The future of fossil fuels

Investment in renewables is a trend that is picking up but this does not mean that investment in fossil fuels is going to die down anytime soon. While it is true that eventually the world will transition into renewable energy, there is no doubt about that. This transition however is not going to be instant. It is going to take several decades for fossil fuel usage to drop down to a bare minimum and for renewable energy sources to take the place that fossil fuels have at present.

According to Energy Policy Tracker, in 2020 alone, the G20 countries made almost 40% of all of their energy-related investments in fossil fuels. This 40% amounts to a staggering $274 billion, although investments in renewables were not too far behind at almost 38% amounting to $258 billion. This however shows that in spite of the global push towards renewables, the investment flow from the G20 countries in fossil fuels is still open.

Out of this $274 billion investment

  • ● Almost $196.6 billion have been invested into oil and gas.
  • ● Almost $30.64 billion have been invested into coal.
  • ● Almost $1.27 billion have been invested into hydrogen-based fossil fuels.
  • ● The remaining amount has been invested into multiple fossil fuel types.

Out of the $274 committed for fossil fuels, almost $221.33 billion are for unconditional fossil fuels, which means that this investment will be pumped into the investment of fossil fuels without any conditions or strings attached in the form of climate target, whereas the remaining amount is for conditional fossil fuel production with climate targets.

Among the G20 nations, the United States has the greatest share of investment in fossil fuels with almost $72.35 billion, closely followed by the UK at almost $42 billion investment and India at almost $29 billion, followed by Germany at almost $27 billion.

So why is it that in spite of the global push for clean renewable energy and the imminent threat to the climate, the big countries are still counting on fossil fuels? The answer lies in the way global economies are currently structured.

The last five to six decades of development have been driven by fossil fuels. Our wars, economies, development, and value chains, everything is very deeply connected with fossil fuel investment, production, and consumption.

Any attempt to abruptly transition from fossil fuels to clean renewable energy is going to be just as harmful as global warming is for the climate. If the transition is not properly thought through, it can end up disturbing the global economy, resulting in unplanned consequences of a very dire nature.

If we look back at 2020, we can see that the Covid.19 pandemic has proven to be a disrupter. If we look at the energy sector, then we can see that the energy sector did not get affected a lot by the pandemic. However, the pandemic has had an impact on the energy sector and this impact has been in the form of increased reliance on fossil fuels for many of the developing nations.

The pandemic triggered a global recession and as many economies went into lockdown, the developing nations were the ones to suffer the greatest economic blow. They had to deal with the virus, make sure that the people do not starve to death due to the lockdowns, and keep the economy afloat somehow. This resulted in a lot of resources being allocated differently than the developing nations had initially planned.

In economic terms, we can call this the opportunity cost effect. As the developing nations reallocated their scarce resources to areas that required more pressing concern, their focus shifted away from investing into renewables. In other words, the opportunity cost of investing in renewables increased for the developing nations, as a result, they went back to relying upon fossil fuels.

Indonesia for instance has scaled back earlier plans of replacing fossil fuel plants with renewable energy solutions. More tax breaks and incentives have been provided and more investment is being pumped into fossil fuel production to meet energy demands in Indonesia.

In the words of billionaire investor John Goff, “Oil and gas are going to come back with a vengeance.” Once the vaccinations create mass immunity and the global economy starts to reopen, the pent-up demand for fossil fuels is going to surge. Renewables simply cannot keep up with all the demand for energy right now, so fossil fuel is a factor that just cannot be taken out of the equation.

There is another bulwark backing up the fossil fuel and that is pension funds. In the UK alone almost $10 billion of pension funds are invested into fossil fuel stocks. Why? Because fossil fuel stocks provide a stable rate of return. From an investment perspective, fossil stocks are low-risk investments that act as stabilizers. Oil and gas ETFs posted a return of almost 94% over the last year, which is a very high rate of return.

According to the data by Energy Policy Tracker, the investment in renewables is not very far behind fossil fuels but one must consider the nature of this investment. Most of the investment in renewables is for research and development.

Let us look at it this way. The money that goes into fossil fuel investment, goes into the extraction, purification, and supply of fossil fuels mainly. Whereas the investment that goes into renewables is mainly for finding out innovative and cost-effective ways for renewable energy. Furthermore, one very big challenge that the renewable sector faces is the lack of resources such as copper, lithium, and tin. Copper and lithium are two of the main elements and the earth simply does not have enough of these two elements to enable a swift transition.

This is one major reason why no matter how much the media pushes for clean renewable energy, the ground reality is not going to change. Fossil fuels are cheaper and they are currently driving the global economy. The renewables have got a lot of obstacles to cross before the rate of transition can be sped up, till then for those who are looking for a good rate of return on their investment, fossil fuels will remain an important investment category.

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