Monday, February 9, 2015

Deutsche Bank Says Climate Change is Driving Down Oil Demand and Prices

Deutsche Bank released a report that says decreased demand due to the growing concern about climate change is the reason that the price of oil has dropped so substantially. The Deutsche Bank Research House market analysis published in the January issue of Konzept titled, "Peak Carbon before Peak Oil," intimates the beginning of the end of fossil fuels. Deutsche Bank speaks with authority as they have significant investment partnerships with coal oil and gas companies. So their frank talk about "the second worst global decline in oil prices in 30 years," is something that even the most hardened climate deniers need to hear.

According to the report, concerns about peak carbon is the primary driver of low oil prices. The unprecedented concern about climate change and growing political momentum are putting downward pressure on fossil fuels. It is widely known that climate change is caused mostly by emissions from the burning of fossil fuels. If we are to keep temperatures below the internationally agreed upon upper threshold limit (2 degrees Celsius above pre-industrial norms) we will have to substantially reduce our consumption of fossil fuels.

The forthcoming global climate agreement due to be signed at UN Climate Talks in Paris this year will lay the foundation for global emissions reduction. The net result is that demand for fossil fuels will decline at an ever increasing pace.

As explained in the report, "CO2 emissions have to peak in 2020 and thereafter fall by 2.5 per cent a year through to 2035. The corresponding forecast for oil demand is a decline of 0.5 per cent a year, compared with a 1.5 per cent a year increase over the last two decades."

The US and China, the world's two largest consumers of fossil fuels, have agreed to reduce their oil demand by 15 billion barrels or around 10 per cent over the next 15 years.

In light of declining demand, the report questions the value of ongoing fossil fuel exploration and development. According to most estimates at least half of all known reserves will have to be kept in the ground if we are to have a chance at keeping global temperatures below the 2 degrees C upper threshold limit.

This is at odds with the fact that the oil industry spent $650 billion to explore and develop new oil reserves in 2014. The question asked in this report is, where are the markets to justify this effort to increase supply? As pointed out in the report, we currently have enough oil and gas for the next 5 decades and enough coal for the next hundred years. At current rates we will burn through our carbon budget in two decades.

"If the currently agreed climate change targets are to be met with any reasonable certainty, over half the proven fossil fuel reserves would have to stay where they are - underground," the report says.

Many oil producers are seeking to sell their remaining fossil fuel assets before the world fully engages a low carbon economy. Saudi Arabia is a case in point, as is Canada's tar sands. As explained in the report, "expect the taps to stay fully turned on as producers rush to monetise their assets."

The declining price of oil also decreases the incentive to seek out new sources of oil. Goldman Sachs identified almost $1 trillion in investments in future oil projects that are no longer profitable under $70 a barrel, let alone under $50 a barrel.

Sheik Ahmed Zaki Yamani said, the stone age did not end for lack of stone, the oil age will end long before the world runs out of oil" Sheik Yamani is a Saudi Arabian politician who was Minister of Oil (Petroleum) and Mineral Resources from 1962 to 1986, and a minister in OPEC for 25 years.

The Deutsche Bank report confirms Sheik Yamani's prophecy, and clearly signals the beginning of the end of fossil fuels. The sun is setting on fossil fuels.

To read the entire Deutsche Bank report click here.

No comments: