Will the electric vehicle revolution trigger a global economic crisis?

Originally posted on EVANNEX.
Through Charles Morris

The transition to electric vehicles and renewables is already creating winners and losers. We often write about the winners in this space – they include just about everyone who has invested in Tesla since the 2010 IPO, especially those who followed. a purchasing and retention strategy, as well as those who bet on charging infrastructure companies before their recent outbreak following the adoption of the bill on infrastructure. Many fear that workers in the auto industry are among the losers, and this is shaping up to be an issue that could hold back the transition of electric vehicles, especially in self-centered countries like Germany and Japan, where the switch to electric vehicle manufacturing could endanger a substantial number of jobs in the automotive industry.

Every major technological change causes major economic disruption, and economists tend to agree that short-term economic losses will be more than outweighed by the benefits of cleaner air, less environmental damage, and more efficient transportation.

However, the fossil fuel industries continue to invest considerable sums in the development of new oil and gas resources and infrastructure, and in a few years there is a real risk that they will produce much more oil and gas than is necessary for them. future demand. This stubborn refusal to prepare for the new energy economy could leave oil-producing countries with stranded assets worth more than $ 11 trillion by 2036 – a huge loss that could well, according to a new study. trigger an economic crisis.

“In the worst-case scenario, people will continue to invest in fossil fuels until suddenly the demand they expected does not materialize and they realize that what they have is worthless. Then we could see a financial crisis of the magnitude of 2008, ”said lead author of the study, Jean-François Mercure of the University of Exeter. The Guardian. Oil capitals like Houston and Calgary might end up looking like post-industrial Detroit.

The new paper, published in the journal Natural energy, explores how the coming decline in demand for oil and gas will affect the global economy. Fossil fuel reserves, as well as infrastructure such as refineries, machinery and pipelines, are sure to decline in value, with adverse effects on local economies. The most vulnerable assets are those in remote areas and / or harsh environments, where oil and gas are comparatively expensive to extract. The most at risk are the Canadian oil sands, the American shale and the Russian Arctic. Deep-water wells in Brazil and elsewhere, as well as oil fields in the North Sea, are also relatively expensive oil assets.

On the other hand, fossil fuel importers such as the EU, Japan, India and South Korea are expected to benefit from the transition, as the switch to renewables brings savings that can be invested in the development of more renewable energies, the creation of new jobs and the improvement of energy. independence. For the world’s two biggest polluters – the United States and China – the situation is more complex, as each has a diverse economy that includes both significant fossil fuel assets and growing clean energy sectors. .

The study explored several different alternative futures. In a business-as-usual scenario, researchers estimate that global fossil fuel assets – most owned by the United States, Russia and OPEC countries – would be valued at more than $ 25 trillion by now. 2036. However, thanks to the falling costs of renewables, they would be worth a fraction of that figure. As oil prices fall, OPEC countries may decide to turn on the taps and quickly sell fossil fuels in order to generate as much income as possible before the music stops. In this “fire sale” scenario, more fossil fuel assets would be stranded elsewhere in the world. In the United States, some 62% of assets would be stranded by 2036.

Photo courtesy of David Havasi.

In another more optimistic scenario, OPEC accepts production quotas in order to orchestrate a more orderly phase-out and to distribute losses more evenly among oil-producing countries. Even in this brighter cooperative future, trillions of dollars in global fossil fuel assets would eventually fail. The United States, Russia, and China would each suffer an economic blow of around $ 1 trillion by 2036. (This would be more than offset by economic growth over the same period.)

Photo courtesy of Zach Shahan / CleanTechnica.

The prescription for avoiding economic hardship is clear: The United States and other advanced economies must reduce their economic dependence on fossil fuels, and quickly. According to the study’s authors, there is little government policy can do to avoid the projected losses, as the root cause will be a global drop in demand for petroleum products. Much will depend on the policies of low-cost producers such as Saudi Arabia and the other OPEC countries. If they ramp up production and start a massive sell-off, it could trigger a sudden collapse of the global oil industry, and some $ 11 trillion in assets – half the current value of global fossil fuel assets – would be blocked.

Such a race to the bottom must be avoided at all costs. “If Saudi Arabia plays one way and the United States another, then we will see economic, financial and political instability in the world, banks fail and changes in capital flows,” he said. Mercury. To avoid chaos, oil exporters should diversify their economies as quickly as possible. More importantly, the net producers and consumers of oil must work together to equitably distribute the pain and the profit. “It must be a story of international cooperation and not leaving people behind. “

So there is no need to worry. All we need is for the countries of the world (and the political parties within those countries) to agree on the urgent need to act and begin to cooperate for the good of all.

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