The Global Energy Transition: Why Fossil Fuels May Be Losing Steam
Fossil Fuel Overview
Since the Industrial Revolution, which began in the early 18th century, non-renewable fossil fuels have been the main resources for the world’s energy supply. Oil, natural gas, and coal are the main sources of energy that have traditionally been extracted from below the Earth’s surface and converted into useable sources of energy. As global energy consumption continues to rise in the future, energy experts from the U. S. Energy Information Administration expect that fossil fuels will remain as the main sources of global energy in the coming decades. Recent economic projections from the U.S. Department of Energy predict that rapid economic growth in developing countries like China, Brazil, India, and Indonesia will nearly double global energy consumption by 2040 (Cusick, 2016). While the global population continues to grow, fueling an increasing demand for energy, some energy analysts believe that fossil fuels are in their decline phase and will disappear from the global energy profile over the course of the next 50 to 100 years.
From the massive deposits of shale gas in western Texas to the tar sands of northwestern Canada, a resurgence of fossil fuel discoveries amid rapidly changing extraction technology has created a series of new global energy leaders. Many energy experts point to the vast pockets of shale gas within America’s Permian Basin, Brazil’s massive new discoveries of offshore oil reserves, and Qatar’s newly revised 896 trillion cubic feet of natural gas reserves as proof that the world will be using fossil fuels for the foreseeable future. However, vast of quantities of fossil fuels still in the ground don’t necessarily indicate that society will continue to use these as the world’s main sources of energy. Forces are starting to converge to render some types of fossil fuels as unappealing sources of energy. These forces include the economics of energy production, impacts to human health and the environment, the emerging viability of renewable sources of energy, and the pursuit of energy independence by nations all around the world.
While fossil fuels have become a critically important element for everyday life and have contributed immensely to the development of the modernized world, the strength of the opposing forces to the industry has already started to impact coal and petroleum, which are losing their appeal as energy sources in many of the world’s developed countries. Renewable sources of energy and natural gas have started to replace coal-fired power plants, while the rise of electric vehicles has already started to replace the petroleum-based internal combustion engine. Moreover, many progressive cities and nations around the world have announced plans to completely ban vehicles powered by fossil fuels within the coming decades.
As the signals of the global energy transition are starting to become increasingly apparent, it will be imperative not to ignore the incremental changes in the world’s energy market. Despite the growing signs that changes are occurring within the global energy portfolio, fossil fuels, including coal, oil, and natural gas, are being consumed in ever-great quantities with each passing year. While the U.S. and other developed nations are starting to hinder the development of the coal industry, countries like China, India, and Bangladesh are more than making up for the bankruptcy of American coal companies like Murray Energy. While 540 coal-fired power plants have closed in the U.S. since 2010, Bangladesh is currently implementing plans to increase its coal power capacity by 63 times over present-day coal power generation, with a total of 33,200 megawatts of new coal-fired power plants under construction and pre-construction (TIB, 2019). Even with the paradox of the world’s developed countries abandoning coal, while the developing countries continue to rely on coal, energy experts believe that nations determinedly attached to fossil fuels will ultimately end up being less economically competitive in the long run.
Adapting the world’s infrastructure toward a future with less fossil fuels will take decades at a minimum. As some corporations and even entire countries begin the transition, replacing the world’s energy sources will create a vast array of new markets for technology related to energy storage, smart electronics, transportation systems, and physical infrastructure related to alternative forms of energy extraction. In terms of the supply and demand of fossil fuels, forward-thinking energy experts believe that energy prices for oil, coal, and natural gas will be subject to dramatic high and low swings as global economies begin to implement strategies to overhaul their energy profiles (Meehan, 2017). While global leaders have their work cut out for themselves with regards to ensuring that local and regional economies are able to smoothly transition to new sources of energy, the world’s major fossil fuel exporters face the biggest challenges with adapting their economies away from traditional fossil fuel extraction toward more sustainable methods of long-term economic growth.
Some of the world’s largest petroleum-exporting countries have already started to identify opportunities to diversify their economies away from fossil fuels. The Organization of the Petroleum Exporting Countries (OPEC) has also expressed the need for the group of 14 nations involved in the oil cartel to work together to safeguard against energy price fluctuations and persistent macroeconomic uncertainties. Environmental concerns have recently started to put more pressure on OPEC’s operations and have led some prominent financial institutions to divest their funds from fossil fuel investments. OPEC members continue to plan for additional United Nations-led climate change agreements that could further target their operations. OPEC turbulence has even led some countries to announce departure plans from the oil cartel. Ecuador, which first joined OPEC in 1973, was the latest country to abandon the organization after a long battle between the country’s leaders and other OPEC members.
Saudi Arabia’s Transition
In addition to OPEC turmoil about the future of the world’s oil market, Saudi Arabia has been moving forward with plans to diversify its economy away from traditional fossil fuel production and toward a more economically focused global financial hub. Home to roughly 16 percent of the world’s crude oil reserves, Saudi Arabia is starting to employ the use of costly enhanced oil recovery technology, which is a sign that the easy-to-access reserves are being depleted (Meehan, 2017). In December 2019, Saudi Aramco, Saudi Arabia’s gigantic state-owned oil company, launched the world’s biggest initial public offering (IPO) to convert the oil company into a publicly traded company with shares available for sale on the Saudi stock exchange. Diversifying Saudi Arabia’s economy away from traditional oil production has been one of the top priorities under Crown Prince Mohammad bin Salman’s Vision 2030 campaign.
Selling shares of Saudi Aramco in the global marketplace has helped to transform the state-owned company into an internationally integrated energy business. As the surge in anti-fossil fuel sentiment has spread around the world, some policy experts have expressed concerns about whether or not Saudi Aramco’s IPO will be as successful as the country’s leaders anticipate. While the intention of the IPO was to generate funding to be used in the Vision 2030 campaign to transform the Saudi Arabian economy away from fossil fuels, some economists have highlighted the irony of using an oil-related IPO to diversify a country away from oil production. With investors becoming increasingly focused on ethical endeavors, the listing of the world’s largest oil company on the stock market may not be as well-received as prior IPOs. Many hedge funds have been divesting from fossil fuel investments in order to avoid the price swings of the oil market. As volatile energy prices and investors focused on climate change drive future hedge fund decisions, Saudi Arabia will have to work more diligently on initiatives to raise funding to prepare for the post-fossil fuel era.
The Long-Term Dilemma
The size of global fossil fuel reserves and the dilemma of how long current resources will last are complicated questions that many energy analysts have attempted to address over the years. According to a report from the World Energy Outlook (WEO), the energy that is generated from fossil fuels will continue to remain as the world’s chief source of power and will meet about 84% of global energy demand through 2030 (Shafiee, 2009). However, the U. S. Energy Information Administration has highlighted that sustained growth in wind, solar, and hydro power are projected to be the fastest-growing sources of energy over the next two decades, expanding by approximately 2.6 percent annually through 2040 (Cusick, 2016). While energy analysts continue to reiterate a forecast that underscores the global dominance of coal, gas, and crude oil in the future, concerns over the peak oil theory and the end of new fossil fuel discoveries have continued to make headlines for decades. Even though studies have revealed that there are far more reserves of fossil fuels in the ground than can ever be extracted, the accessibility and economic limits of fossil fuel extraction will dwindle over the next half century.
Given the rapid speed of adoption, and the implementation of new global environmental policies like the Paris Agreement or the U.S. Clean Power Plan, it is clear that the global transition to alternative forms of energy has already begun. The precise timeline for the ultimate decline of fossil fuels is dependent on a variety of factors. Will petroleum engineers continue to ensure that the supply and demand of crude oil can be met at both the national and global levels? Will environmental policies limit the future growth of the fossil fuel industry? How will the effects of climate change impact global economic growth? These are the questions that will determine the rate of decline for fossil fuels and the emergence of economically viable alternatives.
Signs of Transition
The marginal cost of oil, gas, and coal production has been increasing, which has increased the attractiveness of alternatives like solar, wind, and hydro. A downward shift in the price of fossil fuels has been seen as beneficial for consumers. However, as long as prices remain depressed, fossil fuel producers that are utilizing increasingly expensive extraction technologies, and those that are working with hard-to-reach reserves, will continue to experience economic hardships. Moreover, a decline in oilfield production rates has also adversely impacted producers. Average oil field production deterioration from first-year levels increased from a six percent decline before 1970, to a more than 14 percent drop in the 2000–2007 period (IEA, 2013). Oil producers are now starting to become forced to invest in smaller hydrocarbon projects as the larger reserves are becoming increasingly depleted. The marginal cost of a smaller project is often much higher for a company than that of a large and established project.
The emergence of large investments in alternative sources of energy is one of the most visible signs of the global energy transition. As renewable energy portfolio standards are starting to become more common, renewably sourced energy installations have become economically competitive with traditional forms of energy generation. Instead of celebrating the discovery of new fossil fuel reserves, many countries have been celebrating newly implemented initiatives to conserve energy and build renewable energy generation capacity. The growing awareness of the long-term environmental and human health impacts from fossil fuel generation have contributed to a new stream of energy-related consciousness about the need to reduce global dependence on fossil fuels. Renewable energy generation better aligns with global sustainability initiatives and efforts to embrace a more socially responsible world. As energy priorities have become more aligned with the health of humanity and the environment, the fossil fuel industry will need to respond to policies aimed at supporting the looming global energy transition.
Cusick, D. (2016). “Fossil Fuels May Not Dwindle Anytime Soon.” Scientific American.
International Energy Agency. (2013). “Resources to Reserves 2013: Oil, Gas and Coal Technologies for the Energy Markets of the Future.” Organization for Economic Cooperation Development/International Energy Agency.
Meehan, G. (2017). “Thank You Fossil Fuels and Good Night: The 21st Century’s Energy Transition.” The University of Utah Press: Salt Lake City
Shafiee, S. (2009). “When will fossil fuel reserves be diminished?” Science Direct.
TIB. (2019). “Choked by Coal: The Carbon Catastrophe in Bangladesh.” Transparency International Bangladesh.