The Oil Industry Has a $500 Billion Bubble Problem

Oil prices are rebounding as global economic activity picks back up. But the boom could likely be a mirage as governments finally get their act together on climate change—and it could lead to financial ruin if Big Oil ends up chasing it.

A new report from Carbon Tracker, a London-based think tank, found that if the industry takes the bait and tries to wring more oil and gas out of the ground, it could end up strapped with more than $500 billion in stranded assets. (And let’s not even get started on the damage to the climate.)

From a business standpoint, the industry clearly sees dollar signs with high prices and rebounding demand. But could create what Axel Dalman, a lead author of the report, said in a press release would be a “nightmare scenario if they go ahead with projects which deliver oil around the time that demand starts to decline.”

World leaders are well aware at this point that the end of the fossil fuel era needs to start, and soon. If not, humanity could face catastrophic consequences. The report finds that as governments start to (hopefully) get serious about winding down the fossil fuel industry to protect the climate, it could leave oil companies and shareholders holding the bag.

“As the world transitions away from oil and gas, [companies] run the risk of destroying significant value as a result of failing to deliver the expected return results,” said Mike Coffin, co-author of the report. “For investors, this means ensuring that they engage with companies and that companies are ultimately stewarding that capital appropriately, and are not investing and wasting money on products that run the risk of becoming stranded assets as demand falls away in the next decade.”

Carbon Tracker’s suggestion to these companies and the shareholders? Resist the temptation to go all in on projects because this peak demand can’t and won’t last forever. The report predicts that some fossil fuel companies and their shareholders may only have a few years to really cash in on their investments at peak or near peak demand before oil prices come back down to earth by the end of this decade. Some may reap in a return while prices are still high, but it’s likely that many won’t as governments around the world invest in cleaner infrastructure and demand for electric vehicles goes up. That demand is expected to go up more than 30% by 2030, Carbon Tracker noted in the report.

The report findings also show why the world needs a solid plan for winding down the industry. An unmanaged decline could drive billions in losses, hurt workers, and still potentially screw the climate in the end if a few companies end up trying to squeeze every last drop of oil they can out of the ground. 

What the findings really show is that ultimately, everyone is screwed if Big Oil keeps erecting fossil fuel infrastructure—including wealthy investors and shareholders.