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Published on February 13th, 2014 | by Giles Parkinson

14

Jeremy Grantham — Renewables Will Replace Fossil Fuels

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February 13th, 2014 by  

Originally published on RenewEconomy.

Legendary hedge fund investor Jeremy Grantham says there is no doubt that solar and wind energy will “completely replace” coal and gas across the globe, it is just a matter of when.

Solar panels on a barn.
Image Credit: manfredxy/Shutterstock.

The founder of $100 billion funds manager GMO Capital is known as a contrarian. But he suggests that the pace of change in the fuel supply will surprise everyone, and have huge implications for fossil fuel investments.

“I have become increasingly impressed with the potential for a revolution in energy, which will make it extremely unlikely that a lack of energy will be the issue that brings us to our knees,” Grantham writes in his latest quarterly newsletter.

“Even in the expected event that there are no important breakthroughs in the cost of nuclear power, the potential for alternative energy sources, mainly solar and wind power, to completely replace coal and gas for utility generation globally is, I think, certain.

“The question is only whether it takes 30 years or 70 years. That we will replace oil for land transportation with electricity or fuel cells derived indirectly from electricity is also certain, and there, perhaps, the timing question is whether this will take 20 or 40 years.”

Grantham’s predictions go against the conventional wisdom of the fossil fuel industry, but they the thoughts of many people, including Stanford researcher Tony Seba, who said last year this could occur within a few decades.

And Grantham says it could happen quicker than even he believes, and will have major implications for new investments in the fossil fuel industry – a topic very much in mind for project developers and bankers in Australia.

“I have felt for some time that new investments today in coal and tar sands are highly likely to become stranded assets, and everything I have seen, in the last year particularly, increases my confidence,” Grantham writes.

“China especially is escalating rapidly in its drive to limit future pollution from coal and gasoline and diesel-powered vehicles. Increased smog last year in major cities led to an unprecedented level of general complaint.

“China simply can’t afford to have Chinese and foreign business leaders leaving important industrial areas in order to protect the health of themselves and their families. Nor are they likely to be comfortable with a high level of sustained complaint from the general public. They have responded in what I consider to be Chinese style, with a growing list of new targets for reducing pollution. A typical example recently was an increase of 60% in their target for total installed solar by the end of 2015! Hardly a month goes by without a new step being announced.”

He also questioned whether the $650 billion spent by the fossil fuel industry searching for new oil reserves was a smart idea, given his recent experience of a colleague’s Tesla. Grantham, the former owner of a 12-year-old Volvo, described his journey from New York to Boston as his best car experience, and suggested that the slump in battery costs would mean the $75,000 vehicle like Tesla’s would soon be available at $40,000.

“One can easily see that in 10 years there could be a new world order in cars. (And if that weren’t enough, there is a wholly different attack on the traditional gasoline engine from an entirely new technology, the hydrogen fuel cell, to be introduced by Toyota this year.)

In short, with slower global economic growth, more fuel-efficient gasoline and diesel vehicles, more hybrids, cheaper electric cars, more natural gas vehicles, and possibly new technologies using fuel cells and, conceivably, methanol, it is certain that oil demand from developed countries will decline, probably faster than expected.

“Some emerging countries, notably China, are likely to take more dramatic and faster steps to reduce demand than we have ever thought about. Already they have 200 million electric vehicles – mostly motorbikes – almost as many as the rest of the world squared.

“Total global oil demand at current prices or higher is likely to peak in 10 years or so. At much lower prices we would fairly quickly lose most of our high-cost production: deep offshore, fracking, and tar sands.

“Times may be changing faster than we think. My guess is that oil prices will be higher than now in 10 years, but after that, who knows?

“The idea of “peak oil demand” as opposed to peak oil supply has gone, in my opinion, from being a joke to an idea worth beginning to think about in a single year. Some changes seem to be always around the corner and then at long last they move faster than you expected and you are caught flat-footed.”

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About the Author

is the founding editor of RenewEconomy.com.au, an Australian-based website that provides news and analysis on cleantech, carbon, and climate issues. Giles is based in Sydney and is watching the (slow, but quickening) transformation of Australia's energy grid with great interest.



  • Kiwiiano

    It will be good if the renewables do replace fossil fuels but it should be happening now if we are to avoid climate calamity. In fact it should have started 20 years ago rather than hoping for 20 years in the future.

  • Chatteris

    My sense is that precisely because governments know that the writing is on the wall for fossil fuels, they are going hell for leather to extract as much coal, oil and gas as possible before these particularly lucrative industries die.

    • Ronald Brakels

      I frequently get that impression too.

    • Pieter Siegers

      Yeah and that is because many government members themselves have heavy assets in the fossil fuel industry so that is why some governments like the US struggle so much in advancing clean energy.
      Although I also expect this to change this all of a sudden, just like Grantham predicts, I do hope that it isn’t ‘necessary’ having extended climate change disasters to make that change in attitude happen.
      For humans this type of decision taking is typically the driver for people to realize things must be changed, and then yes things can go really fast.
      I expect this will happen in 10 years from now, I guess much depends on how strong mother Nature will beat us in the coming years and most of us will wake up when things get worse. Just look at China and India.

  • Jouni Valkonen

    It is good point that peak oil demand is more probable than peak oil on supply side. Of course supply always follows the demand.

    There is however one thing to consider in this view. That is oil price today is artficially high, because oil producers are limiting the production in order to get a lot wider profit margins. The global average production cost of oil is only $25 per barrel where as market price is more close to $100. Therefore oil markets are complex. But it goes without saying that in 2030′s no-one does not want to buy oil for transportation at a rate of $100. When cheap oil resources are exhausted, it is the end for oil demand.

    • Ronald Brakels

      It doesn’t look to me as if oil producers are holding back production. If they are its resulting in a lot more oil production in places like the United States and Canada, more use of LPG instead of oil, and a lot more small cars, hybrids, and electric cars being sold than what would happen otherwise. My guess is all the big oil producers are producing as much as they can and if they could they’d produce more they would in oder to kill electric cars and other developments. I suppose its possible that they are counting on high prices in the future and so are holding back, but that’s not my impression. My impression is that a lot of major oil fields are in decline and those in charge of them are struggling to maintain production. But I could be wrong.

      • Jouni Valkonen

        Yes, you are wrong. Average pumping cost (not including capital and searching costs) is only $10 per barrel. So if there was not limiting the oil production, oil price would plummet into $10 per barrel.

        Of course the most profitable wells would be finished in a decade, so it does not make sense to push those hard.

        • Ronald Brakels

          Back when oil was $147 a barrel why they didn’t use their reserve capacity to stop oil getting that expensive? As a result of high oil prices the US has cut oil consumption by about 13% and massively increased its own oil production and high prices also allowed hybrids and electric cars to take off. Sounds like these oil producers are kind of dumb if they couldn’t have prevented that but didn’t.

          And by the way, oil prices are determined by markets, not production costs. It doesn’t matter if oil costs $1 a barrel to produce, if it sells for $100 a barrel on the oil market producers will sell it for $100. They won’t say, “No, I couldn’t possibly charge you that much. Here, have it for $1.10. That way I cover my costs and make a little profit.”

          • Jouni Valkonen

            yep, that is the most silly thing because those who own the most profitable oil-wells, are making more than 90 % profit margins. This is just outright ridiculous and unfair.

            There should be global oil tax, that would set the price of oil to $120 per barrel. So if the production cost of oil is e.g. $50 per barrel (US average), then there is paid 70 dollar tax.

            Global oil tax revenue should be spend on financing global basic income. This would be far nicer than pouring barrels of petrodollars into Middle East.

          • Ronald Brakels

            No one has to buy oil from the Middle East and the good news is we now have the technology at hand so that moving away from oil won’t even be a hardship. It would be very easy for countries like Australia to eliminate oil imports with higher efficiency standards. Let’s hope we all move away from oil in short order.

          • Jouni Valkonen

            Note, that oil is more profitable to EXPORT than to self-consume.

          • Ronald Brakels

            Jouni, you’d think so, but people here keep buying petrol even though it’s $1.50 a liter. If they’d stop doing that then we could be a net exporter.

      • Rick Kargaard

        Conventional or cheap oil is depleting rapidly, Heavy oil, tight oil, and oil sands production is more expensive.Also shortages are sometimes created by transportation and marketing problems such as resistance to pipelines. Cushing prices as compared to Brent prices are evidence of this. As for controlling supply, OPEC has always attempted to do this as a method for keeping prices higher.

      • Pieter Siegers

        I do agree with you Ronald. Let’s just hope Grantham’s predictions will soon become reality this will limit the fossil fuel industry to become much much smaller. Demand will simply change so they’ll have no choice. My guess is that the ones that really want to survive are going to adjust their products, otherwise they’ll vanish. Can’t wait for that change to happen! In the meantime we as consumers already do have the power to choose a more sustainable life-style, thus helping the move to clean energy sources to be faster.

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