No need to sell your oil shares just yet
Around the world, public institutions are being pressured by activists to divest themselves of their fossil fuel holdings. They should resist
The art and antiques collection of the late David Rockefeller, grandson of the great oil magnate John D. Rockefeller, was auctioned at Christies New York last month, enthralling the public and raising more than $830 million for various charities. The sale took place after the rather more momentous decision by the Rockefeller family to sell off their remaining shares in fossil fuel companies. At the time the Rockefeller Family Fund (one of six Rockefeller philanthropic institutions, all of which have followed suit) singled out Exxon Mobil for its “morally reprehensible conduct”: the 21st-century Rockefellers claimed that the world’s largest oil company had not just ignored the evidence of man-made climate change but had actively conspired to obscure the evidence.
Exxon Mobil is the most notable of the great oil companies that provided the bulk of the Rockefeller fortune. It was formed from the merger 20 years ago of Standard Oil New Jersey (Exxon, or Esso) and Standard Oil New York (Mobil), the two most powerful legacy companies to emerge from the breakup of Rockefeller’s original Standard Oil Trust in 1913. Its leaders had certainly resisted the pressure felt by all oil companies to acknowledge the claims of climate scientists. Unlike other oil companies, they did not pay lip service to environmentalism, and continued to run their affairs much as before. In public, Exxon Mobil championed climate scepticism. But as a company it reoriented its industrial activities away from oil and towards natural gas, which omits much less CO2 than coal or oil. Its response to the Rockefeller divestment was laconic and pugnacious: “It’s not surprising that they’re divesting from the company since they’re already funding a conspiracy against us.”
Conspiracy is a strong word, but across the US in particular activists are looking for ways to sue oil and coal companies. They see the oil industry denying scientific evidence of climate change in the same way that big tobacco denied the inks between smoking and cancer.
In January, New York Mayor Bill de Blasio announced that the city was suing the world’s five largest publicly-traded oil companies — BP, Shell, Chevron, Conoco Phillips and Exxon Mobil — for damages related to climate change and the supposed threat to New York. He said:
“We are seeking billions of dollars in damages to protect us against extreme weather and rising seas and to fortify New York City against future storms. For decades big oil ravaged the environment and big oil copied big tobacco. They used a classic cynical playbook. They denied and denied and denied that their product was lethal. Meanwhile they spent a lot of time hooking society on that lethal product, and think about how cynical and dangerous that is knowing the damage that was being caused, having all the evidence in the world, and yet using all the tools at their disposal to deepen the crisis for their own profit.”
De Blasio went on to announce the city would start to divest its five pension funds, which held shares worth $5 billion in fossil fuel companies.New York’s action is the first outside California, where San Francisco and five other authorities have also sued a group of fossil fuel companies for damage related to climate change. None of these legal actions, citing “public nuisance”, have progressed much beyond the press release stage, but they are symptomatic of the increasingly aggressive tactics deployed by American environmentalists.
If the legal attacks do not look particularly threatening to the fossil fuel companies, the divestment movement seems, on the face of it, to be gathering momentum. Around the world, institutions worth up to $6 trillion have pledged themselves to divest all or part of their oil, gas and coal holdings. These are mostly publicly-owned pension funds or academic institutions. In the UK more than 60 universities, including Edinburgh, Bristol and Durham, have announced they are divesting, partially or completely. But the bigger names are holding out.
The University of Cambridge has come under particularly heavy pressure from students and staff to divest its £6.3 billion endowment fund. One of the British campaigning groups, People and Planet (those with long memories may recall its first incarnation as Third World First), says £370 million of the university’s money is invested in fossil fuel companies. The university receives research funding from BP, Shell, Exxon Mobil and others. The university’s governing body decided to divest, but, unprecedentedly, was overruled by its council, which sets policy. A divestment working group has been set up and is yet to report its final conclusions — despite being urged to come down on the side of divestment by such luminaries as Dr Rowan Williams, former Archbishop of Canterbury, and Professor Noam Chomsky, the eternal leftist theoretician.
The University of Oxford has adopted a subtler policy in dealing with the pressure from students and academics. It has divested from coal and tar sands — generally regarded as the worst of a bad lot — while maintaining its no doubt rewarding investments in oil companies. And it emphasises its commitment to renewable energy research as well as to investment in green energy companies.
The divestment movement on both sides of the Atlantic generates a great deal of heat but the actual effect on the companies concerned is negligible at best: the shares sold for idealistic reasons are bought by someone else, presumably of a less fastidious cast of mind. For the time being at least, divestment is unlikely to restrict the flow of capital into the targeted companies. And some more thoughtful environmentalists argue that divestment actually reduces their movement’s influence on companies. If you are not a shareholder, you cannot hold management to account, or engage them on future strategy.
An apparently more sophisticated actuarial argument is based on fossil fuel reserves becoming stranded assets. What does it matter if Exxon has 21.2 billion barrels of proven oil reserves if the global shift to zero carbon technology will not allow these reserves to be monetised? The pitch is thus: “Get out of these shares before they lose their worth.”
This reasoning is closely linked to the decisions of COP-21 taken at Paris (“The great climate change boondoggle”, Standpoint January/February 2016.) The principal ambition enshrined in the agreement was “to hold the increase in the global average temperature to well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5°C above pre-industrial levels, recognising that this would significantly reduce the risks and impacts of climate change.”
In their public pronouncements, environmentalists assume as a matter of course that the Paris targets can and will be met. For them it is a matter of morality, for sure, but also, because 186 nations signed up to the agreement, a matter above all of cast iron policy. The world has said it will do it, and therefore it shall be done, whatever inconvenient truths there may be about global economic growth and concomitant increases in energy demand. They speak in terms of carbon budgets as if there is a sort of global green treasury which will order a halt to energy-related carbon dioxide emissions.
One need not be unduly cynical to see that the Paris targets won’t be met by posturing, transnational dirigisme and (let us not forget) the called-for $100-billion-a-year wealth transfers from North to South. But action taken by sovereign nations, companies and individual consumers is already changing the balance between carbon-neutral and carboniferous energy sources. In 2017, for instance, renewables accounted for 40 per cent of new generating plant installed around the world. As the noted analyst Kingsmill Bond of TS Lombard has said: “If you believe in marginal economics, then you had better wake up to the fact that renewables are now the marginal source in power generation.”
It is a fact little acknowledged by the green commentariat, obsessed as they are by President Trump’s decision to withdraw from the Paris agreement, that the United States has seen the largest reduction in CO2 emissions in recent years. This is partly due to the encouragement of renewables at state rather than federal level: in 2017, for instance, the oil state of Texas generated 18 per cent of its electricity from wind and solar. It was greatly helped by its huge indigenous natural gas supply, which was always on hand to balance intermittent renewable production. And that points to the decisive factor in US CO2 abatement: cheap and abundant shale gas has largely replaced coal in thermal power generation. Gas emits less than half as much CO2 as coal.
Coal is the fossil fuel most vulnerable to the transition to renewables over the coming decades. But coal is cheap and abundant, and in many countries its role as a major employer gives it political clout. While China is expected to replace much of its coal capacity with gas and renewables, India — which despite signing the Paris agreement insists that the burden of reducing emissions must fall on the old industrial nations — will expand its coal-fired power stations enormously.
Recent experience in the coal industry shows that attempts to write it off have had unexpected effects, which may foreshadow what will happen in the oil industry in future decades. Big coal producers had scaled back their investment in new mines for “prudential reasons” related to the reduction in coal demand in the US and Europe. But Asian demand has continued to rise, causing the market price to double in less than two years. The prime beneficiaries of the environmentalists’’ war on coal have been the shareholders in mining companies.
Hitherto, power generation has been the energy sector most amenable to decarbonisation. As the global economy grows by 3-3.5 per cent over the coming decade, electricity will take an increasing share of the overall energy mix. This will be driven by rapidly increasing urbanisation, especially in Africa and Asia, with 2 billion more people living in cities by 2040. But even with renewables taking an increasing share of generation, rising by 7 per cent a year, gas use will continue to grow strongly for some decades. Coal is expected to maintain its current production as its share of the overall cake declines.
But other sectors, especially transport and industry, are likely to remain strongholds of fossil fuel use — though there will be a gradual shift from oil to natural gas (again reducing carbon intensity). BP’s most recent Energy Outlook shows oil demand rising until 2035 before reaching a plateau. Natural gas use will almost equal oil’s by 2040, while the dramatic increase in renewables may still leave it in fourth place behind coal.
Transport is the big one. While humans continue to drive diesel and petrol vehicles, and to fly in airplanes that burn jet kerosene, the oil industry has little to fear. BP’s forecast, even if taken with a pinch of salt, dramatically illustrates oil’s transport market dominance. The forecasts for electricity are based on a rapid increase in electric vehicles, but from a low base.
One area where that might change is in shipping. Although statistics for fuel consumption in this sector are notoriously unreliable, it is safe to say that they account for about 7 per cent of global oil demand. Three quarters of this is heavy fuel oil, the dirtiest end of the oil barrel, and the rest marine diesel. The International Maritime Organization (IMO) pledged recently to reduce greenhouse gas emissions at least 50 per cent by 2050, compared to 2008 levels. One way of doing that would be to switch from oil fuel to liquefied natural gas (LNG), of which there is a rapidly growing supply, thanks in part to US shale. That of course would be an enormous job, a process lasting many years, involving the complete replacement of the current world cargo fleet. LNG emits about 30 per cent less CO2 than oil fuels, and to get to the 50 per cent figure some calculate that it would be necessary to blend in biogas to the LNG. The bottom line is that none of this will happen in a hurry.
Should the fossil fuel industries be concerned about divestment? And should investors be concerned about the value of their oil, gas and coal holdings? In both cases, the answer is a cautious “no”. It is argued that oil companies should begin to scale back investment in new production, and return more cash to shareholders. But barring a technological silver bullet — cheap, easy and large-scale battery storage, for instance — the realities of global economic growth combined with the relatively low cost of oil, gas and coal, mean that the old dinosaurs have a few decades to flourish yet before they too become fossils. Although they will be grazing alongside the renewable energy mammals of the future.
And John D. Rockefeller? A ruthless capitalist, he was also a devout Baptist who used his immense wealth largely for philanthropic purposes. He might not entirely disapprove of his descendants’ turn away from fossil fuel. As he once said: “If you want to succeed you should strike out on new paths, rather than travel the worn paths of accepted success.”