How Goliath Might Fall — Fossil Fuel Industry to Experience Market Crashes Over Next 10 Years

There’s a very real David vs Goliath conflict now underway in the global energy markets. On one side is a loose coalition made up of renewable energy producers and advocates, individuals who are increasingly concerned about global warming, environmentalists, technophiles, people promoting a democratization of the energy markets, and energy efficiency advocates. On the other side is a vast and powerful global fossil fuel industry backed by wealthy billionaires like the Koch Brothers and various national and nationally supported corporations around the world.

Up to 3.4 Trillion Dollars in Bad Fossil Fuel Investments

By the end of the next 1-3 decades, one set of these two forces will have won out — which will, in turn, decide whether the world continues along the path of climate devastation that is business as usual fossil fuel burning, or sees a rapid reduction in burning-related emissions to near zero which will help to mitigate climate harms while effectively crashing the 3.4 trillion dollar global fossil fuel market.

At issue is the fact that wind, solar, and electric vehicles together have the potential to rapidly take over energy markets that were traditionally monopolized by the fossil fuel industry. Earlier this year, a report out from Bloomberg vividly illustrated the stakes of this currently-raging conflict as it relates to oil and a burgeoning electric vehicles industry.

bloomberg-oil-crash

(Electrical vehicles provide hopes for keeping massive volumes of fossil fuels in the ground and similarly huge volumes of carbon out of the atmosphere. This is achieved by greatly reducing oil demand which could crash the oil markets by as soon as the 2020s. Image source: Bloomberg.)

According to Bloomberg, present rates of electrical vehicle (EV) growth in the range of 60 percent per year would be enough to, on their own, produce an oil glut in the range of 2 million barrels of oil per day by the early to middle 2020s. Continued rapid electric vehicle adoption rates would then swiftly shrink the oil market, resulting in a very large pool of stranded assets held by oil producers, investors and associated industries. Bloomberg noted that even if EV growth rates lagged, continued expansion would eventually result in an oil market crash:

“One thing is certain: Whenever the oil crash comes, it will be only the beginning. Every year that follows will bring more electric cars to the road, and less demand for oil. Someone will be left holding the barrel.”

Bloomberg also noted that LED light bulbs are increasing market penetration by 140 percent each year all while the global solar market is growing at a rate of 50 percent per year. And when technologies like LEDs, solar, wind, and increasingly low cost batteries combine, they generate a market synergy that has the capacity to displace all fossil fuels — coal, oil, and gas.

Coal Already Seeing Severe Declines — Oil and Gas are Next

During 2010 to 2016, we’ve already seen a severe disruption of the coal markets globally and this was due in part to strong wind and solar adoption rates. Coal capacity factors are falling, coal demand is anemic and the coal industry has suffered the worst series of bankruptcies in its history. “The coal industry fundamentals remain very bleak in my opinion,” noted Matthew Miller, a coal industry analyst with S&P Global Market Intelligence in a recent report by the Sierra Club. “If there is a light at the end of the tunnel, we can’t see it yet.”

But as bad as things are for the coal industry now, in the timeframe of 2017 through the early to middle 2020s we have a reasonable expectation that renewable energy and efficiencies will produce even stronger market impacts through competition with fossil fuels. Though not as bad off as coal, natural gas has now entered an unenviable market position where rising fuel costs would cause a ramping rate of renewable energy encroachment. A feature that has tended to check natural gas price increases. Meanwhile, presently rising oil prices will only serve to incentivize the current wave of electrical vehicle adoption.

rapidly-falling-battery-prices

(Rapidly falling battery prices along with falling solar and wind energy prices will eventually make fossil fuels non-competitive on the basis of cost. Meanwhile, ramping climate harms produce strong incentives for switching energy sources now. Image source: Bloomberg.)

During this time, first cheap renewables and then cheap batteries will increasingly flood the energy markets. Applications that directly replace fossil fuels in core markets will expand. Meanwhile polices like the Clean Power Plan in the US and COP 21 on the global level will continue to erode policy supports for traditionally dominant but dirty fuels.

Coal, Oil and Gas — Noncompetitive Bad Energy Actors

The choices for fossil fuel industry will tend to be winnowed down. Competition will be less and less of an option. Meanwhile, direct attempts to dominate markets through regulatory capture by placing aligned politicians in positions of power in order to strong-arm energy policy will tend to take place more and more often. But such attempts require the expense of political capital and can quickly turn sour — resulting in public backlash. As we have seen in Nevada, Hawaii, Australia and the UK, such actions have only served to slow renewable energy advances in markets — not to halt them entirely. Furthermore, reprisals against agencies promoting fossil fuels have gained a good deal of sting — as we saw in Nevada this year when a major casino and big utility customer decided to pull the plug on its fossil fueled electricity and switch to off-grid solar in the wake of increasing net metering costs.

All that said, we should be very clear that the outcome of this fight over market dominance and for effective climate change mitigation isn’t certain. The fossil fuel industry is one of the most powerful political and economic forces in the world. And even though they are now bad actors on the issue of climate change — which threatens both human civilization and many of the species now living on Earth with collapse and mass extinction — they still, in 2016, retain a great deal of economic and political clout. And this clout endows these industries with an ability to enforce monopolies that effectively capture various markets and delay or halt renewable energy development in certain regions.

Trends Still Favor Renewables

Nonetheless, the trends for renewable energy currently remain pretty strong, despite widespread fossil fuel industry attempts to freeze out development of these alternative sources. And collapsing economic power through expanding competition by renewables would ultimately result in a loss of political power as well. In such cases, we wouldn’t expect a crash in economic power and political influence by fossil fuel interests to occur in a linear fashion — but instead to reach tipping points after which radical change occurs. And over the next 10 years there’s a high likelihood that a number of these energy market tipping points will be reached.

Links:

Here’s How Electric Cars Will Cause the Next Oil Crisis

Vegas Casino Plans to Leave Warren Buffet’s Nevada Utility

The Coal Industry is Bankrupt

Clean Power Plan

COP 21

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What Solar Panel Dumping Case Reveals About How Chinese Manufacturers Dominate Markets

Today the Federal Trade Commission ruled against Chinese solar manufacturers, finding that government subsidies harmed US companies. In the ruling, Chinese companies were assigned duties between 2.9 to 4.7 percent. The duties depended on the degree of subsidy assistance Chinese companies received. Another ruling will be made in June to determine the degree to which Chinese companies have been dumping solar panels on the US market. This additional ruling is expected to result in further duties and penalties.

The Solar Surge

These rulings and investigations come after a massive surge in amazingly cheap Chinese solar panel exports to the US since 2008. This influx, which almost everyone with any honesty is calling dumping, has resulted in average solar panel prices falling from $3 to less than $1 per watt over the same period. In fact, the lowest cost solar panels on the US market are now selling for less than 84 cents per watt. This extensive dumping has resulted in three US solar companies, including Solyndra, being forced to file for bankruptcy and has negatively affected every other US solar manufacturer.

The silver lining is that US solar energy consumers now have access to solar panels at much lower costs. And these panels are now rapidly closing the gap between fossil fuels, likely to beat coal on cost by 2015. But the rapidly falling prices may well drive all manufacturers except the Chinese out of this critical market. And this state-sponsored international monopoly may well be benevolent if not for the stark history of Chinese monopolization in other key areas. For example, Chinese state-sponsored industry moved to rapidly dominate rare earth metals and are now setting higher prices or denying access to rare earth metals altogether. Similar behavior with regards to solar panels may well prove disastrous in a world needing a rapid transition to mitigate the effects of climate change.

Government Spending/Perks Key to Chinese Dominance

So how do Chinese companies come so rapidly to dominate markets like solar? The answer is a combination of cheap loans, government payments on interest for the these loans, and predatory business practices. Cheap loans provided by the Chinese government resulted in the emergence of 700 new solar companies in China over the last ten years. In total, because of these loans, the Chinese now possess a capacity to manufacture 40 gigawatts of solar panels within one year. That’s enough solar panels to power all of New York State in just one year.

These state-sponsored loans may have provided the impetus for developing a world-dominating industry, but a number of other ‘perks’ aided the Chinese industry as well. For example, many Chinese manufacturers were able to purchase land directly from the state at 1/3 standard price levels. In addition, Chinese monopolization of rare earth metals has led to preferential pricing for raw materials feeding in to this state-sponsored industry.

But these aren’t the only advantages state sponsored Chinese companies enjoy. In addition to low interest loans provided to Chinese solar manufacturers, often the interest on these loans are paid, pro-bono, by the Chinese government.

So imagine you are a Chinese solar manufacturer. You receive nearly unlimited low interest loans from the government. You have much or all of that interest paid by provincial governments. The land for your plants is sold to you at major discounts and your raw materials are supplied to you at the lowest prices possible. This is all facilitated by the state-sponsored system. And, finally, you benefit from relatively low labor costs which give you a 3-4 percent price advantage. In fact, the other state-sponsored benefits are so great that the labor cost difference may as well be nil. In such a beneficial environment, it would require a stunning failure for you not to achieve market dominance.

Chinese Capitalize on State-sponsored Consumer Incentives

But what other benefits could a solar manufacturer in China look to gain from? Not just from the Chinese state, but from other states’ programs as well. Up until last year, the Chinese solar industry was almost entirely positioned for export. This strategy allowed them to benefit from state-funded programs that provided incentives for solar panel purchases. Already receiving so many benefits from the Chinese state, these solar exporters were rapidly able to dominate markets in Europe and the US, driving many other solar manufacturers to lay-offs and bankruptcies.

Meanwhile, the West suffers from an ideology that dramatically opposes the level of state assistance currently provided by the Chinese government. So most Western programs have been aimed at providing support for consumer purchases, not to providing seed funds for a fledgling industry, and, thus, those funds have been indirectly grabbed up by the surging Chinese solar industry.

Tariffs, Trade Barriers not Enough. Best Solution is Comparative Levels of Investment

In total, China is investing the equivalent to 90 billion dollars each year in alternative energy and efficiency. And this  investment will be enough to dramatically reduce prices for both wind and solar power by sheer scale alone. If the United States and other western governments wish to host industries that become anywhere near as competitive, they will need to provide comparative levels of direct funding, year after year. Otherwise, the Western manufacturers will fail and the key emerging solar and wind industries will be entirely ceded to the Chinese. Enacting trade barriers, penalties and tariffs would, at best, only slow the transition to Chinese state-sponsored monopolization.

 

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