Bubble: Oil and Gas Could Lose 95% of Value

If you wonder why petro-states like Russia and Saudi Arabia have become so bold in attacking democracies around the world, and why a fossil-fuel dominated Republican Party is carrying water for them, look no further.

Financial News (London):

Companies in the oil and gas sector, including large groups such as Shell, BP and Exxon, could lose 95% of their value by 2050 if governments take action to limit global warming to 2 degrees Celsius, according to new analysis.
The report, from the investment consultancy Mercer, is one of the first comprehensive attempts to model sector-by-sector effects of climate change, and potential regulatory action to combat it, on investors’ portfolios.
It concludes that efforts to keep global warming to 2°C will have a cost impact for equity returns in the coming decades. Overall, efforts to mitigate climate change will cost stock investors in developed markets around 0.2% a year in the next three decades, adding up to foregone returns of 5.6% by 2050.
But because stocks are not the only thing investors put money into — Mercer also looked at the consequences for property, bonds and infrastructure — overall, efforts to curb climate change are expected to benefit investors by between 0.1% and 0.3% a year. Allowing it to run unchecked would hurt returns overall.
But within those averages, the costs and benefits vary wildly. Mercer estimated that in the scenario where governments take “aggressive” action, by 2050 the global demand for oil will have dropped by a third, while the supply of less-polluting natural gas rises 20%. Coal power will be aggressively phased out and electric cars will make up half of new vehicle sales.

In that world, oil and gas stocks will lose 42% of their market value by 2030, and 95% by 2050. On the plus side, investments in renewable energy, such as wind and solar, would soar by 178%.
But if governments fail to take action, and emissions of carbon dioxide continue to rise, leading to global warming of 4°C by 2050, there will be no winners, Mercer predicted.
The high-polluting sectors are better off. Instead of falling 95%, oil and gas stocks might be off by only 15% or so. However, Mercer said: “In 3°C and 4°C scenarios, all sectors, apart from renewables, have negative return impacts, to 2030, 2050 and 2100, with return impacts varying between 0.1% p.a. and 7.7% per year.”
Helga Birgden, global business leader for responsible investments at Mercer, said the report showed that for “nearly all asset classes, regions and timeframes, a 2°C scenario leads to enhanced projected returns versus 3°C or 4°C and therefore a better outcome for investors”.
She added: “It’s an opportunity, since although incumbent industries can suffer losses in a 2°C scenario, there are many notable investment opportunities enabled in a low-carbon transition.”

New York Times:

An unsettling fact of Wall Street today is that some of the same people who accurately predicted the housing bubble are now describing another bubble, whose collapse will make the financial crisis of 2008 look mild. Perhaps the most famous is Jeremy Grantham, a founder of the Boston-based asset-management firm G.M.O. and a commander of the British Empire. In 2005, Grantham began to write letters to his investors saying that the housing market appeared overleveraged; in 2007, he warned of “the first truly global bubble.” His latest prediction overshadows the preceding one. We are, he says, in the midst of a historic period of mispricing. Because the global economy depends on hydrocarbons, practically every asset in the world relates in some way to oil and gas. Grantham believes hydrocarbons will be priced, or regulated, into submission. In light of that belief, not only oil companies’ stock but practically everything else on the market looks falsely inflated.

–

When Grantham started his climate fund, the Grantham Foundation, in 1997, many asset managers on Wall Street viewed his work as a fringe pursuit. “There was an undercurrent of, ‘Oh, this is a load of [expletive],’ ” he said. During the past two years, however, the cavalcade of hurricanes, droughts, floods and displacements has made it impossible to maintain the same level of denial in the polite corporate circles that ring Wall Street. This did not mean that climate-based investment strategies had become popular. It was the opposite: No one was willing to risk all of his or her “career units,” as Grantham called them, on climate.
“The problem of doing it accurately is, of course, massive,” he said, referring to betting on climate change. “It’s a fast-moving area with even more uncertainty than an uncertain world. It’s the cutting edge of uncertainty.”
Grantham’s fund is going long on lithium and copper, which he believes will form the vascular system of future renewable-powered supergrids. His confidence derives from an odd and specific conviction that “sooner or later, there will be a carbon tax,” and much of the market capitalization of the leading oil and gas companies will be erased. “You have a certainty,” he said. “It will happen. Or we’ll be on our way to a failed civilization.”

It took me a moment to process what this meant. Grantham was saying that a bet on a future carbon tax was a sure thing because the absence of a carbon tax meant civilizational catastrophe. If he were right, he could make billions. If he were wrong, it wouldn’t matter, because the world would be on fire. “Perfectly fine logic,” Grantham said, as the old radiators gurgled around him.
If Grantham’s logic was so perfect, why didn’t everyone see it? It’s often said, on Wall Street, that the stock market’s prices reflect all available information — an idea known as “efficient market theory.” The idea has dominated the financial sector for half a century. If it really were luminously obvious that a carbon bubble was about to explode, the theory says that prices should reflect that — in other words, that Grantham had no edge and his thesis made no sense.
“They say everything’s priced in,” I ventured.
“Complete [expletive],” Grantham said. Then he embarked on a detailed explanation of why, summarizing John Maynard Keynes’s theory of career risk — “that it is better for reputation to fail conventionally than to succeed unconventionally” — before returning to present-day Wall Street, where asset managers, impelled by short-term self-interest or outright denial, feared to stick their necks out on climate-related bets. Faced with such irrational behavior, efficient market theory seemed wobbly. “It’s [expletive] because people are incompetent,” Grantham continued, “it’s [expletive] because —”
Around 10 a.m., his cellphone crackled to life, and a woman’s voice said: “Jeremy, you have to get to your next meeting.”
For a second, Grantham appeared almost mournful. He held my coat up for me to put my arms through. Then he dashed downstairs into the snow.

23 thoughts on “Bubble: Oil and Gas Could Lose 95% of Value”


  1. Why would companies that provide 20% more natural gas in 2050 than currently and still provide 70% of current oil production lose 95% of their value? Plus, they wouldn’t be like every other company and compensate for lost revenue streams with other sources?

    The report says ‘aggressive’ action still results in 50% gasoline cars in 2050, 70% oil use, 20% more natural gas use, and investment in renewables in that time doesn’t even double – and yet we stay under 2 degrees warming in that scenario?

    That doesn’t seem weird?

    Reply

    1. It does seem weird. Probably because electric vehicles are going to have a lot more penetration than the report estimates by 2050.

      Regardless, these b******s chose the most nefarious path possible, by electing to conduct a secret multi-billion dollar disinformation campaign. Instead of reaping trillions of dollars by embracing the challenges and technologies and opportunities inherent in building a new carbon-free energy system.

      History will record Exxon and Koch, etc etc as perpetrators of evil on the grandest scale in human history.

      Reply

      1. Probably because electric vehicles are going to have a lot more penetration than the report estimates by 2050.

        I still think ICE cars will have a very long tail in many parts of the world, even after new car sales are dominated by EVs.

        Reply

    2. Large oilfields produce for decades. If there is more remaining in existing fields than is allowed by the carbon budget, then it becomes a permanently oversupplied market at some point.

      Reply

      1. There are about 900,000 active oil and gas wells in the US. Half of the oil wells and 2/3 of the gas wells are unconventional shale explorations. Those are depleting much faster. More than half a trillion $$$ have been burnt this decade by fracking companies. So these assets are not worth what certain investors still think.

        Reply

  3. The “petro-dollar” is deeply embedded into the health and running of the U.S economy – it will have to change profoundly to adapt to a non fossil-fueled centric system, I guess president’s like Trump cannot a imagine post-ff society.

    Saudis Threaten ‘Nuclear Option’ To Kill Petrodollar

    Saudi Arabia threatened to use the “nuclear option” of undermining the petro-dollar if the U.S. moves forward with the NOPEC bill.

    The U.S. Congress has been mulling legislation, known as the NOPEC bill, which would allow the Justice Department to take antitrust action against OPEC for manipulating the oil market. Specifically, the bill would remove sovereign immunity countries have from such action, allowing the U.S. government to sue. In theory, the law would prevent OPEC from coordinating production cuts.

    https://oilprice.com/Energy/Energy-General/Saudis-Threaten-Nuclear-Option-To-Kill-Petrodollar.html

    Reply

  4. The sooner that this affront to lands and the original occupiers of those lands end and returns it to nature, the better.

    Large enough to be seen from space, tailings ponds in Alberta’s oil sands region are some of the biggest human-made structures on Earth. They contain a toxic slurry of heavy metals and hydrocarbons from the bitumen separation process.

    https://www.nationalgeographic.com/environment/2019/04/alberta-canadas-tar-sands-is-growing-but-indigenous-people-fight-back/

    Reply

  5. Can we wait for the bubble to burst ? Listen to this guy he knows what he is talking about.

    Time is running out to save the natural world from extinction.

    https://www.theguardian.com/world/2019/apr/11/expect-even-greater-migration-from-africa-says-attenborough-imf-global-warming

    ‘What we do in the next 20 years will determine the future for all life on Earth.’

    https://www.washingtonpost.com/climate-environment/2019/04/11/natural-world-is-under-attack-heres-why-david-attenborough-is-still-hopeful/?utm_term=.9e2d87a1d95a

    Reply

    1. Oil prices are currently low due to a slowing global economy and because the U.S. is producing too much:
      https://www.cnn.com/2018/12/26/investing/oil-prices-crude-2019/index.html

      Peak oil demand – maybe – if the global economy never speeds up again. EVs still have such a slim market share that they have little impact at this point.

      Chevron is just diversifying, not getting out of the oil business:
      https://www.cnbc.com/2019/04/12/why-oil-giant-chevron-is-buying-anadarko-petroleum-for-33-billion.html

      Reply

  7. The near term still shows rising oil and coal and FF’s to power civilization. We’ll grab and use any and all energy available.

    In the unlikely event of a significant carbon tax, a study a few years ago found that they’d lose not 95% but 100%. They’d all go bankrupt. However, a recent article said that Saudi Aramco could produce oil at only $3 per barrel; that’s stiff competition when push comes to shove in the economics of alt energy.

    Reply

    1. What will happen is that the developed countries will arrange for the remaining FF budget to be produced in their own (or allied) countries, and the rest will stay in the ground. We are already seeing this vis a vis Iran, Venezuela and the push to replace Russian gas supplies to Europe with US LNG.

      Reply

      2. Also => Research shows that natural gas no better than coal for mitigating climate change

        => Oil and gas is sector top source of US methane emissions, ahead of agriculture

        A gas well remains a gas well, even when production is long ceased, the well is just plugged. As shale gas exploration needs an ever growing amount of wells being drilled just to keep production flat, we will see a vast growth of the amount of gas wells. 5% of gas wells leak from day one. After 14 years, 50% of the wells are leaking. So it’s only a matter of time when methane will be released into the atmosphere.

        Reply

  9. It’s often said, on Wall Street, that the stock market’s prices reflect all available information — an idea known as “efficient market theory.” The idea has dominated the financial sector for half a century.

    BOOK RECOMMENDATIONS:
    Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets (2007), by Nassim Taleb. Ever notice how every change in the market can be explained post-facto as a predictable event. Wall Street has a long history of bullshitting itself.

    Mean Markets and Lizard Brains: How to Profit from the New Science of Irrationality (2008), by Terry Burnham. The irrationality of the human brain is a central topic to the skeptics’ movement, explaining people’s embrace of woo. This book focuses on how it manifests in the investor community.

    The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street 2010, by Justin Fox. He uses the history of the stock market to break down the myth of the rational marketplace.

    Reply

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