We Mean Business

The 3 business risks of using fossil fuels

Are oil companies taking action on the carbon bubble quickly enough?
ShutterstockAlex Freiburg
Are oil companies taking action on the carbon bubble quickly enough?

According to a new report by the International Renewable Energy Agency (IRENA) (PDF), the sweeping changes affecting the energy industry could leave more than $10 trillion in coal, oil, gas and related assets stranded. This underscores a growing number of reports indicating that the fossil fuel industry is on precarious economic ground — posing new risks for companies that rely on oil, gas and coal.

As the fossil fuel industry loses ground, investments in renewables are on the rise, and smart companies are placing their bets on clean energy. 

Launching the report, IRENA Director-General Adnan Z. Amin commented, "The economic case for the energy transition has never been stronger. Today, around the world, new renewable power plants are being built that will generate electricity for less cost than fossil fuel power plants."

Dozens of leading companies — including Apple, General Motors, Goldman Sachs, Pearson, P&G, Walmart and Wells Fargo — have joined the RE100 commitment to turn to renewable energy for 100 percent of their power needs, with The Climate Group in partnership with CDP

As companies consider where to invest in power for their operations and supply chains, they should carefully weigh three main business risks of fossil fuels and look at the promising opportunities presented by clean energy.

1. Oil markets are becoming riskier

A 2016 report by Financial Times energy editor Ed Crooks painted a stark picture of the U.S. oil industry. Since oil prices began to decline in 2014, oil industry equipment was being sold off at auctions for bargain-basement prices. 

The industry’s future outlook is similarly bleak: Over the next 25 years, oil company revenues could fall by at least $22 trillion, equal to twice the GDP of China. Even as revenues fall, the oil industry’s debt is rising. Between 2006 and 2014, the industry’s debts grew from about $1.1 trillion to $3 trillion. Between 2015 and early 2016, 52 of the smaller U.S. oil and gas production companies that were participating in the shale gas boom had entered bankruptcy.

Given the combination of growing debts and declining revenues, 40 percent of U.S. oil and production field service companies have earned B- or below ratings by Standard & Poor’s. In 2015, Bank of England Governor Mark Carney predicted that up to 80 percent of fossil fuel reserves could be stranded. This substantiates IRENA’s prediction that $10 trillion in assets will be stranded, significantly higher than the $320 billion forecast by the International Energy Agency

For companies purchasing energy and fuel, the volatile prices of oil and gas have increased their interest in renewables. Unlike fossil-fuel-powered generation, renewable energy technologies such as wind and solar have low and stable marginal costs, which allows energy consumers to hedge fuel price volatility and future increases in electricity rates.

2. Coal is a shrinking industry and will not rebound

Since the coal mining boom in the 1970s, the U.S. industry has been shrinking, losing 200,000 jobs since 1979, according to the U.S. Bureau of Labor Statistics. Demand for coal has been shrinking for years and changes in technology, such as automation, also have contributed to the decline in jobs. 

In addition, coal-fired plants are closing. In 2015, 94 plants in the United States closed, and 41 closed in 2016. As coal declines, companies are evaluating at renewable energy. In some parts of the United States, unsubsidized solar is about half the price of coal (PDF). Clean energy also holds the promise of jobs: IRENA predicts that the jobs created by the growth in renewable energy will more than make up for the jobs lost due to the transition away from fossil fuels. In 2016, solar industry employment in the United States grew by 25 percent (to 260,000 jobs), surpassing U.S. oil and gas extraction jobs (177,000) and U.S. coal mining jobs (50,000).

3. Investors and the public are concerned about climate risks

The economic risks in the oil and coal markets come at a time of increasing public and investor concern over the climate risk of the fossil fuel industry. 

Earlier this month, BlackRock, the world’s largest asset manager, announced that it will put new pressure on companies to disclose how climate change could affect their business. Shareholders are also holding companies accountable. In 2016, shareholders filed 175 climate-related resolutions, up from 167 in 2016 and 148 in 2015, and resolutions are expected to exceed 200 this year

Investor concern is matched by public concerns about climate change. According to the 2016 Yale survey, 70 percent of Americans believe climate change is happening, and more than half of all American adults are worried about climate change and believe it is already harming people in the United States. A Pew survey revealed strong bipartisan support for expanding solar and wind energy production.

These developments all speak to a larger trend: As fossil fuels present an increasing number of economic and business risks, smart companies are investing in renewable energy to power their growth.