Given the availability of solar power at four cents/kWh, a price with which crude oil could only compete if offered below $7/barrel, the ‘carbon bubble’ is expected to burst, family office Wermuth Asset Management has warned.

According to the company, this will have profound implications for the Middle East’s oil producing countries, global financial markets and the world economy, reported the Gulf Daily News (GDN), our sister publication.

If leaders this year commit to a global two degree Celsius temperature target for 2050, by reducing CO2 emissions, 80 per cent of the world’s known fossil fuel reserves will need to be written off by energy majors, it said.

Regardless of an agreement, competition from renewables and greater energy efficiency in industry is now such that long-term fossil fuel price forecasts need to be revised downwards, with $21 trillion in reserves likely to be written off.

Wermuth Asset Management founding partner and chief investment officer Jochen Wermuth told the Berlin Investment Forum that investment in oil, gas and coal assets no longer had any future in most parts of the world.

“We are still in the oil age. But for how long?” said Mr Wermuth.

“Whether there is a binding agreement in Paris or not, the ‘carbon bubble’ will burst, and the smart investor will get out before it does.”

The Carbon Tracker Initiative has predicted that in the next 10 years oil companies will spend over a trillion dollars a year on projects reliant on crude prices of over $95 per barrel.

The current average crude oil price is about one third less.

Wermuth Asset Management believes that the default risk of these investments has not yet been priced into the stocks of oil companies, but it may turn out to be money spent for nothing.

“There are two mega trends that are dampening the outlook for oil producing companies and countries,” Wermuth said.

“Firstly, production continues to rise, but consumption is stagnating in Europe, North America and Japan, where half of global output is sold.

“Demand from China has also peaked.

“The recent crash in crude prices has not stimulated growth in demand.

“Secondly, renewable energy is getting considerably cheaper, and is challenging fossil fuels,” he added.

The International Energy Agency has estimated that fuelling power generation through oil could cost Middle Eastern countries as much as $60 per MWh (six cents/kWh) in 2020, and up to $215 per MWh (215 cents/kWh) without subsidies.

With renewable energy increasingly competitive, often without subsidies, Wermuth Asset Management is encouraging banks, insurers and investors to make the risks associated with fossil fuels transparent, to adjust their balance sheets and to divest themselves of hydrocarbons.

The family office asserts that GCC countries that are still reliant on revenues from oil and gas need to diversify their portfolios sooner rather than later.

“In some Gulf states oil sales account for around 85 per cent of national budgets, and today’s low crude prices are clearly demonstrating the need for diversification,” Wermuth added. - TradeArabia News Service