The oil and gas industry is pulling the wool over the eyes of the SA government of national unity. It wants us to invest in what is likely to become stranded assets.
The International Energy Agency explains that the longer-term trends are clear: “Fossil fuel technologies have been losing market share to clean energy technologies across various sectors in recent years and in many cases fossil fuel-powered technologies have already seen a peak in sales or additions.”
Though it is forecast that market demand for fossil fuels, including oil and gas, will be volatile, there is a more fundamental trend of new lower-cost (and lower-carbon) technologies being the determinants of economic growth. Notably, this declining demand is important for new oil and gas projects to take into account, just as the economic, financial and climate change risks of major new oil and gas projects must be taken into account.
It is widely agreed that the global energy sector has been in a state of economic decline and that this trend will continue. The latest research substantiates this.
- The energy sector only has 3.9% of the stock market — declining from 28% of the stock market in the 1980s.
- During the decade before Russia’s invasion of Ukraine the energy sector lagged the stock market and for five years it placed last in the stock market.
- At the start of this century coal was the leading source of electricity, commanding 50% of the electricity market. In 2023 it failed to command 20% in any given month.
- The oil and gas sector faces strong competition in most of its major end-product markets. ExxonMobil CEO Darren Woods expects there will be no new vehicles using petrol by 2040 and that the petrol and diesel sector will consequently decline thereafter.
- Plastics use is expected to grow, but recycling will put a damper on industry growth projections (though the lawsuits against Exxon in the US may further reduce industry growth).
Clean energy deployment is accelerating fast, as the costs have fallen by almost 80% in 2010-22. The falling costs of wind and solar are due to the learning curves of clean energy and it is likely that the price difference between fossil fuels and renewables will become larger in future — with renewables likely to become even cheaper.
The result is that electricity, rather than heat from gas, has expanded to become the basis of the entire energy system. Battery storage is now the cheapest new-build technology for peaking purposes (up to two hours of discharge duration) in gas importing regions such as Europe, China or Japan.
Increasing energy efficiency is seeing a strong global focus among policymakers as many governments are introducing new or strengthening existing policies and energy saving programmes. These countries include India, which has enacted new policies for various sectors, and the US through its Inflation Reduction Act.
The latter has stimulated energy efficiency measures, coupled with substantial job creation — more than 2-million Americans now work in energy efficiency, according to the National Resources Defence Council. Other benefits of increasing energy efficiency include increasing energy security, reducing air pollution and needing less clean energy to be installed and reducing costs.
At the same time, increasing energy efficiency has the ability to create a substantial number of jobs. For SA, C40 Cities has calculated that building retrofits have the potential to create and sustain 342,000-560,000 jobs.
Rapid increases in electric vehicle (EV) sales is driving the energy transition as global oil demand is largely due to road transport (45% of demand) and petrochemicals (15%). However, as internal combustion engines (ICEs) are phased out and the uptake of EVs increases, road transport will no longer be a source of oil demand growth. This change is expected to take place as soon as 2030, with projections assuming that the sale of ICE vehicles has already peaked.
Government commitments and policies are rapidly moving to decarbonise the energy sector. For example, SA’s commitment to the Paris Agreement and our own plans for a just transition.
Banks are beginning to develop and implement their own fossil fuel policies. Article 2.1c of the Paris Agreements aims to make “finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development”. The implication of this is that capital needs to be directed towards low-carbon solutions and away from high-carbon activities. Thus, financial institutions such as banks can support the goals of the Paris Agreement through their lending, investment and underwriting activities.
What is interesting is that though neither international nor SA banks are moving as fast as we need to align to the Paris Agreement, there have been some shifts and new policies excluding or limiting fossil fuels investments and exposure to climate change. The May 2024 Reserve Bank guidance notes set out the requirements for banks operating in SA to disclose their climate-related risks and put measures in place to reduce these risks.
China’s growth rate has shaped energy markets and the global environment, accounting for more than 50% of global energy demand growth and 85% of the rise in energy sector CO2 emissions over the past 10 years. However, China’s growth has slowed and there is an expectation that its total energy demand will peak around the middle of this decade. With stable and then slowly declining demand, clean energy growth is sufficient to drive a decline in fossil fuel demand and hence emissions.
The SA government should stop being in denial about the energy transition that is under way and rather allow us to embrace the transition in a way that does the least harm to people in SA while offering the most benefit to the economy.
• Hamilton, an economist and analyst focused on sustainable development and trade, is exploring alternative economic models and the just transition with SA NGOs.
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