Article

Fossil fuels still drive world economies

Despite the focus on renewable energy, fossil fuels will continue to be the main way of fuelling economic activity worldwide for the next few years.

| 7 min read

The recovery from the deep and short recession caused by the pandemic saw a sharp increase in the prices of oil, gas and coal. Whilst the world conversation was all about replacing fossil fuels, once again the heavy lifting, carrying and transforming of raw materials and products needed plenty of traditional fuel.

In 2020, the world needed 557 exajoules of energy. Of this, 31% came from oil, 27% from coal and 25% from gas – so fossil fuels accounted for 83% of the total. Nuclear contributed 4.3%, hydro 6.8% and renewable electricity from solar and wind 5.7%.

Chart 1: World energy consumption by fuel in 2020

The leading players all plan to add more to renewables in the next few years, with plans for substantial increases to wind farms and solar installations. Meanwhile, nuclear faces conflicting pressures. Whilst there is some enthusiasm to put in more capacity, nuclear fleets around the world are ageing and will face a number of closures as they end their safe and useful lives.

Germany has decided to close all its nuclear stations out of policy preference. France has more temporary closures in her large, ageing fleet and needs to consider replacements. New nuclear plants are very expensive and take a long time to plan and build. There are sometimes difficulties in getting the technology to work for a new design.

Fossil fuels will be with us for some time

All this means that, even with plenty of rhetorical support from the main governments of the EU and the US, and even with the renewable investments of some emerging market economies including China, for the next few years fossil fuels will continue to be the main way of fuelling economic activity worldwide.

The debate about energy use often turns into a debate about electricity.

The heightened policy support for carbon-free development in some advanced countries can lead to offshoring rather than reducing the global use of fossil fuels. A country which makes it dearer and more difficult to use fossil fuels may end up importing more goods that have a heavy energy content. An individual country’s figures for carbon dioxide output under the international standards for accounting are improved if the country shuts steel plants, foundries, kilns and other high energy users and imports the steel, ceramics and engineered products instead.

The debate about energy use often turns into a debate about electricity, where it is feasible to increase the proportion generated from renewables or nuclear. Much energy is used direct from the coal mine or oilfield. Substituting electricity for oil or gas in every home heating system, industrial plant and vehicle will be both expensive and take a long time.

The emerging world has effectively said to the advanced world that they need to pursue their growth plans using more coal, oil and gas for the time being. They would need much larger sums of money in grants from the rich to pay for a quicker transition to different technologies. They see the opportunity to sell more energy intensive products to the advanced world keen on its transition away from the fossil fuels that power these activities. China and India include plans for substantial increases in coal mining and use in the years ahead.

Chart 2: 2020 world electricity production by fuel

Energy giants

Russia, Qatar and the US have the largest proven reserves of natural gas. The US is wedded to producing and using its gas on a large scale, keeping domestic gas prices well below current European levels with limited scope to export its own production. Russia sees its huge gas reserves as a great way to earn a substantial income for many years to come, but also as a useful diplomatic lever.

The US is the biggest user of coal in the advanced world, consuming just 11% of Chinese use in 2020.

Russia seeks to play off the EU with China in exploring how best to allocate and sell its surplus. China is the dominant coal miner and user, burning more than four times as much as India in second place. The US is the biggest user of coal in the advanced world, consuming just 11% of Chinese use in 2020.

The big three in oil are the US, Saudi Arabia and Russia. The US expanded its oil and gas industries substantially under President Trump, producing a larger annual proportion of her proven reserves than the other two. Saudi works with its OPEC partners to restrict output to a limited extent to try to keep prices up. China and the USA are the largest generators of renewable electricity, but their output is dwarfed by Chinese reliance on coal.

The rise of renewables

Looking forward to 2030 it is likely that, whilst renewable electricity will grow rapidly from a low base, the world will still be needing as much oil and gas as it is burning today. The growth of emerging economies, led by India and China, will place more orders for fossil fuel to offset the reductions from planned transition in advanced countries.

China will continue to drive ahead using more coal. Last autumn the world shortage of gas and the impact of emission controls on Chinese power stations left China struggling to keep the lights on. This in turn led to a relaxation of emission controls and a direction to dig and burn more coal. Security of supply trumped green objectives.

Chart 3: World coal consumption outlook to 2025 by region

All this makes valuing old and new-style energy investments difficult. The large oil and gas companies of the advanced world with quotes on the big stock markets will be under pressure to divest or close their traditional fossil fuel activities. They will probably sell more of them to unquoted companies or emerging world owners who will be less concerned about the politics of ownership. They will be able to see money making opportunities especially if sale prices are discounted to reflect first world dislike of these assets.

There will continue to be an avalanche of money into renewables to try to force the pace of transition. This provides opportunities but also runs the danger of valuations exceeding the real future earning power of the assets. There also remain battles ahead over whether battery electric or hydrogen are the best way forward for various sectors and activities. For heavy plant and equipment, for heat transformation of raw materials and for large trucks there is an argument to say hydrogen is a more suitable approach than big batteries.

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Fossil fuels still drive world economies

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