The beginning of the end for fossil fuels?

Climate change hysteria.  Tar sands and fracking.  Prices for oil and gasoline on a roller coaster.  What in the world is going on with fossil fuels?

I’m no expert on energy, but as a fascinated observer, it’s been increasingly dawning on me that perhaps we are seeing the beginning of the end of an era.  Of course, the end of fossil fuels will probably take decades to unfold—though change can also happen with surprising speed. (Think: the ubiquitous smartphone is not even ten years old yet!)

A permanent shift towards a low-carbon economy certainly appears to be underway.  A number of key forces are working in concert to fundamentally change how energy is produced and consumed in our modern economies.  These include new production technologies, evolving political realities around climate change, increasing energy efficiency, and the rise of renewable energy and electric vehicles.  All of these are trends that look to be with us for a long time, inexorably pushing us towards a green energy future and away from polluting fossil fuels.

Let’s start with new fossil fuel production technologies, specifically hydraulic fracturing (“fracking”) and tar sands extraction.  In recent years, they have opened up a massive amount of previously inaccessible petroleum to production.  Pioneers of these methods were able to profit handsomely.  However, as they were quickly brought to scale, global oil production skyrocketed.  We now have an unprecedented massive oversupply that drove oil from over $100 per barrel to below $30.  Meanwhile, countries that depend on oil exports for their government budget are pumping more than ever in response to the low price they’re getting, which further exacerbates the glut.  As a result, many oil and gas companies are going bankrupt.  Meanwhile, extraction technologies will continue to evolve and spread, keeping downward pressure on the profitability of the fossil fuel business for the indefinite future.

Next, record temperatures and bizarre weather patterns are fueling an expanding global awareness of climate change.  Normally, cheap oil and gas is a huge incentive for consumers to guzzle and burn more.  This time may be different because of growing international political will to reduce carbon emissions.  The recent UN Climate Change Conference in Paris marked a historic level of agreement among almost all nations that we face a serious challenge that must be met with real long-term action.  While there’s no formalized enforcement of these agreements, politicians are beginning to understand that they will be held accountable for making progress on lowering emissions.  Climate science is making it clear that most of the known fossil fuel reserves will need to be left untouched in the ground in order to avoid climate catastrophe.  This will lead to more mandates for, and massive investments in, better fuel efficiency, renewable energy, and other new technologies (like electric vehicles and grid-level energy storage) for the foreseeable future.

Another factor working against fossil fuels is energy efficiency.  As countries develop and technologies advance, less energy is needed to support a thriving civilization.  The developed countries of the world use approximately the same amount of energy now as they did in the year 2000, during a period in which their populations and economies grew significantly.  While developing countries are responsible for virtually all the recent growth in world energy consumption, this growth will likewise slow and eventually stop in the future as these countries mature economically.  Energy efficiency projects are extremely compelling impact investments, as they provide both financial returns (money that’s no longer needed for energy becomes freed up to pay investors) and the environmental benefits of reduced carbon emissions.  Investment money will continue to pour into this profitable sector for decades to come, ultimately bringing the world into a new era of decreasing fossil fuel consumption.

JF_solar roof300WEBLast but certainly not least, renewable energy is booming, and sales of electric and hybrid vehicles are growing rapidly as well.  Renewable energy, such as wind, solar, and geothermal, is our best hope for replacing fossil fuels as our primary energy source.  Electric vehicles shift our transportation infrastructure from petroleum to electricity, which can be produced renewably.  The growth in these areas could not be coming at a better time.  According to the International Energy Agency, from 2008-14, almost all of the new power generating capacity coming online in developed countries was renewable.  In the world as a whole, almost half of new capacity in that time was renewable.  This growth has been driven in part by dramatically falling prices for solar (photovoltaic) panels, which resulted from large Chinese manufacturers entering the industry.  Government mandates are also forcing utilities to steadily increase the renewable share of their power mix over time.  With most new investment going to renewables, the cost of maintaining our aging fossil fuel infrastructure will continue to rise, and ultimately much of it will be shuttered.  Now consider the growing shift towards electric and hybrid vehicles that are increasingly powered by cheap, non-polluting renewable energy, and the question becomes, how long until fossil fuels are hardly being burned at all anymore?

As impact investors, we have a unique opportunity to help drive this transition to a clean energy economy.  New green investing vehicles are coming to market constantly.  Green bonds, for example, are relatively conservative investments that directly finance renewable energy, energy efficiency, electric vehicles, environmental remediation, pollution controls, water sustainability projects, and green buildings, while paying investors a reasonable return.  Renewable energy facility holding companies, part of an emerging sector known as “yieldcos,” purchase and manage solar and wind farms and pay the proceeds from power sales back to investors.  We can also purchase ownership shares in many of the companies creating and scaling clean energy innovations through mutual funds and private equity funds, and we can divest our portfolios from companies engaged in fossil fuel exploration, production, and distribution.  If you are interested in these kinds of investing opportunities, ask your Natural Investments advisor.  This is an exciting yet crucial moment for our planet.  There’s no time to waste!

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James Frazier

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