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The Future of Oil, Gas, and Coal: Stranded Assets or Safe Refuge?

Dr John Constable, GWPF Energy Editor

In a classic example of econo-political psy-ops, Mark Carney is using his final days in the Bank of England to intimidate institutional financial managers, in pension funds for example, by suggesting that investments in conventional energy are high risk adventures requiring special justification.

However, consideration of the state of the global energy supply over the last thirty years suggests that if anyone has some explaining to do it is Mr Carney himself. Climate policy failure followed by distressed correction seems more probable than other outcomes, and if any investments are likely to be stranded, it is those such as wind and solar that are in effect wagers on the success of current carbon reduction strategies.

“The Dove Sent Forth from the Ark.” Gustave Doré, 1866

The outgoing Governor of the Bank of England, Mark Carney, already more climate activist than responsible guardian of the Old Lady of Threadneedle Street, seems intent on causing an investment market panic and a consequent stampede out of conventional energy and into renewables. Asked point-blank in a recent interview whether he supported “divestment” from fossil fuels  (BBC Today program 30.12.19), he tactfully evaded the question but nevertheless asserted that coal, oil and gas were insecure assets, and that any institutional decision-maker preferring to bet on oil, for example, is engaged in a high risk adventure and must therefore offer special justification for their position.

This pre-emptive strike means that Mr Carney’s own wager, on certain low-carbon technologies, escapes examination. That is the wrong way around. Fossil fuels are known quantities; their physical, thermodynamic, properties are manifestly favourable, and they have as a matter of historical record delivered human wishes for centuries, and still continue to do so at low cost in the present. What we know about modern renewables, on the other hand, is, to say the least, much less certain. The burden of proof, then, must be on those who believe, as Mark Carney apparently does, not only that low carbon policies will persist for decades to come but also that modern renewables, wind and solar, are now competitive and pose a real threat to conventional sources of energy.

We can gain some insight into the likely strength of his position by charting once again data that this blog has shown on several occasions, global total primary energy supply, which is all that matters if we are concerned with emissions and a transition to low carbon energy:

Figure 1. Global Total Primary Energy (TPE) supply 1990 to 2017 (ktoe). Source: Data from the International Energy Agency (IEA) : Chart by the author. 

For the sake of contrast, I have represented the fossil fuels in shades of grey, and the low carbon sources, nuclear, biofuels and waste, and hydro in colours, with the modern renewables on which the low carbon gamble is premised, in bright red. Nearly all the growth in global energy consumption over the period is accounted for by growth in fossil fuels. Renewable energy in total, including traditional biomass in the developing world, made up 13% of Total Primary Energy in 1990 and 14% in 2017. Yes, renewables have grown by 72% over that period, from a low base, but fossil fuels have grown by 59% from a substantial base, and consequently they continue to dominate world energy. There is no “energy transition”.

Perhaps most striking of all, the proportion of low carbon energy, that is nuclear and renewables together, stands today at 19% of global TPE just as it did in 1990, before intense coercive policies supporting renewables were introduced. We can conclude therefore that insofar as there has been any significant impact on global emissions, and this will have only been on the rate of increase, that effect will have come from within the fossil fuel sector itself, including gas-switching and improvements in the conversion efficiency of coal-fired power stations and prime movers such as internal combustion engines. Given the policy pressures applied to the world’s economies since the year 2000 that is an extraordinary failure.

On what grounds, therefore, does Mr Carney believe that institutional investors in fossil fuels, and I quote from his interview, “have to explain the judgement, justify that to the people whose money it ultimately is”? The IEA data clearly suggests that fossil fuel investments require no justification, as investments. On the contrary, the questions probing responsibility and realism should be directed at Mr Carney. On what grounds does a person of his prominence take to the headlines to prophesy that fossil investments are at risk? He might well want that to happen, but there is nothing in the fundamental data to suggest that this a likely outcome. How can he bring himself to speak so confidently?

The answer appears to be that Mr Carney is less concerned with empirical data than with the virtual reality of Policy World, a group hallucination in which a “fact” can be conjured out of the air, first by nominating a target and then by reinforcing that target with legislation, or to use the term widely employed by journalists, by “enshrining” it in law. Thus, the ambitions of policy become pseudo-concrete legal realities that can be used to intimidate the public. What we want to happen becomes what is going to happen.

Mr Carney does this twice in his interview by referring to the legal status of the United Kingdom’s Net Zero target, and interpreting it as the future that investors must expect. Net Zero is the “law of the land”, he says with emphasis, and then imagining himself to be addressing the economy at large he asks “we are supposed to transition to a Net Zero economy by 2050… What’s your plan?”.

Asked by the interviewer whether the Net Zero ambition will actually be achieved, Mr Carney replied that “Well, it is important that we do, [and] it is the law”. That may seem a strange way of answering a perfectly reasonable question about practicalities, but in Policy World the law determines what will actually happen. Those that do not obey that law will not merely break it, they will be left behind by the “facts”. Or as Mr Carney put it, again with emphasis, “In fact, up to 80% of coal assets will be stranded, up to half of developed oil fields”.

To those outside Policy World this sort of confusion of desires and physical probabilities will appear delusional; almost a case study from the DSM (Diagnostic and Statistical Manual of Mental Disorders). – Out here on Planet Earth, wishes don’t wash dishes, let alone scrub up your energy system. Of course, Mr Carney’s interview, conducted in the even and barely modulated tones of great power and consequent self-confidence, does not sound insane, far from it, but it is surely yet another instance of that subtle malaise whereby those in authority come to believe that the world is infinitely plastic to their commands. Practical experience, to say nothing of the wisdom of the ages, suggests that this sort of  belief, which is a variety of self-belief, is doomed to disappointment. The real world doesn’t do what it is told. But since Mr Carney can’t draw the obvious conclusions from International Energy Agency data it is even less likely that he will attach any particular importance to the observation of Thomas à Kempis:

Nam homo proponitsed Deus disponit.

(Man proposes, but God disposes.)

Forgotten it may be along the corridors of power, but the rest of us are very familiar with that principle, and the cumulative wisdom of financial market participants around the world, people who have no need for sermons on risk management from central bankers, are putting their faith in God, as it were, in other words the natural world, and continuing to invest in fossil fuels, rather than trusting the smoothly spoken Word of Mr Carney and other missionaries from Planet Policy. Who can blame them? Mistaken governmental decisions concerning emissions reduction have the potential to cause real harm to global civilisation, indeed we may already be seeing signs of this harm in the otherwise very puzzling decline in productivity discussed in a previous post (“UK Energy Consumption and Weak Productivity Growth”). Limiting and repairing that damage will require a great deal of energy, and much will inevitably come from fossil fuels. Far from being a stranded asset, oil, gas, even coal, show every sign of being a desperately welcome lifeboat.

Dr John Constable: GWPF Energy Editor.