Analysts are predicting that with the meteoric rise of renewable energy sources the “carbon bubble” will burst and that will have profound implications for global financial markets – especially the Middle East’s oil-producing countries.
Germany-based Wermuth Asset Management expects that given the availability of solar power at $0.04 kWh, crude oil will soon only be able to compete if offered below $7 per barrel.
Competition from renewables and greater energy efficiency in industry is now to the point that long-term fossil fuel price forecasts will have to be revised downwards, with Wermuth suggesting that $21 trillion in reserves are likely to be written off.
“We are still in the Oil Age, but for how long?” Jochen Wermuth, founder of Wermuth Asset Management, said. “The ‘carbon bubble’ will burst, and the smart investor will get out before it does. Even Saudi Arabia, the world’s largest oil producer, is working on green alternatives.”
The Carbon Tracker Initiative, a London-based NGO made up of financial, energy and legal experts, has predicted that the next 10 years will see oil companies spend more than $1 trillion a year on projects that rely on crude prices staying more than $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.
In some Gulf states, oil sales account for approximately 85 percent of national budgets, and low crude prices are clearly demonstrating the need for diversification – a necessity Gulf Cooperation Council countries are meeting with varying degrees of success. Still, major solar projects across the region demonstrate a willingness for nations to adapt to a future without oil profits to prop up government spending.
