This is a punt week in energy: Earnings are dribbling in, and I believe they’ll be disappointing, or at best mixed (as the Noble (NBL) report was today). Overall, market averages are extended while the energy sector has been one of the strongest recently. If you’re like me, you’re either standing pat in your energy portfolio or taking profits and waiting for another opportunity before investing fresh capital.
All of which brings to me to a Climate Change column, an issue worth talking about on any day, but especially worthy after just celebrating Earth day on Tuesday. You’ll rarely see an energy guy with relatively deep knowledge of the industry and markets surrounding fossil fuels discuss climate change but it’s a more practical view than you’re likely to get from the environmentalists as well as a more environmentally informed view than you’ll often get from the oil companies.
So let me make a few points and then perhaps draw some basic conclusions.
1 – Anyone who remains a climate change denier or fancies that increased temperatures aren’t related to human endeavors and particularly the exhaust products of fossil fuel burning are unqualified to be a part of this most important debate. The evidence is beyond overwhelming.
2 – Oil companies are in the very profitable business of procuring and selling fuels to be burned. In addition, the share prices of those companies depend upon continually finding more sources and increasing volumes of those fuels – and therefore increasing the global carbon footprint.
3 – The numbers may be unclear, but the continued path of increasing volumetric use of oil and gas is unsustainable. Bill McKibben and Al Gore will claim that there is already 5 times more recognized and recoverable fossil fuel than can be burned without rendering the planet “ uninhabitable “. This might be overly alarmist, but it’s clear that some tipping point will be breached if we remain on this path. The only question is when.
One conclusion we could make is that oil companies must be somehow convinced to leave much of what they’ve already found in the ground, or at the very least, harvest it at a much slower pace.
Chris Hayes recently wrote a piece in The Nation magazine and followed up with a segment on his show (where I appeared), comparing the economics of ‘stranded assets’ of oil companies with the emancipation of the Slaves here in the US. His parallel is brilliant – his point is that it required a Civil War with one million dead to impel the South to “strand the assets” of free labor that the Slaves represented. What will convince the oil companies to do the same with their oil reserves?
The cynic would immediately reply: “Nothing” – but that is, in my view, not only overly pessimistic but also hopeless – if we believe in climate change science and even only marginally believe in the timetables set out by the UN commission and other climatologists, we have little choice but to find a plan and start enacting it soon.
This will certainly represent a ‘war’, of its own – and every even small proposal to hinder the unfettered extraction of carbon will be fought tooth and nail by those that economically benefit from it – witness the latest small attempt from the North Dakota Fuel Commission to slow Bakken extraction of oil in places where subsidiary natural gas is being ‘flared’. Even as these assets are literally burned at the source and wasted, still several oil companies are up in arms about any restriction to very profitable recovery rates.
One idea I will leave you with was the suggestion I offered Chris on his show: an offer of equal economic benefit to the asset being stranded. If some oil must remain in the ground to retain a sustainable planet, oil companies will somehow need to be incentivized in providing other sustainable fuels with a smaller carbon footprint. To put it in the terms of Chris’ slavery analogy, the ‘replacement labor’ will need to be subsidized.
But examining that is another topic worthy of another several columns – Happy Earth Day.