COP26: What does the climate push mean for fossil fuel prices ?

COP26 kicked off in Glasgow last week, and fossil fuels are big on the agenda, with dramatic reductions in their production necessary to limit global warming to 1.5°C. However, as detailed in our 29 September newsletter, energy prices have spiked recently, in a reminder that despite the current move towards more sustainable growth, fossil fuels are still king in the energy market—and are likely to remain so for some time. So what will fossil fuel prices look like at the end of our forecast horizon in 2025?
 

• Brent Crude

Oil’s share of world energy supply was around 31 % in 2019. Even though oil supply in absolute terms is forecast to rise in the years ahead, the rate of growth could be limited by softer capital expenditure, as the move toward renewables advances and investors increasingly adopt ESG criteria. That said, government pledges to reduce the use of fossil fuels should place downward pressure on prices through softer demand momentum. In any case, OPEC is likely to step in to attempt to stabilize the market if required. Our panelists project prices to fall around 10 % from 2021 levels to average USD 61.7 per barrel in 2025. 

• Natrural Gas

Natural gas has been increasingly used instead of oil and coal, and was responsible for roughly 23% of total energy supply worldwide in 2019. Because gas is less polluting than oil or coal, it is likely the commodity will continue to extend its dominance over the next few years. However, this increased supply is also likely to weigh somewhat on prices over our forecast horizon, and FocusEconomics panelists see the spot price falling by around 10% on 2021 levels to average USD 3.34 per MMBtu in 2025.

• Thermal Coal

Coal’s share of global energy production has fallen in recent years, to around 27% in 2019. As coal is the dirtiest of the major fossil fuels, it is likely to fall increasingly out of favor, placing downward pressure on demand. That said, a number of countries will likely still depend heavily on coal in the near term, most notably China and India. The move toward renewables is also likely to hit capital expenditure, limiting supply. The panel projects that the price of thermal coal will fall by roughly 35% on 2021 levels to average USD 88.9 per metric ton in 2025.

Insights from Our Analyst Network

Commenting on the continued dominance of fossil fuels amid difficulties in shifting to renewables production, analysts at JPMorgan said:

“While de-carbonization efforts will redesign energy markets over the longer-term, reality is setting in that there is an underestimation of the challenges to the world quickly switching to clean energy, as net zero 2050 targets are decades away and demand for oil from China  has yet to peak. The world will need to invest in energy security as fossil fuels look likely to remain the key source of supply through the decade.”

Analysts at ING argue that coal supply is likely to stay elevated: 

“A recent study from Global Energy Monitor pointed out that coal-fired power plants under development in China amounted to 247 GW, which is nearly six times  Germany’s entire coal-fired capacity (42.5 GW) that it wants to phase out by 2038. However, China is not the only question mark. Some of the major fossil fuel producers such as Saudi Arabia, Russia and Australia are also refusing to strengthen their NDCs ahead of COP26.”
 

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinion of FocusEconomics S.L.U. Views, forecasts or estimates are as of the date of the publication and are subject to change without notice. This report may provide addresses of, or contain hyperlinks to, other internet websites. FocusEconomics S.L.U. takes no responsibility for the contents of third party internet websites.

Author: Matt Cunningham, Economist

Date: November 4, 2021