I have been lucky enough in my life to have lived and worked in multiple countries around the world. That taught me many things, but one that always surprised me was how people's views on things vary depending on where they live. Climate change is a case in point. In the U.S., where I now live, the conversation is still influenced by some debate as to whether it is real, or at the very least whether it is man-made. In the rest of the world though, those things are taken as given and the conversation is entirely around how best to deal with it. That has become clear this week at the U.N. climate summit in Katowice, Poland, and understanding the global view has implications for investors that could easily be missed by those living here.
The simple fact is that the world is taking steps to address the issue, and that fact remains even if you deny its existence. There are two things in particular about this week's conference that stand out as indicators.
The first is the location of the summit itself. Katowice has been for years the center of the important Polish coal industry. The choice of that city as the location for this meeting, and even more the city's acceptance of the role, sends a powerful message that as far as most of the world is concerned, coal, and therefore by extension fossil fuels in general, are if not dead, dying.
The second is that the U.S. effectively sent two delegations to the summit, one official and one not. The official delegation, representing the Trump administration, stuck to the party line that fossil fuels were still the future, even if that message was literally laughed at by other attendees. The second group was made up of state and local officials who were much more in tune with the overall mood.
What that suggests is that whatever direction Federal policy is moving, local government, where the real decisions are made, is moving away from conventional fuels. That is supported by policies already in place in many cities and states. The Mayor of Pittsburgh, a big coal town in the past, was among those attending in an unofficial capacity and the fact that that city along with reliably Republican local governments such as Columbus, SC are moving towards 100% renewable energy, indicates that no matter what the rhetoric from D.C., change is happening.
Now it may be that you agree with the Trump administration's view, but that is not the point. Investing is about what is happening, not what you believe should happen, and a transition to alternative energy sources is happening now. That has wide-reaching implications for investors.
The most obvious and most immediate is that, even with a pro-coal president in the White House, the future for the U.S. coal industry is bleak. The EPA may remove the domestic requirement for electricity generation to shift away from coal-fired plants, but the change is progressing regardless, here and overseas.
The second lesson to be learned here is that investors should rethink long-term holdings in big oil.
For decades, big oil companies' stocks have been regarded as reliable sources of income through dividends and investments that at least keep pace with the broader market. That may still be the case for a while, but as the world moves away from fossil fuels in general, the end is in sight.
That doesn't mean, however, that you should dump everything now. Demand for oil has not really begun to fall yet from a longer-term perspective, nor is it forecast by the IEA and others to do so in the next few years. Even when it does, supply restrictions could keep the price high enough to maintain revenues for a while. What the Katowice summit and the conversation around it suggests though is that big oil is no longer the sure-fire one-way bet for long term investors that it once was and trimming holdings into any rallies that do come will be a good idea.
By Martin Tillier for Oilprice.com
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