Fossil fuels bracing for crude game of musical chairs

Let’s hark back to the childhood game of musical chairs to talk about fossil fuels and climate change (yes really!).

My thought bubble: The world’s oil, natural gas and coal producers are, metaphorically speaking, encircling a bunch of chairs, and as the world tightens its grip on heat-trapping emissions, the use of these fuels drops — and so does the number of chairs.

The big picture: These companies make products we all demand — usually without noticing — when we flip on the light switch, fill up our car’s tank or open up a plastic-wrapped package. Wind and solar are growing rapidly, but oil, natural gas and coal still make up 81% of our world’s energy consumption. That figure hasn’t changed in 30 years.

Where it stands: The big question for fossil-fuel companies — and efforts to tackle climate change — is when and by how much will demand for these fuels decline? That’s where this existential game comes in, because the possible futures are vastly different depending on the world’s appetite to curb emissions.

• This new interactive tool by Resources For the Future, an environmental think tank, compares various energy forecasts by governments, corporations and more.
• I am invoking musical chairs the game because it provides an accessible illustration, but climate change and our energy use are, to be clear, not trivial games. OK, let’s start.

Right now, we’re at the beginning of the game, which will last at least decades and may never end. Coal companies are likely the first ones to lose chairs.

• A series of factors, including environmental policies and plentiful supplies of other electricity sources like natural gas and renewables, are set to cut into coal’s global demand share within the next four years, the International Energy Agency projects.

Risk is also materializing for oil and gas companies, which are increasingly seeking to differentiate their strategies to position themselves as the final chairs in this game. Even in a world with aggressive climate policies, they’re betting we'll still need some oil and gas (independent experts agree).

• It’s why Saudi Aramco, Saudi Arabia’s state-owned oil company, says its oil is the cleanest in the world.
• It’s why a lot of companies are doubling down on natural gas, the cleanest fossil fuel. “I don’t use the term fossil fuel anymore,” BP CEO Bob Dudley told me in a recent interview. “There’s such a big difference between coal and natural gas.”
• It’s why some companies, led by European oil and gas producers like Royal Dutch Shell, Equinor and BP, are getting into renewable energy as they consider an eventual (we’re talking many decades) exit from this game altogether.

Finance is another window into how companies are faring in the musical chairs.

• Norway’s Sovereign Wealth Fund — the world’s largest such fund — announced earlier this year it was divesting from exploration and production companies, like Continental Resources or Devon Energy, not major oil companies like ExxonMobil or Shell.
• This could be an early sign that production-only companies are not financially attractive in the long term from a financial perspective. That’s a few more chairs gone from the game.
• CNBC analyst Jim Cramer recommended to viewers earlier this month that they should lessen their exposure to oil and gas stocks, while the WSJ notes the sector makes up just 4% of the S&P 500 index, down from 10% a decade ago.

But, but, but: In the actual game of musical chairs, eventually the music stops and there is only one chair remaining, and one child the winner. In this crude reality, we don’t know when the metaphorical music stops and the game ends — or even that it will ever end.

• For all the rhetoric, urgency and activism, especially in the past year around climate change, the world collectively is not cutting our energy use. Global carbon dioxide emissions reached a record high last year.

Between the lines: Big oil and gas companies are employing divergent strategies to try to remain profitable in a widely uncertain future where we play the crude game of musical chairs at vastly different paces.

One future is business as usual, which continues the rapid increases in wind and solar and also slow, gradual and uneven lessening of — but not abandoning — oil and natural gas.

• This is the track we’re on now, and this future lacks coordinated global policy. Here, the chairs would be removed slowly, and a lot would remain even a century or more from now.

Another future — the one scientists, activists, Democratic politicians and an increasingly large portion of the public say we must pursue — includes rapidly cutting emissions in the next 30 years, which inherently means a drastic reduction in fossil fuels (especially without technology capturing their C02 emissions).

• Big, global government policy is nearly essential for this future. Here, the chairs would be removed far more quickly.

The bottom line: This isn’t fun like our childhood musical chairs, is it?