[Peakoil] Stranded fossil states are the next traumatic chapter of the great energy shift

[jenny.goldie at optusnet.com.au]

Stranded fossil states are the next traumatic chapter of the great energy
shift

Venezuela is already a stranded fossil state but others, even in the Gulf,
face a tipping point

 
<https://www.telegraph.co.uk/business/2020/02/12/stranded-fossil-states-next
-traumatic-chapter-great-energy-shift/>
https://www.telegraph.co.uk/business/2020/02/12/stranded-fossil-states-next-
traumatic-chapter-great-energy-shift/

 <https://www.telegraph.co.uk/authors/ambrose-evans-pritchard/> AMBROSE
EVANS-PRITCHARD 

12 FEBRUARY 2020 . 10:28PM

We know what a stranded fossil state looks like. It took five years for the
halving of oil prices to defund Venezuela's rentier petro-regime and reduce
what used to be Latin America's richest country to a humanitarian basket
case.

Once the downward spiral began, it became self-feeding and unstoppable.
<https://www.telegraph.co.uk/business/2019/02/02/crippled-venezuela-teeters-
brink/> The economy has contracted by two thirds. Nearly five million people
have left the country since 2018. It is the world's largest refugee crisis
after Syria.

Brent oil prices today far exceed Venezuela's extraction costs, but that is
irrelevant. What matters is the 'fiscal break-even cost' needed to sustain
the socialist Chavista machine. The International Monetary Fund thinks this
is over $200 a barrel.

The Orinoco tar sands - the world's largest crude reserves on paper -
produce high-cost dirty crude that will never be viable in the post-Paris
era of decarbonisation. They are worthless.

Venezuela is the first to go of RBC Capital's 'fragile five', but several
others are heading towards social collapse and sovereign insolvency.

Behind them in this grim parade come the big beasts of the Persian Gulf, and
arguably Russia since it depends on fossil revenues to cover 60pc of its
budget. 

The timing of this massive geopolitical upset is subject to hot dispute. Yet
there can no longer be any doubt that the twin-pincers of draconian carbon
curbs and plummeting renewable costs will sweep away much of the old energy
order, and that markets will bring this forward demolition job soon enough
with Schumpeterian ferocity. 

"The world still looks more or less as it always was, so it is hard for
people to believe that tomorrow is going to be completely different. But
things are moving incredible speed," said Professor Alan Riley, a global
energy expert at the Atlantic Council. 

"Nobody wants to talk about the geopolitical implications because they are
too disturbing. Once it starts we are going to face crises in the Middle
East and Russia at the same time. We could see several more Syrias," he
said.

Mohammed Barkindo, OPEC's Nigerian secretary-general, is fully aware of the
threat. I was in the room in Davos when he let rip against the virtue
flaunters and the green colonialism of his old Western masters, so blithely
willing to consign his country to insolvency with scarcely a second thought.
"Here in Europe it is about sloganeering but we live with climate change on
a daily basis. For us it is double jeopardy, " he said, shaking with
emotion.

 
<https://www.telegraph.co.uk/business/2019/03/05/nigeria-become-next-venezue
la-signs-not-good/> Nigeria is caught between the Devil and desert. Fossil
fuels are its fiscal and economic lifeblood. Yet the UN warns that the
country is at existential risk of desertification and a water crisis in the
North, and floods in the South. 

Nothing to do with us? The UN also says Nigeria will be the world's third
most-populous country by 2050 with 300 million people, and what are they
going to do if they cannot survive in their own country? 

Mr Barkindo's home-state has made heroic efforts to break its oil curse. It
has tried to cut the fiscal break-even cost from $130 to $60 since 2017 yet
still relies on hydrocarbon revenues for half its national budget. Austerity
has eaten into core infrastructure spending, shutting off the only way out
of the economic trap. In the meantime, Boko Haram jihadi terrorists and the
Delta Avengers do their worst. So spare a thought for the human casualties
of the great energy transition. 

The protest reflex of Extinction Rebels and the green movement is so
ingrained, and the habit of indignation so strong, that their own success
escapes their notice. In reality finance have already bowed to their agenda,
and technology has already killed fossil fuels, or at least mapped out a
path where this is irreversible. All that remains is the mopping up job by
dynamic markets. 

In that respect Greta groupies and denialist nutters are almost a mirror
image, each hurling insults at the other in an obsolete discussion.

My advice to green friends is to accept your victory and learn to be
magnanimous. The task henceforth is what to do about a billion stranded
losers - because they are most surely coming your way.  My question to
denialist friends is why buck better, cheaper technology?

We already know that Nigeria, Angola, Algeria, Libya, Iraq, Iran, are near
the front of the line for a decarbonisation crisis. What is new is that the
IMF has begun to issue warnings at more than sotto voce volume to Saudi
Arabia and the Gulf states themselves. 

Its latest fiscal report on the region said that the Gulf's $2 trillion
wealth cushion will evaporate by 2034 unless states take radical action, end
subsidies, and shrink their exorbitant patronage systems. This timetable is
based on the benign scenario (depending on your point of view) of the
International Energy Agency and the oil establishment that peak crude
consumption remains a faraway threat beyond 2040. 

But the IMF also warns that the tipping point could hit by 2030 if there is
a global carbon tax rising to $50 a tonne by then, cutting real oil prices
to $37 and accelerating the process.

The City has already moved a step further. The London-based Principles for
Responsible Investment, a $90 trillion alliance of investment funds, thinks
the shock will come by the middle of the 2020s, a view informed by its own
market antennae. Electric vehicles will displace 70pc of the world's car
fleet by 2040, and coal will disappear from economic life everywhere.

The premise is that awakened societies will force their leaders to switch to
all-out war on climate change within five years, leading to an "abrupt, and
disorderly" change in the policy regime. This is broadly my conclusion as
well. 

The orthodoxy in Riyadh is that even if peak oil demand does arrive soon, it
will not make a dent on oil prices and might even cause them to rise.
Markets will cut off funding for commercial drilling and shrink supply. Gulf
states with national oil companies and the lowest cost of production will be
the last ones standing in those circumstances, gaining market share and
still enjoying fat rents for decades.

Just as likely is the 'race-to-the-bottom' scenario. "If you think that your
oil is not going to be worth much, you have to get rid of it now," said
Daniel Scholten, a technology professor at Delft University and author of
'The Geopolitics of Renewables'.

This is happening in Norway. The government plans to drill like never before
in the Barents Sea, raising the country's total oil output by 40pc in the
early 2020s. It is the last chance to extract the wealth for the Norwegian
Pension Fund before the window slams shut. Game theory dictates that others
must follow, while laggards will end up with stranded assets.

Prof Scholten said we are moving quickly to an unrecognisable global order
where there are no longer energy importers and exporters. Most countries
will be 'prosumers', generating their own needs locally, first with solar,
wind, and batteries, and in the next phase with such technologies as green
hydrogen. Global energy trade will wither on the vine. 

"It is going to get really ugly for the petro-states, and soon. What worries
me is that the world will stop caring about the Middle East, and we'll just
have failed states everywhere falling apart," he said.

Russia may avert a crisis because of its strategic depth and because natural
gas is deemed a climate 'bridge fuel', though how long gas remains safe is
no longer clear. Liquid air batteries have begun to undercut gas 'peaker'
plants for renewable back-up even in Texas, where gas is more or less free
right now.   

Nor are all Gulf states alike. Abu Dhabi has been riding both brown and
green horses for a long time. It hosts the net-zero city of Masdar. Its
sovereign wealth fund ADIA invests in cutting-edge renewables. "They are
heavily into things like battery technology and it gives them lead in market
intelligence. They are prepared for what is coming and are going to endure
for longer," said Helima Croft from RBC.

Whether the Saudis can make the switch is another matter. The House of
Saud's survival is built on an uneasy concordat with Wahhabi clerics and a
cradle-to-grave welfare system that it can no longer afford. "The social
contract is 'we give you money, and you keep quiet'" said Prof Scholten.

Prince Mohammad bin Salman makes the right economic noises, leaving aside
the rather large matter of his consular etiquette. But is his McKinsey plan
to break oil addiction and diversify into everything from car plants, to
weapons production, and a robotic half-trillion dollar tourist city on Red
Sea called NEON, just a string of castles in the air? And can a capricious
police-state dynasty ever reach authentic technology take-off?

The IMF says revenue tithe paid to petro-states by oil consumers in Europe,
America, China, and the around the world has collapsed by $1.5 trillion a
year since 2014. The richest have yet to tighten their belt accordingly. 

The long view is that rentier petro-states are inimical to democracy,
political pluralism, and market creativity. They are inherently corrupt. The
sooner they are gone, the better it is for the world and above all for their
own people.

Getting from A to B is going to be traumatic.

 

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