British financial think tank Carbon Tracker released its new report on Thursday, writhing that, with global oil prices rising to US$90 per barrel, investors may be lured into long-term fossil fuel projects, destroying the world's hopes to limit carbon emissions in line with climate targets and squanders billions in investment.
According to the report, recent oil price rally may make more potential projects look profitable. However, the analysis suggests that by the time these projects begin, demand for fossil fuels may have dwindled, creating a “nightmare scenario” for investors and climate activists.
As the global economy recovers from the economic slowdown triggered by the Covid-19 pandemic in 2020, demand for oil and gas has surged, resulting in a global gas supply shortage and skyrocketing energy market prices.
The international oil price has risen from lows of around US$20 per barrel in April 2020 to seven-year highs of US$90 per barrel on Wednesday and is expected to hit US$100 before the end of the year. Meanwhile, gas prices in Europe and Asia have reached all-time highs.
Nonetheless, since governments have pledged climate commitments and shifted rapidly to electric vehicles and renewable energy development, Carbon Tracker predicted that the price surge would not last over the process of a long-term fossil fuel investment, and oil demand is expected to decline sharply from the late 2020s to 2040.
Mike Coffin, the head of oil and gas at Carbon Tracker and a co-author of the research, said that the same over-investment story for gas repeats itself, advising oil and gas businesses and their investors to “avoid the temptation” to invest in new fossil fuel projects for the long term based on current market prices.
“Companies may view high pricing as a sign pointing towards investment in increased supply,” said Axel Dalman, a Carbon Tracker analyst and the report's principal author, “However, if they proceed with projects that deliver oil at a time when demand begins to drop, this might turn into a nightmarish scenario.”
Coffin added, “Failure to recognize ‘the sea change risks’ faced by fossil fuel developers because of the worldwide transition to low-carbon energy could result in carbon emissions being locked in, putting the Paris climate targets as well as investment returns at risk.”