Could the EV and Clean Energy Revolution cause an economic crisis?

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Published on EVANNEX on November 28, 2021, from Charles Morris

The transition to electric vehicles and renewable energies is already creating winners and losers. We often write about the winners in this space – this includes nearly everyone who has invested in Tesla since its 2010 IPO, especially those who followed a buy-and-hold strategy, as well as those who were into charging infrastructure companies prior to their recent surge have set after the passing of the Infrastructure Act.

Many fear that auto workers will be among the losers, and this is proving to be an issue that could hold back the transition to electric vehicles, especially in auto-centric countries like Germany and Japan where the shift to electric vehicle manufacturing is significant Paying could jeopardize jobs in the auto industry.

Above: A Tesla is parked in front of oil wells (Image: Tesla Owner)

Any major technological change causes major economic disruption, and economists agree that short-term economic losses are far outweighed by the benefits of cleaner air, less environmental damage, and more efficient transportation.

However, the fossil fuel industries continue to invest huge sums in developing new oil and gas resources and infrastructures, and in a few years’ time there is a real risk that they will produce far more oil and gas than will be needed to meet future demand. According to a new study, this stubborn refusal to prepare for the new energy economy could leave oil-producing nations with more than $ 11 trillion in stranded assets by 2036 – a terrifying loss that could well spark an economic crisis.

“In the worst case, people invest in fossil fuels until suddenly the expected demand does not materialize and they realize that their property is worthless. Then we could see a financial crisis on the order of 2008, ”the study’s lead author, Jean-Francois Mercure of the University of Exeter, told The Guardian. Oil capitals like Houston and Calgary could end up looking like post-industrial Detroit.

The new paper, published in Nature Energy magazine, examines how the impending decline in demand for oil and gas will affect the global economy. Fossil fuel reserves, as well as infrastructures like refineries, machinery and pipelines, are sure to depreciate, with devastating effects on the local economy. The most vulnerable assets are those in remote regions and / or harsh environments where oil and gas are comparatively expensive to extract. Canadian tar sands, US shale and the Russian Arctic are most at risk. Deep sea drilling in Brazil and elsewhere, as well as oil fields in the North Sea, are also relatively expensive oil production facilities.

On the other hand, fossil fuel importers such as the EU, Japan, India and South Korea will benefit from the switch, as the switch to renewable energies enables savings that can be invested in expanding renewable energies, creating new jobs and improving energy independence. The situation is more complex for the two biggest polluters in the world – the US and China – as each has a diversified economy that includes both significant fossil fuels and growing clean energy sectors.

The study looked at several different alternative futures. In a “business-as-usual” scenario, the researchers estimate that global fossil fuel assets – which are mainly located in the US, Russia and OPEC countries – are estimated at over 25 trillion US dollars by 2036. However, thanks to the falling cost of renewable energy, they would be worth a fraction of that number. If oil prices fall, OPEC countries could decide to open the taps and sell fossil fuels quickly to get as much sales as possible before the music stopped. In this “burn out” scenario, more fossil fuel assets would be stranded elsewhere in the world. In the US, around 62% of assets would be stranded by 2036.

In another, rosier scenario, OPEC accepts production quotas in order to orchestrate a more orderly exit and distribute the losses more evenly among the oil-producing countries. Even in this more hopeful, cooperative future, fossil fuels worth trillions of dollars would be stranded around the world. The U.S., Russia, and China would each suffer around $ 1 trillion in economic damage by 2036. (This would be far outweighed by economic growth over the same period.)

The recipe for avoiding economic problems is clear – the US and other advanced economies must reduce their economic reliance on fossil fuels, and do it quickly. According to the study’s authors, there is little government policy can do to avert the projected losses, as the cause will be a global decline in demand for petroleum products.

Much will depend on the policies of cheap producers like Saudi Arabia and the other OPEC countries. If they ramp up production and start a distress sell-off, it could cause a sudden collapse in the global oil industry, and assets worth about $ 11 trillion – that’s half the current value of global fossil fuel assets – would be stranded.

Such a race to the bottom must be avoided at all costs. “If Saudi Arabia goes one way and the US goes the other way, we will see economic, financial and political instability, bank failures and changes in capital flows around the world,” said Mercure. To avoid chaos, oil exporters should diversify their economies as soon as possible. More importantly, net oil producers and consumers must work together to fairly share the pain and profit. “This has to be a story of international cooperation and not leave people behind.”

So you don’t have to worry. All we need is for the countries of the world (and the political parties within those countries) to agree on the urgent need for action and start working together for the benefit of all.


Written by: Charles Morris; Source: The Guardian

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