Believe it or not, the fossil fuel industry used to be considered a bad investment. This is hard to believe in 2023, with the sector accruing gigantic profits on the back of the global energy crisis. As supplies tighten, profits increase and the expectation that oil and gas investments were stranded assets — destined to collapse against the rise of renewables — seems like a half-remembered dream.
Firstly, what is a stranded asset? In short, a stranded asset is an ongoing investment, one that you pour money, resources, and energy into — expecting that it will continue to provide a positive return on this investment — that then ceases to do so. The financial and material resources put into this investment are therefore useless, unable to be relocated to a productive sector because no one wants to buy into something that doesn’t make any money. You are left with, at best, nothing, and at worst a costly value-extracting infrastructure that no longer has any reason to exist.
But how could this have been predicted to occur in the fossil fuel sector? The expectation was that as renewable energies took over ever greater amounts of capacity generation, investment in fossil fuels would dwindle. Eventually, fossil fuel extraction would become financially unviable as demand shrank and investors pulled out in favour of renewables. Without investment, the massive amounts of cash and infrastructure poured into oilfields would be rendered useless, wasted on something that would never deliver a return. With all the investments tied into derelict physical infrastructure (rigs, pipelines, refineries) and the stock value zero, the hydrocarbon resources that could deliver a return on that investment would remain locked within the earth. In other words, the assets would be stranded beyond the market’s reach, or so the theory went.
In reality, fossil fuels are undergoing their most profitable era ever, and facing severe physical constraints on their ongoing operations. Peak oil is finally entering the industry vocabulary, and both the quality and quantity of fossil fuel resources are declining. But it is precisely because of these constraints that they are becoming so profitable. Supply is, though still enormous, declining; whereas demand is not. As a result, the same number of buyers are vying for less and less, driving prices and profits up. This is partially a result of the increased costs associated with extraction and refining, but also due to intentional price gouging — sometimes with the direct intent of causing economic damage to cow unfavourable political actors.
A Society of Stranded Assets
For all its current profitability, fossil fuel extraction and usage will end someday. Either the industry will extract “every last molecule of oil”, or some coalition will curb their political hegemony and leave it in the ground. But this does not necessarily mean they will become stranded assets. The orthodox theory of stranded assets envisions the industry being left behind as society moves on without it. Just as likely, however, is fossil fuels remaining buoyant to the last moment extraction is (physically and economically) possible, as the society depended on them crumbles from the declining supply.
The last few drops of hydrocarbon will be so energy intensive to extract that it is unlikely to be economically feasible. Yet it is still extremely unlikely that they will transfer their money to another sector before they reach intractable limits. As pointed out by Julia Steinberger:
“fossil fuel companies are not energy companies. They are fossil fuel companies. They are tied, by their history, capabilities, and culture, to fossil fuels…They are terminally enmeshed with fossil fuels”.
Whether by economics or nature, when the ability to access fossil fuels ends, so will these companies. Oil rigs will sit idle, pipelines will rust away, and refineries will loom like ghosts amongst the societies that once depended on them.
However, this does not necessarily mean that society will move on without them. Instead, these companies might well extract down to the last molecule, leaving everything that uses fossil fuels useless. The accumulated investment represented by our hydrocarbon-dependent infrastructure will be trapped beyond economic use. In other words, the decline of fossil fuels could lead to vast swathes of our societies becoming stranded assets.
How would our transport system function without fossil fuels? How would an agricultural system, dependent on hydrocarbons for everything from fertilizer to machinery, be able to feed us? What about homes dependent on gas central heating? Wherever you look, we live in a society filled with infrastructure destined for obsolescence.
This is one of the overlooked critiques of growth. Because on any reasonably long timescale, fossil-fuel-dependent growth is not delivering us more, but just piling up soon-to-be detritus. A mass of useless infrastructure that we will not only be unable to use, but that will actively hamper our ability to adapt to a post-carbon world. The more we build in a carbon-dependent economy, the more we must laboriously disassemble, repurpose, or abandon in the future. Continent-wide rust belts will haunt any nations that fail to transition.
There is nothing inevitable about these stranded assets, however. Societies can adapt and change. We can build zero-energy waste management, we can make agriculture productive without fossil fuels, and base our cities around active travel and electrified public transport. These are changes that are easier to do now, whilst we can still transition investment from the carbon economy to a post-carbon economy. We can use our current hydrocarbon infrastructure to build its successor. But this is also a rapidly closing window of opportunity. The sunken costs in our current infrastructure cannot be transitioned when they become ‘stranded’. Once the fossil fuels that power, maintain, and justify our current material economy are gone, we have to build the alternative from scratch. The hangovers of our current society will become an obstacle, rather than a launchpad, for the next iteration of human civilization.
This is a problem that will only grow worse the longer we wait to act upon it. Everything directly powered, or with downstream dependence on fossil fuels, must be changed. The alternative is to be trapped in a cage of crumbling infrastructure, all the accumulated efforts taken to build it wasted. Fossil fuel profitability should not be taken as a sign that the theory of stranded assets is incorrect, but that it is in fact the collective investment of the societies dependent on the fossil fuel industry that is in danger of being stranded. We need to decarbonize not just to save the world, but to save our ability to live within it.