Peaking: Why Peaks Matter

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This is the third report in our series on peaking fossil fuel demand. It focuses on why peaks matter to financial markets.

1. Summary

Peaks matter because they separate the world of growth and opportunity from that of decline and risk. This is the reality that will face the fossil fuel industry in the aftermath of Putin’s War. Peaks mark the turning point. 

• Volumes decline. After the peak, volumes decline. It may take time to become clear, and there will be cyclicality, but the long era of fossil fuel demand growth is over.
• Prices fall. As volumes decline in the face of a cheaper competitor, so prices will tend to fall. The current supply shock obscures this dynamic.
• Profits collapse. And as prices fall, profits of the low-margin, high-capital-intensity fossil fuel sector will fall more rapidly because of leverage.
• Assets get stranded. As volumes and prices fall, assets at the top end of the cost curve are rapidly stranded.
• Companies go bust. Companies that believe their own propaganda and fail to prepare for change will not be prepared for the new environment and will fail.
• Financial markets decline at peaks. For example, European fossil fuel electricity, US coal, or global oil services all saw a peak in their stock prices at the time of peak demand.
• Cost of capital rises. At the peak, the cost of capital rises, making it harder for incumbents to grow or even survive. Investors starve dying industries of capital.

Peaking thus kicks off a series of vicious cycles, from costs to technology and society to politics. The low-growth, low-margin, fossil fuel sector is highly vulnerable to peaks. And when the supply shock of Putin’s War fades away, the weaker parts of the fossil fuel system will be a soft target for hedge funds looking to short the losers of the transition.