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The Actuary The magazine of the Institute & Faculty of Actuaries

Fossil fuel demand to peak in 2020s

Rapid growth in renewable energy and clean technologies will see fossil fuel demand peak over the next decade, leaving trillions of pounds worth of investments at risk.

Energy switch will impact around a quarter of companies ©iStock
Energy switch will impact around a quarter of listed companies ©iStock

That is according to a new report published by Carbon Tracker yesterday, which forecasts demand for coal, gas and oil to peak between 2020 and 2027, most likely in 2023.

This poses a “systemic risk” to financial markets, with much of the estimated £19trn invested in infrastructure by the fossil fuel sector likely to be left as ‘stranded assets’.

The tipping point is set to hit when solar and wind power account for 6% of global energy supply and 14% of electricity, which is far below levels already seen in many European countries.

“Fossil fuel demand has been growing for 200 years, but is about to enter structural decline,” said report author Kingsmill Bond. “Entire sectors will struggle to make this transition.

“They can expect price declines, greater competition, restructuring and stranded assets. We have seen a similar pattern in coal and cars in recent years, and horses and gaslights in the past.”

The report highlights how government policies to slash emissions and reduce air pollution are driving the energy transition, along with the falling cost of renewables and battery storage.

This energy switch is expected to directly impact around a quarter of companies listed in equity indexes worldwide, hitting banking, capital goods, transport and automotive sectors.

Countries that export coal, gas and oil are predicted to suffer most, with Russia one of the 12 nations where fossil fuel rents account for 10% or more of GDP.

Despite this, the report warns that much of the fossil fuel industry appears blind to the risks, with BP, OPEC and the IEA all only expecting demand to peak after a generation or more.

“Investors anticipate, so they will typically react even before companies see peak demand,” Bond continued. “We believe investors will react faster as the transition works its way through the world’s capital markets.

“As each sector is impacted, it becomes easier for the market to anticipate something similar happening in their sector.”

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