The future is yet to be written, we could move from our current fossil fuel driven, technology era to a sustainable technological era or suffer climate change and fossil fuel depletion in a very uncertain future. Exactly how bad the future of our lives, that of our children’s and our grandchildren is unknown, the discharge of CO2 through human activity will not in itself cause huge climate disruption, what is at issue is the feedbacks of the climate. Computer modelling, applied physics and observation can only do so much in the testing of climate change theory, they are not crystal balls but tools. And that is very much the theme of this post.
When I first became interested in the environment way back in the 1970s the issue was one of pollution and the loss of species, despite the knowledge that CO2 could change the climate as early as the 1950s it only became an issue in the early 1990s, but what if CO2 was not a problem, where would we be today?
Peak Oil, that is, the point in history when demand starts outstripping supply as well as the discovery of replacement wells is an issue now. [ the Wikipedia entry covers the issue extensively] Predictions for when it will occur range from any time between 1999 and 2040. The United States Government felt compelled to do a study of the consequences in its Hirsch Report in 2005 which concluded that oil would start to decline around 2015. Oil companies such as Shell are dismissive of Peak Oil believing that the industry will carry on supplying well into the future and when unconventional oil is taken account, that is very heavy crude and tar sands which make up over half of known reserves, we have plenty to burn as pointed out in these articles, here and here. Others however mistrust the fossil fuel industry [see here] [and here] with industry experts being at the forefront of the criticism, the author of the US Peak Oil report was a former high ranking employee of Exxon.
When the banks collapsed it took governments by surprise, well at least they pretended ignorance despite warnings from whistle-blowers in banking. Governments were assured by the finance industry that everything was above board and it was yet another way they were creating wealth. In hindsight it is all perfectly clear, the banks created a system the was inherently flawed and easily abused, and one some would consider fraudulent. Why then, should we, our government and anyone effected by the 2007 credit crisis trust any industry? Is being burnt by the banks an exception or would it be wise to be sceptical of the energy industry?
Enron was, back 2000, an energy giant with a turnover of $100 billion and a value of over £60 billion, a year later it was bankrupt as a complex fraud was revealed. Board members and key personnel were unaware of the fraud, the clever book keeping and the amount of liabilities. Unconventional shale gas [aka fracking] may also be an elaborate business model bordering on a Ponzi scheme, or at the very least a gold rush. At the moment the dash for shale gas is big in the US, it is very competitive and the price is now low, at the same time insiders indicate some ‘seams’ are lot less productive than first thought but as drilling rights are highly prized some companies are appearing to be in good profit by selling off their rights to late comers. At the moment it is a gold rush with plenty of investors but if production quickly peaks then there will be more losers than winners and ultimately the gas price will climb. This video covers the issue in more detail. You may ask, why don’t people such as investors do a little research? Clearly on past performance whether it be the 1930s Wall Street crash, 2007 credit crunch, the dot com bubble or the recent sale of Facebook which lost half its value in just 3 months, investors operate in a very optimistic environment.
Sceptics/deniers of Climate Change are quick to mention the wonders of thorium nuclear reactors [which have failed to work commercially for 50 years] and shale gas, they want to believe both technologies will provide cheap abundant energy. The desire, particularly in the US to return to the good old days of cheap fuel is such that a new conspiracy theory is forming that it is only evil [tree huggers] [the government] [bankers] [Arab revolutionaries] (tick box) are keeping the prices high. But before we laugh at their naivety look around, do you see many people getting concerned that the beginning of the end of the oil era may be upon us in 2 years time?
About 3,170 years ago Ramsis III built great temples, many statues, a great tomb and additions to the great temples that superseded that of many of his forebears. His inscriptions and relief carvings show a great Pharaoh ruling over a great land, the truth was very different to the impression. Documents were to eventually turn up that tell of a different story: his most important staff, his tomb workers went on strike because of lack of food, his great battles with invading armies were undecided and his queen organised a military coup against him. Egypt was suffering drought and it was part of a 20 year climate change event that reshaped every civilisation. Ramsis III is considered the last great pharaoh and Egypt quickly fell into decline after his death. He held it together and gave the impression nothing had really changed.
The oil [and gas] industry want to give the impression there is no need to worry, and we want to believe them. We won’t be thrown into some Mad Max world where gangs of bikers scavenge the last of the petrol, but fuel will continue to be more expensive until a point when countries start warring, economically and perhaps violently to get their share of a diminishing resource. Both China and the US need to keep their peoples happy with the consumer dream, for China consumerism has been the treat to keep its people from revolution, the moment it fails to deliver is the moment the people will hit the streets. If a billion new car owners is what it takes I am sure China will do everything in its power to enable that [it plans for just 20 million electric cars by 2020].
So if you are an investor, say, with a few £billion for pensions in 20 years time where will you put your money. Even the oil companies admit that the cheap easy oil will be severely diminished in 22 years. If climate disruption continues to increase in frequency we can expect more years like this year where the US and Europe have lost 20% or more in food production. If governments do decide to act belatedly and cap CO2 emissions and therefore the fossil fuel industry where are you going to put that money, now?
BP’s 2011 profit was $24 billion, with assets of $280 billion, as long as it stops its rigs or refineries blowing up it is a safe investment, but those assets are future oil, oil in the ground which may have to be left there or may be grossly over-estimated. As an investor you don’t know and if times are good now what is going to be the signal that the black gold oil rush is over? As oil companies seek new reserves they are drilling into deeper waters, operating in unstable countries, spending more money looking for smaller and smaller reserves and those healthy dividends will start to look smaller and smaller. You don’t even need peak oil to get nervous: Saudi Arabia is one of the most oppressive societies on earth, it is also secretive, if a country like Tunisia can erupt in revolution so can SA, and there the Wahabi Islamists, who are likely to prevail, are not friendly to the West. A few months, a few weeks without their oil would throw the markets into chaos. [If in the first Gulf War we hadn’t joined in the Kuwaitis would have have sold $billions of assets to raise a mercenary army and cause chaos to the global economy in the process.]
We won’t know when peak oil has occurred until after the event so does it not make sense for investors to plan ahead now? The alternatives to the $6 trillion energy market as well as current transport are clear. It is alternative energy, it is electrification of railways and eventually private transport, it is local business, local shops, and local housing rather than out of town suburbs, shopping malls and long commutes. It is thousands of opportunities to be there first and make a profit in the process. Even Richard Branson and Virgin airlines is investing in a non fossil fuel, non bio fuel alternative ‘for when oil runs out‘.
I doubt many investors will read this blog but to make that change and for humanity to avoid that environmental disaster we need to do something. May be it is -the economy stupid- we are perhaps, wasting our breath on the denial-sphere, on politicians with a five year agenda, instead we need to focus on those with a long term vision, we need to get the market to think straight and really hedge its bets.