As we approach ‘peak oil’, what does this mean for the fossil fuel industry and alternative sources of energy?

Henry Ford and Thomas Edison became great friends in their later years. They exchanged gifts, bought neighbouring holiday homes in Florida and took road trips around America in a Ford Model T. They even worked together on a project to develop an affordable electric vehicle, although the prototype was eventually abandoned due to high costs.1

Around this time, the two friends reportedly made a bet that still resonates today: Ford predicted oil would continue to dominate as the world’s principal source of power, while Edison backed electricity. For a long time, it looked as if Ford had comfortably won the bet. Vast underground oil reserves discovered in the Middle East, the US and elsewhere made petroleum more practical and affordable, helping launch the Age of Oil in the second half of the 20th century. 

Fast forward to today, and electric cars are again threatening oil’s supremacy. A century after Ford and Edison’s failed experiment, Ford’s company is investing heavily in electric vehicles. Global sales growth in electric cars continues to outpace that of internal combustion engine (ICE) vehicles. The market share of electric cars relative to the total number of new passenger vehicles registered globally remains small, at about 2.4 per cent in 2018,2 but may surge to as much as a quarter of total global sales by 2025, according to the Centre of Automotive Management.

These developments point to a wider trend. What’s happening in the auto industry is a microcosm of a global energy transition that could bring about global peak demand for fossil fuels as early as 2023.3 Industry giant BP estimates a later peak for oil demand,4 placing it between 2035 and 2040; others forecast it will fall somewhere in-between. What is clear is that oil’s dominance is waning, and electricity demand is on the rise. However, it is far from certain exactly what will replace oil to supply energy in the future, how this transition may evolve and over what time frame. There will be significant implications for economies and financial markets. The global environmental consequences are – to put it mildly – considerable.  

figure 1: proven oil reserves

The transition

The term ‘peak oil’ means something different now to what it did in the past, when it referred to perceived limitations in supply. Following the 1973 oil crisis, when the price of a barrel of crude oil nearly quadrupled within months, US President Jimmy Carter predicted world demand for oil would overtake supply by the 1980s. In fact, new technology to extract oil from shale deposits and tar sands has vastly extended the reserves that are technically and economically recoverable, especially in the last decade (see figure 1, above).

Investors will have a lot of exposure to fossil fuels just by being in liquid financial markets

Thomas Covert, assistant professor at University of Chicago’s Booth School of Business, studies investment behaviour in the energy market. He says data from BP consistently shows most oil-producing nations find significantly more oil and gas than they consume in most years. Hydraulic fracturing technology helped launch the shale oil revolution in the US, which surpassed Russia and Saudi Arabia to become the world’s largest petroleum producer – and a net oil exporter for the first time in 75 years – in 2018.5

“Energy forecasters have estimated there are more shale resources outside of the United States than within the United States, and probably by a large amount,” Covert says. “To the extent that investors believe what’s happened in the United States is even a little bit replicable elsewhere, there will likely be a lot more supply coming.”

The planet’s oil resources are likely to be anywhere between 2.8 and four times larger than the existing proven reserves of about 1.6 trillion barrels.7 But there is a problem. Burning fossil fuels is causing irreparable damage to the environment and threatens to wreak havoc across economies and societies if it continues at its current rate. As Dieter Helm, professor of energy policy at Oxford University, drily put it: “There is more than enough [oil] to fry the planet many times over.”8

These concerns are one of the principal drivers behind the current energy transition. Fossil fuels – oil, coal and natural gas – are not the only source of greenhouse gas emissions; others include agricultural land use9 (see figure 2, see below); nevertheless, fossil fuels are the major contributor to carbon dioxide (CO2) pollution. This means reversing growth in global consumption of fossil fuels will be crucial in a multi-pronged effort to meet the goals of the Paris Agreement, which aims to limit the increase in global average temperatures to well below two degrees Celsius above pre-industrial levels.  The stakes could not be higher.

figure 2; Global greenhouse gas emissions

“The last time the world was three degrees Celsius warmer was around three million years ago, and there were palm trees and crocodiles in northern Greenland,” says Rick Stathers, senior ESG analyst at Aviva Investors. “We know this by analysing fossil records when the earth was three degrees warmer. That means the sub-tropics will become uninhabitable and hundreds of millions of people will need to migrate. From a scientific perspective, the transition from our current energy system to a more sustainable, low-carbon one needs to be much more rapid than it is now.”

While there is widespread recognition the energy transition needs to happen, history shows it is likely to be economically, culturally and geographically uneven. The replacement of wood by coal in the 19th century, and coal by oil in the 20th century, created new paradigms in the energy system. This process had three dimensions in each case: shifts in tangible elements such as technology, infrastructure and distribution chains; industry coalitions and investment patterns; and political and social regimes that influenced belief systems, social practices and regulations.10

The current transition is likely to follow a similar pattern. Governments are working to cut their reliance on fossil fuels and introducing new regulations to curtail their use. Renewable alternatives are becoming more financially viable and technologically advanced. And companies and investors are adapting their business models and shifting their strategies.

Managing the transition: countries

Starting with the global policy response, a wealth of research shows the world is stuck between two main hazards in grappling with climate change. If countries move too quickly to limit carbon emissions, large swathes of the oil and gas sector will be severely affected. Barclays estimated as much as US$30 trillion in revenues could be wiped off over a period of 25 years for companies in the fossil fuel industry if the world cut carbon emissions to their target level overnight.11

On the other hand, there is the even greater risk of inaction. If carbon emissions are not curtailed at all, it is probable global temperatures would rise six degrees by 2100. Research from the Economist Intelligence Unit, commissioned by Aviva Investors, shows the financial cost of physical damage caused by such a profound environmental shock would be in the order of US$43 trillion, discounted to present-day value. That amounts to 30 per cent of the world’s entire stock of manageable assets.

“The point of the Paris Agreement was to steer the global economy between these two extremes by encouraging a smooth transition towards a low-carbon future,” explains Steve Waygood, chief responsible investment officer at Aviva Investors. “This is in the best interests of governments, markets and societies.”

Most countries around the world have reaffirmed their commitment to the Paris Agreement, but the results have been mixed. Economies that depend heavily on oil are examining how they can diversify. Saudi Arabia, under the King Salman Renewable Energy Initiative, is building its first solar energy project to supply 45,000 households with power in Al Jouf.12 Such efforts, however, are likely to be negligible in reducing the nation’s per capita carbon emissions, which have increased tenfold since 1950, according to the Carbon Dioxide Information Analysis Center.13

More importantly, China and the US – the top two polluters that together are responsible for 45 per cent of the world’s greenhouse gas emissions – are at odds in their approaches to the Paris Agreement. The US is in the process of withdrawing from the accord under President Trump, while China has taken an unlikely lead as one of the most active countries in introducing new rules to reduce fossil fuel demand. According to the Global Carbon Project, China is responsible for more pollution than any other country worldwide, with about 30 per cent of CO2 emissions in 2018. 

Targeting peak CO2 emissions by 2030, China announced a range of policies in its latest five-year plan for energy development. Kelly Sims Gallagher, professor of energy and environmental policy at Tufts University's Fletcher School, said China has taken a comprehensive approach with specific domestic energy and climate policies for every sector. An emissions-trading system was established in 2018 for the power sector, on top of existing subsidies for renewables. In transportation, China has fuel economy standards for light- and heavy-duty vehicles. Energy efficiency standards have been promulgated in nearly all sectors, and the overall economic reform strategy is focused on moving towards lighter, low-carbon operations within industries. 

China’s foreign policies, however, have not been as environmentally friendly. While China has cut the number of new coal-fired plants within its borders, it is the biggest financier of fossil fuel-based power plants, specifically coal plants, in Central and South Asia, said Gallagher, a former US climate policymaker and co-author of Titans of the Climate: Explaining Policy Process in the United States and China. Financial backing under China’s Belt and Road Initiative (BRI), Gallagher added, often comes with a requirement that Chinese equipment using inefficient coal technology be used. The infrastructure being built will have a significant impact on the future of global warming.

In meeting the goals of the Paris Agreement, all nations will have to work together to meet their own targets without potentially increasing carbon emissions elsewhere. Estimates from the Global Carbon Project predict global CO2 emissions are likely to have risen by more than two per cent in 2018, after a 1.6 per cent rise in 2017.14 Substantial regulatory reforms at all levels are needed to discourage fossil fuel consumption, with current policy initiatives tending to combine a mixture of taxes, fees, carbon emission standards and subsidies to encourage energy conservation.

figure 3: Fossil fuel infrastructure value (US$ billion)

Profit: the mother of invention

Even if countries can manage to synchronise government policies, it will not be enough to facilitate the necessary transition away from fossil fuels, argues Samantha Gross, a fellow in the Cross-Brookings Initiative on Energy and Climate at the Brookings Institute. 

“You need policy to kick start things, particularly policy that levels the playing field. After that point, you need economics. Think about the investment needed to change the global energy system. You’re talking about trillions of dollars. That must come from the private sector. Ultimately, people need to be able to make money to solve these problems, and that’s where technology comes in,” Gross says.

Peak oil will bring both opportunities and risks for investors. Carbon Tracker Initiative, which researches the financial impact of climate change, estimates infrastructure assets in the fossil fuel industry are worth a total of about US$25 trillion (see figure 3, see above). As Ian Berry, head of infrastructure equity at Aviva Investors, points out:  “Investors will typically have a lot of exposure to the fossil fuel industry just by being in liquid financial markets.” 

Devising strategies to ensure investment portfolios are resilient during the transition away from oil will be challenging. The fossil fuel sector is capital intensive, with sunk costs in energy infrastructure creating a lot of inertia. Investors who transition too slowly into renewables could miss out on potential benefits. Invest too early, though, and losses could result as new technologies come with higher risk, especially as market conditions change.

In a recent paper, Kingsmill Bond, new energy strategist at Carbon Tracker, detailed four phases of the energy market transition based on his analysis of previous power shifts: ‘Innovation’, in which the penetration rate for new technologies is up to about two per cent; ‘Peaking’, which refers to a market penetration between five and ten per cent for new technologies; ‘Rapid Change’, defined as a market share of between ten and 50 per cent for the new technologies; and ‘End Game’, where new technologies have more than a 50 per cent market share and replace previous incumbents as dominant players. 

In Bond’s view, the most important phase for investors is ‘Peaking’, when the old energy regime begins to plateau and then decline amid growing market share for new entrants. He believes the growth of wind and solar energy indicates we are at the cusp of this stage, during which disruption in the fossil fuel sector will cause “a major reallocation of capital, bankruptcy of companies that are unprepared, and sector restructuring”.15 In the two largest economies, the US and China, solar and wind account for about seven per cent and six per cent of electricity generation in 2017, respectively; the figures are much higher in some European economies.

Investors face three main risks during this phase: systemic, country and stock specific. Systemic risks may increase as the market share for fossil fuels begins to shrink. One example is gas-fired power plants in Europe. The operational cost of some plants has made them far less profitable as energy prices decrease, yet their assets have become ‘stranded’ and difficult to sell. Bond estimates sectors directly impacted by the fossil fuel industry may account for up to a quarter of the stocks and corporate bonds tracked by global ratings agency Fitch.  

Figure 4: Renewable energy penetration

“There is oversupply in the energy industry,” says Lei Wang, senior credit analyst at Aviva Investors. “The shale technology revolution caused natural gas prices to fall in North America, affecting global pricing. Then, as the technology transferred to oil, oil prices have dropped. The industry has not adjusted capacity by that much, so profitability will continue to be an issue.”

Oil majors such as ExxonMobil, Shell and Total are attempting a transition into renewables, although success is by no means certain. 

“It’s a tough road,” Bond says. “One question is ability: do they have the necessary core skills that can be translated to renewables? Another is intellectual culture: incumbents are schooled to assume continuity. History suggests it is very difficult for them to radically restructure.”

Arguably, Big Oil’s established presence in the energy sector places it in a strong position to benefit from the rise in renewables, says Stephanie Niven, global equity portfolio manager at Aviva Investors. Some have already integrated it into their business strategies. Total, for example, entered the solar power business in 2011 with a controlling interest in SunPower, a manufacturer of high-efficiency photovoltaic cells. In 2014, it built one of the largest solar farms in the Mojave Desert near Los Angeles with a capacity of 700 megawatts (MW), followed three years later with the first solar power plant in Nanao, Japan.16 In its strongest move yet to cater to the expected higher demand for electricity at the expense of oil, Total bought a 74.3 per cent share of Paris-based utility company Direct Energy in April 2018.17

Others have taken it a step further. Denmark’s Dong Energy, which was originally short for Danish Oil and Natural Gas, divested its entire upstream oil and gas business in 2017 and changed its name to Orsted to focus on renewables, including offshore wind, solar and biomass, while halting all use of coal. Interestingly, Orsted announced in November 2018 an agreement to provide 500MW of wind and solar power to ExxonMobil for the latter’s operations in the Permian Basin, the US’ largest shale oil-producing region, in Texas and New Mexico. 

“We’re seeing more oil companies taking steps to diversify their business models,” Niven said. “It’s difficult to call a point in time when peak oil demand may occur, but it’s definitely the direction of travel. It’s important for oil and gas companies to be nimbler, less capital intensive, and able to consistently extract additional inefficiencies.”

The rise of renewables

The transition away from oil will bring opportunities, as well as risks, for investors. Thanks to technological advances, customer demand and government policy incentives, greener alternatives are becoming more viable as investments. 

In 2017, renewable energy accounted for two-thirds of global net electricity capacity growth, according to the International Energy Agency (IEA).18

The same organisation estimates renewable capacity will grow by 46 per cent between 2018 and 2023. Clean energy also encompasses hydropower, nuclear, bioenergy and geothermal, but wind and solar are among the fastest growing.

“We’ve chosen to invest because the price of the energy produced from renewables can have limited or no exposure to the prevailing market price, typically driven by the cost of energy produced from fossil fuels. Renewables can be more stable and lower risk,” says Berry, whose infrastructure equity portfolio is heavily invested in renewables. “Many renewables no longer need subsidies from governments. The one problem with that from an investment perspective is whether cash flows and valuations will remain as stable in the future.”

Despite this caveat, the trends are positive: average costs for producing wind and solar energy have dropped to levels that are now competitive with fossil fuels, without sacrificing performance, according to Deloitte.19 In the past five years, average wind and solar costs in the US fell to about $5 usage charge per kilowatt hour (c/kWh) and $6 c/kWh, from $11 c/kWh and $17 c/kWh respectively.20 This follows a global trend for the effective cost of energy to fall over the long term, due to increased efficiency, cost controls and competition.

Solar and wind farms cost less to maintain than they once did, adding to their growing advantage over fossil fuels, says Berry. “There are shades of grey, but simplistically it is much easier to maintain solar panels because you either do nothing or you wash it. The cost to keep it going is maybe ten per cent of revenues. A gas turbine power station, on the other hand, may require 60 per cent of revenues to operate. This is not quite a fair comparison since part of it is buying the fuel. Nevertheless, operating costs as a percentage of revenue are still very high.”

Unlike fossil fuels, solar and wind are free resources. Furthermore, when a solar panel or wind turbine generates electricity, it is immediately available to consumers.21 By comparison, fossil fuel plants need to burn coal, oil or natural gas to drive large turbines that produce electricity. According to the Oxford Institute for Energy Studies, about 60 per cent of the energy content of coal is lost in the process of converting it into electricity. Internal combustion vehicles fare even worse, with about 80 per cent of the energy lost. Therefore, each terawatt (TWh) of energy generated by renewables can displace 2.5TWh of coal and 5TWh of petrol. 

Technological advances

The increased efficiency of renewable sources makes them well suited to powering technologies of the future. If solar and wind power can be used to fuel electric cars, for example, the efficiency improvements over oil are on a scale that simply cannot be ignored.

New vehicles are not the only technology to favour electricity. Robotics, artificial intelligence, quantum computers and cryptocurrencies all run on electricity. PwC economist Alex de Vries reckons the annual energy consumption for Bitcoin alone was comparable to that of Ireland in 2018,22 making energy efficiency particularly important. 

The next step in the progress of renewables is likely to involve the development of high-tech batteries to store energy when the wind isn’t blowing and the sun isn’t shining – a modern variation of the challenge that faced Ford and Edison way back in the 1910s. 

“A fundamental problem with the energy market concerns the storage of power.  If we can’t find the technology at scale to allow for that in a cost-effective manner, renewables won’t fulfil their potential,” says Isaac Vaz, director of infrastructure equity at Aviva Investors.

Today’s batteries have some major disadvantages. Chief among them is energy density, a measure of how much electrical energy can be safely stored per unit of space. Current lithium-ion batteries in electric vehicles, for example, average about 130 watt-hours per kilogram (Wh/kg), far from the 235Wh/kg needed for a drive range of about 500 kilometres in a single charge.23

“To have an impact on the energy market and compete with other types of energy storage solutions, batteries need to have a longer storage duration,” Vaz adds. 

However, there are significant trade-offs between energy density improvements and flexibility, safety and costs, with the following challenges in current energy storage technology: loss of efficiency when charging or discharging power; susceptibility to temperature or weather conditions; and degradation patterns of batteries over time.

But a race to build a better battery involving hundreds of companies worldwide is well underway. “Battery technology has yet to keep pace with demand,” Niven added.  “We’re beginning to see the likes of  Tesla pushing the boundaries of battery technology. Utility companies are pushing it and mobile phone manufacturers are pushing it. We’ve got three industries coming together to solve the limitations of batteries.”

There is evidence these investments are paying off. In its first quarterly update in 2018, Tesla said its Model 3 battery has “the highest energy density cells used in any electric vehicle”.24 The company did not give specific figures in Wh/kg terms, though industry estimates indicate the energy density measure to be around 200Wh/kg, nearly in reach of the industry’s 235Wh/kg milestone. 

Another key improvement is in costs. While still relatively high compared to other energy sources, battery costs have fallen by 75 per cent since 2010, according to HSBC.25 By 2030, the batteries market is estimated to total about US$250 billion, compared with US$45 billion in 2017. 

There are grounds for optimism that improved technology will enable a transition to cleaner energy

Given the financial and technological incentives, there are grounds for optimism that improved technology will enable a transition to cleaner energy sources.  We have come a long way since Ford and Edison’s wager, and Edison’s bet on electricity looks to be increasingly prescient – even if he had to forgo bragging rights during his lifetime. While there are big obstacles in the transition to renewables from oil, the smart money is likely to follow a greener future.


  1. ‘The history of the electric car,’ US Department of Energy, 15 September 2014.
  2. ‘Rising demand: 2.1 million e-vehicles sold,’ Centre of Automotive Management, 17 January 2019.
  3. Kingsmill Bond, ‘2020 vision: why you should see peak fossil fuels coming,’ Carbon Tracker Initiative, September 2018.
  4. ‘BP Energy Outlook 2018,’ BP, 2018.
  5. Javier Blas, ‘The US just became a net oil exporter for the first time in 75 Years,’ Bloomberg, 6 December 2018.
  6. ‘BP Statistical Review of World Energy,’ BP, June 2018.
  7. Thomas Covert, Michael Greenstone and Christopher R Knittel, ‘Will we ever stop using fossil fuels?’ Journal of Economic Perspectives, Winter 2016, 
  8. Dieter Helm, ‘The future of fossil fuels – is it the end?’ Oxford Review of Economic Policy, Volume 32, Number 2, 2016.
  9. ‘Global Greenhouse Gas Emissions Data,’ US Environmental Protection Agency, January 2017.
  10. Bassam Fattouh, Rahmatallah Poudineh and Rob West, ‘The rise of renewables and energy transition: what adaptation strategy for oil companies, and oil-exporting countries?’ The Oxford Institute for Energy Studies, May 2018.  
  11. Mark Lewis, Lydia Rainforth and James Stettler, ‘Climate change: Warming up for COP-21,’ Barclays, 24 November 2015. (The US$30 trillion estimate in this report is an updated figure from author Mark Lewis in February 2019 using the same methodology, and accounting for lower expected oil price projections to 2040. The updated estimate is lower than the original US$33 trillion estimate made in 2015.)
  12. Anthony Dipaola, ‘It’s hard to be the saudi arabia of solar,’ Bloomberg, 16 December 2018.
  13. ‘Saudi Arabia Fossil Fuel CO2 Emissions,’ Carbon Dioxide Information Analysis Center, 2012.
  14. ‘Global CO2 emissions rise again in 2018, according to latest data,’ Global Carbon Project, December 2018.
  15. See footnote 3.
  16. ‘Our expertise in solar energy,’ Total, 2019.
  17. Francois De Beaupuy, ‘France’s oil major is getting ready for an electric future,’ Bloomberg, 18 April 2018.
  18. ‘Renewables 2018: Market analysis and forecast from 2018 to 2023,’ International Energy Agency, 2018.
  19. ‘Global renewable energy trends: Solar and wind move from mainstream to preferred,’ Deloitte, September 2018.
  20. See footnote 10.
  21. Bassam Fattouh, Rahmatallah Poudineh and Rob West, ‘The rise of renewables and energy transition: what adaptation strategy for oil companies and oil-exporting countries?’ Oxford Institute for Energy Studies, 2018.
  22. Alex de Vries, ‘Bitcoin’s growing energy problem,’ Joule, 16 May 2018.
  23. ‘Reality check,’ Nature, 12 April 2018.
  24. ‘Tesla first quarter 2018 update,’ Tesla, 2 May 2018.
  25. ‘Navigating the energy transformation’, HSBC, October 2018.

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