By Paul Homewood
The Law of Unintended Consequences!!
Climate activists celebrated landmark victories over Big Oil at the end of May, but investors should be wary of their environmental goals and the likely impact on demand for oil.
It may not be the outcome activists are hoping for.
Calls for oil companies to speed up the transition from fossil fuels to zero-carbon energy reached a crescendo at the end of May as a Dutch court ordered Royal Dutch Shell to increase its greenhouse emission cuts, Exxon Mobil XOM +0.8%, meanwhile, lost a battle – as well as seats on its board – with activist investors over its record on climate change. Chevron’s CVX +1.3% shareholders demanded an explaination how it plans to deal with Scope 3 emissions, the emissions generated by the consumers of its products.
Activist investors are turning up the heat on the oil industry after the International Energy Agency (IEA) released a bombshell report that said the world must stop investing in new oil and gas development immediately if it wants to achieve its net-zero goals.
The inherent flaw in the strategy to force the oil industry to commit suicide is that companies like Exxon, Chevron and Shell will just sell their assets to other players not subject to shareholder pressures.
It doesn’t mean the end of oil and gas production.
Indeed, national oil companies and sovereign wealth funds from Asia, the Middle East and Russia, as well as global private equity firms, would likely be the top suitors for oil and gas assets. Even banning production in the United States would only increase the value of other global deposits, including many in places with far worse environmental records than here.
Even Norway, one of the most progressive nations in Europe on climate change, understands this broader reality.
Norway has a huge renewable energy sector and is a world leader in offshore wind, but it has no plans to stop investing in its large oil and gas reserves. Oslo sees the environmental benefit of ensuring that new oil production should come from areas with sustainable practices and strong regulatory oversight, rather than countries that score poorly in these areas, including some OPEC producers like Iraq, Iran, Venezuela, Nigeria and Algeria.
And while the world doesn’t appear headed for a supply crunch in near-term, the outlook a few years from now changes dramatically if the world’s largest oil companies pull the plug on exploring for oil and gas.
The world is rapidly returning to pre-pandemic demand levels for oil thanks to aggressive vaccination programs. International benchmark Brent crude prices topped $70 a barrel for the first time since the pandemic took hold and U.S. retail gasoline prices over $3 a gallon are at a seven-year high.
If resources stay in the ground due to climate activism, there is a serious risk of a spike in energy prices unless there is a corresponding reduction in demand.
A substantive reduction in demand is unlikely.
via NOT A LOT OF PEOPLE KNOW THAT
June 3, 2021 at 07:15AM