“The real financial risks are from Mr. Carney’s (Bank of England Governor and FSB Chair) attempt to turn certain kinds of legal investments into political targets. The political allocation of capital into housing was one of the root causes of the 2008 panic. Let’s not politicize energy investing in the same way.”, The Wall Street Journal Editorial Board, December 9, 2016
Not So Risky Climate Business
A new study dismantles the logic of oil and gas ‘systemic risk.’
Among the many doomsday scenarios floated by the climate-change lobby is a theory that asks: What if an abrupt change in policy strands fossil-fuel resources in the ground, which in turn crashes oil companies and then the global economy? IHS consulting recently released a rebuttal to this “carbon bubble” babble, and the dismantling deserves more attention.
Daniel Yergin and Elena Pravettoni of IHS looked at whether oil and gas assets pose a “systemic risk” to the world financial system, a danger floated by more than a few regulators. No less than Bank of England Governor Mark Carney warned in 2015 that limits on carbon could crater asset valuations and “potentially destabilize markets,” as the damage rippled through insurers and banks with portfolios in oil.
Not so much, says IHS. Oil-and-gas companies are not going belly up in an event similar to the collapse of Lehman Brothers. One reason is that about 80% of the value of most publicly traded oil companies is derived from “proved reserves,” which are projects that will happen within a decade or so. In other words, companies aren’t assuming as assets every drop of oil in the ground that they may or may not be able to develop.
Regardless of forced carbon reductions or temperature spikes, the switch to alternative fuels will take decades. For some perspective, the authors note that the oil industry started up in 1859 but did not overtake coal as the world’s largest energy source for about a century. Barring some technological breakthrough, no one expects oil to be a minority source of energy before 2050. Financial markets and insurance contracts can manage risks as they evolve year-to-year or even day-to-day.
Perhaps the strongest evidence that oil companies won’t blow up the world economy is that they’ve been stress-tested by the recent crash in commodity prices. Some 82 global oil companies burned off 42% of their value between June 2014 and December 2015, or about $1.4 trillion in market capitalization. Yet the report notes that since oil dipped below $100 a barrel in 2014, the Dow Jones Industrial Average has risen 6%.
The panic over climate risk is really a pretext for more regulation. Mr. Carney chairs the Financial Stability Board, an international outfit that exists to flag financial risks and offer itself as the answer. An FSB task force later this month will deliver “guidelines for voluntary disclosure” that could cover assets and risk practices for oil companies as well as their investors. The report will likely be submitted to major country financial ministers for approval.
Mr. Carney and the FSB are playing to climate activists, who want to use such disclosure as ammunition to pound pension and other investment funds to divest from fossil-fuel companies. Mr. Carney has also highlighted the climate-change free-speech probe led by New York’s Attorney General Eric Schneiderman, which is based on flimsier evidence than even Mr. Carney’s conjectures.
The real financial risks are from Mr. Carney’s attempt to turn certain kinds of legal investments into political targets. The political allocation of capital into housing was one of the root causes of the 2008 panic. Let’s not politicize energy investing in the same way.