Leading economist warns dim market prospects darken future for fossil fuels at the RIA Conference
Jeff Rubin says convergence of government policy around carbon reduction, shrinking world energy demand and divestment decisions turning fossil fuels into a twilight industry
On the first day of the 2017 RIA Conference in Vancouver, U.S. President Donald Trump announced that the U.S. would be withdrawing from the Paris Agreement, which sets out a global plan to limit global warming below two degrees Celsius, and was signed by nearly every country in the world.
While the president’s move was initially considered a setback to the goals of the Paris Agreement, given the U.S. is the second-largest emitter of carbon emissions in the world, many experts who presented at the conference were confident that President Trump’s move would do little to derail the world’s commitment to reducing global greenhouse gas emissions.
Among them was Jeff Rubin, former chief economist of CIBC World Markets and energy expert, who was the opening keynote speaker at this year’s RIA Conference. In his presentation sponsored by RBC, Rubin argued the fossil fuel industry will be entering its twilight years sooner rather than later for reasons beyond the control of any single politician.
He noted that while fossil fuels such as oil and coal continue to dominate the world’s energy markets in both developed and developing economies, global demand is not likely to ever meet the seemingly endless global supply available thanks, in part to the shale gas revolution in the U.S. and bitumen production in the Canadian oil sands.
“Who can we blame for the glut? Well, guess what? Most of it comes from right here in North America,” he said. “The huge increase in tight oil production from shale formations and the steady increase in heavy oil production from Canadian oil sands, far from being a casualty of the glut, we are the source, which poses an existential dilemma for unconventional producers of oil in North America, particularly for the highest cost producers in the oil sands.”
He noted that various forecasts suggest that long-term oil demand will likely peak over the next decade due to a confluence of factors. International progress that led to the Paris Agreement, will push countries to not only reduce their consumption of carbon intensive energy sources, but also lead to greater energy efficiency and limits to the amount of fossil fuels that can be produced and used. To meet future energy demand, investments into renewable energy sources by some of the largest carbon emitters like China, India and large states in the US will be instrumental in transforming world energy markets, something that organizations like the International Energy Agency and the US Energy Information Administration recognize.
“What future does high cost oil have in the world? A very limited one,” said Rubin. “All scenarios have oil consumption peaking at the end of this decade and irreversibly decline to 2050.”
This broad, long-term trend away from fossil fuels has only accelerated the reticence of institutional investors and other responsible investors to place their funds in carbon-intensive companies. With as much as US$5 trillion in investments divested from fossil fuel-related investments over the last few years, Rubin suggests the pace of divestment is likely to grow for basic investment reasons.
“The divestment campaign against fossil fuels has morphed considerably in the last couple years and has spilled over into the mainstream financial community,” he said. “Its focus is less about social activism and more about the fiduciary responsibility of wealth managers to protect their clients not only from the risks posed by climate change, but risks posed by the efforts to mitigate climate change and the enormous economic consequences such mitigation policies may have.”
“Of course, divestment has received additional impetus from the collapse in fossil fuel prices, which today are half or less than the levels we saw before the last recession, that has shed billions of dollars of market capitalization of fossil fuel stocks around the world. Going forward, climate change targets suggest that far more difficult market conditions lie ahead with decimation of even more market cap for the fossil fuel industry.”