Investors in fossil fuel stocks should beware. Here’s why

by 5 Jun, 2018

The global economy could be heading for another sharp downturn triggered by the bursting of the “carbon bubble”, as cheap renewable energy causes a collapse in demand for fossil fuel, research from Britain’s Cambridge University has concluded.

The research predicted that oil companies’ vast reserves of fuel could become “stranded assets” before 2035, having been sharply devalued by the rapid shift to electric cars and wind and solar power. The study said that technological change in the global power generation and transport industries is happening much faster than expected by many industry experts, meaning that fossil fuel prices could collapse suddenly when investors realise what is happening!

For those who hold money in traditional energy stocks (such as Shell, BP, Total and others), this narrative will be one to keep an eye on, especially if you plan on holding these equities for years to come, because their prices could fall as renewable energy becomes more affordable and more mainstream.

The report comes only a few weeks after some of the world’s largest fund management firms announced plans to put pressure on energy companies to take tougher action on carbon emissions, in order to help them survive the global energy transition (away from fossil fuels). However that ambition suffered a major defeat when only 5.1% of shareholders at the Royal Dutch Shell annual meeting in late May backed a resolution to set tougher climate targets, even lower than the level of support for similar measures in 2017 (6.3%). Norway’s $1 trillion sovereign wealth fund was among the entities that voted against the motion, despite calls from major banks including BNP Paribas and HSBC for harsher scrutiny of Shell’s policies on climate change.

Though shareholders may be comfortable with these businesses sticking with traditional models for now — they may be in for a shock if the findings from Cambridge University prove to be correct. The research showed the pace of technological change in countries around the world and found that the share of power generation from renewable sources was growing by an average of 8 per cent a year, and the share of hybrid and pure electric vehicle models was rising by at least 10 per cent a year. This means that energy giants may have to adapt or die as the energy industry continues to change rapidly around them.

If you are holding energy shares in your portfolio right now, should you panic and sell them? Not necessarily. Fossil fuels aren’t going anywhere just yet, as economies including the US and Russia in particular are still highly dependent on them for revenues, but the research does underline the speed of change as policymakers across the world begin to embrace green energy.

Investors with a long time-horizon should not be complacent, as prospects for the fossil-fuel industry are not bright and its demise may have profound economic and geopolitical consequences.

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