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The 'carbon bubble' will burst with profound implications for the Middle East's oil producing countries

UAE. Wermuth Asset Management has announced its expectation that, given the availability of solar power at $4 cents/kWh, a price with which crude oil could only compete if offered below $7/barrel, the ‘carbon bubble’ will burst and that it will have profound implications for the Middle East’s oil producing countries, global financial markets and the world economy.

If COP21 leaders this year commit to a global 2⁰C temperature target for 2050, by reducing CO2 emissions, 80% of the world’s known fossil fuel reserves will need to be written off by energy majors. 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.

The Berlin Investment Forum, hosted by Wermuth Asset Management on 15th June, was attended by HE Salim bin Mohamed Al Owais, Chairman of Bee’ah, UAE, Valerie Rockefeller Wayne of the US oil family and Stephen Brenninkmeijer of clothing retail giant C&A, among others. Institutional and family office investors, environmental experts and policy makers sat to discuss risks and opportunities for alternative investment in the energy sector.

In his keynote speech, Jochen Wermuth, Founding Partner & Chief Investment Officer, Wermuth Asset Management, declared 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 Jochen 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. Even Saudi Arabia, the world’s largest oil producer, is working on green alternatives. According to Oil Minister Ali Al Naimi, the Kingdom has ambitions to export solar and wind energy by 2030. That, to me, is a sign that we need to start putting our assets elsewhere in the energy sector.”

The Carbon Tracker Initiative, an NGO, has predicted that in the next ten 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.

Jochen Wermuth continued: “There are two megatrends that are dampening the outlook for oil producing companies and countries. 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.

“Dubai set a new global benchmark in December 2014, when Acwa Power and TSK successfully bid for Dubai Electricity and Water Authority (DEWA)’s 200 MW solar PV plant, offering $5.84 cents/kWh. That’s cheaper than power generated from oil at $10 per barrel.

“While many were surprised by such a bid, SunEdison has since offered solar power for $4 cents/kWh in Austin, Texas. Oil would have to be sold below $7/barrel and natural gas below $3.50/MMbtu to compete. If we consider that solar power cost $600 cents/kWh in Germany when it first provided subsidized feed-in tariffs in 2000, this is remarkable progress. There is no longer any need for subsidies:  solar power is winning in open competition with fossil fuels.”

The International Energy Agency (IEA) has estimated that fueling power generation through oil could cost Middle Eastern countries as much as $60 per MWh ($6 cents/kWh) in 2020, and up to $215 per MWh ($215 cents/kWh) without subsidies.[1] 

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% of national budgets, and today’s low crude prices are clearly demonstrating the need for diversification. When Saudi Arabia, the world’s largest oil producer, has established a $110 billion solar power programme, it’s time for energy investors to wake up to reality,” Mr. Wermuth concluded.

AboutWermuth Asset Management (WAM)
Wermuth Asset Management (WAM) founded in 1999, is a Family Office and investment advisory firm specialising in Impact Investments in resource-efficient companies with returns of 20% per annum. WAM is dedicated to and follows the UN Principles of Responsible Investing (PRI). WAM seeds and advises alternative investment vehicles in private equity, infrastructure, listed and real assets.

Jochen Wermuth is Founding Partner and Chief Investment Officer of Wermuth Asset Management and the Green Gateway Fund. He is a steering committee member of 100% Impact (a family office association) and of Europeans for Divest-Invest (an investor association). Mr. Wermuth has served as a Director at Deutsche Bank’s global markets division in London, as a World Bank and EU-TACIS finance adviser and on the Advisory Board of the World Economic Forum’s Community of Global Growth Companies.

[1]  Forbes, 30 March 2015: The Middle East’s Growing Oil Demand Problem

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