which naturally depresses prices and decreases revenues, bringing default ever closer.

Nor is it only oil and gas which have the production/price problem. The coal industry is in dire straits too. This coming week, east Europe’s largest private coal miner, OKD in the Czech Republic (or Czechia, as we might all come to know it), may well file for bankruptcy (or hope for rescue via nationalisation). Just two weeks ago the world’s biggest private-sector coal producer, Peabody Energy in the US, in April, filed for bankruptcy several others have already disappeared. International coal prices have plunged by 98% since 2008. At this price it’s cheaper than the gravel on your front drive – which will perhaps ensure that the biggest coal users (India and China) will keep burning the stuff for years ahead.

The usual situation for commodity price slumps is that low prices result in output cuts, the surplus is worked down, and eventually the market rebalances and prices recover and stabilise. But we’re not in a usual situation; this is a fossil fuel death spiral, brought about by stagnating economic growth more or less everywhere – in a world where central banks have tried all the tricks they have to stimulate demand – and, of course, the fact that the whole world is now trying to turn its back on fossil fuels – even India and China. They used to say that China would get old before it got rich; the same thing can now be said about the great Shale Revolution – it will pass away before anyone makes a packet from it.

The worrying aspect of this is that it’s not just a death spiral for fossil fuel producers – it might also see some hefty problems for those financial institutions that unwisely lent them trillions, never mind those countries (such as Saudi Arabia) that are completely dependent on fossil fuel prices.

The obvious question is – how long is this spiral downwards? You may as well ask: how long is a piece of string? Yet what is truly different about this fossil fuel slump from previous ones is that a coincidence of policy – driven by climate change fears and public pressure – and technological advances is making the Big Switch-Over to renewables increasingly inevitable. Interestingly, the latest Department of Energy & Climate Change (DECC) public attitudes survey was published last week, showing that 80% of respondents (the survey sample was 2,105 UK households) supported the use of renewables, with just 4% opposed and 2% strongly opposed. As Juliet Davenport, CEO of the renewable energy company Good Energy – a member of the Social Stock Exchange, and which has just picked up the “New Energy Champion” trophy at the 2016 New Energy and Cleantech awards – said: “The message from the British public is loud and clear…people want to see a transition to a renewable future here in the UK.” As the fossil fuel industry expires, killed off by a range of daggers – and its death throes may well be decades – there increasingly is only one alternative.



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