One thing that globalisation enabled the developed world to do was to dump a great deal of its “dirtiest” business in developing world countries.
From factories to coal consumption to “recycling” (sometimes a euphemism for “landfill, but in a poor country”), we swept all the mucky stuff out of our front door and into someone else’s.
This is not necessarily a bad thing – industrialisation has always been a good path towards getting people out of poverty. But it’s a good illustration of the law of unintended consequences: we didn’t get rid of pollution, we just moved it to somewhere where it was less tightly regulated.
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Why am I bringing this up just now? Because the same thing is going on in the oil business.
The unintended consequences of the anti-fossil fuel crusade
Long-suffering readers will know that I am a sceptic by nature (I even wrote a book about it).
And I’ll admit that when it comes to ESG (environmental, social and governance – what a meaningless acronym) that scepticism goes up to 11.
But there’s a good reason for that: so much of this stuff is driven by a desire to be seen to be doing “the right thing” rather than engaging with any of the practicalities involved. That’s why “greenwash” is such a problem in this sector. Words are easy. Slogans cost next to nothing.
The problem with hard problems is that they’re hard. Tackling carbon emissions is particularly hard. For a start, it’s a global problem. Co-ordinating the world’s nations is a famously difficult task.
For another, it involves finding a better store of energy than fossil fuels. The best alternative that we’ve found – nuclear power – turns out to be politically toxic because (and I have some sympathy with this view) it’s hard to trust human beings to handle something so potent with the consistent competence necessary to avoid the occasional high profile disaster.
Shouting at these problems doesn’t make them go away, but it does give an instant feel-superior payoff. And unfortunately, it also makes for bad decision making, because short-term payoffs are appealing to human beings.
This takes us to divestment and fossil fuels, and a really interesting piece in today’s FT by Bill Barnes, who is the founder of energy project development consultancy Pisgah Partners.
Government and societal pressure – not to mention the pain of a volatile oil price and a genuine concern about the industry’s long-term viability – are pushing big oil companies to diversify and “divest” themselves of oil assets that might well be “stranded” (ie unextractable and thus worthless) at some point in the future, when oil demand has peaked.
There’s an obvious risk here though: it’s one thing to say that we shouldn’t use oil, but it’s quite another to find something that we can use instead.
If we need oil, we need oil. It’s a bit like any form of prohibition – if you push the supply of a good out of the mainstream, but demand remains the same, then you’ll create a black market for it (or in this case at least, a less visible and accountable one).
So in reality, all that this pressure is doing (and it’s a point that Merryn has been making for quite some time) is pushing ownership of oil out of the relatively transparent, comparatively disciplined, and somewhat accountable hands of public companies, and into the far less transparent or accountable ones of private or state owners.
Opec doesn’t do stranded assets
So what are the consequences?
Barnes starts by making the point that the 2010 Deepwater Horizon disaster cost BP and its partners “more than $70bn in remediation costs”. He wonders what would have happened if the assets had instead been in the hands of “highly leveraged private equity-backed independents”.
Who’d have paid the bill?
It’s a good question. And it’s increasingly pertinent, because just like the exporting of big industry and coal usage from the developed world, these things don’t vanish.
When Big Oil sells its assets, they don’t get shut down, they just shift ownership. And undoubtedly, some of these new owners will be in “weaker hands unable to meet liabilities accruing from a catastrophic failure.”
In short, “energy asset sellers and their regulators should carefully consider whether in their attempt to reduce the risk of ESG-related damage they merely shift the liability to others less able to shoulder the burden.”
Meanwhile, you also shift assets to those who have no qualms about ruthlessly exploiting them. You can see it at work in the oil market right now. Opec members must be laughing; the rise of shale in the US was the biggest threat to those regimes since the cartel was formed. Combined with the threat of long-term peak oil demand, it must have seemed like their time was up.
But now the frackers and other Western oil majors are hobbled by hostile politics. And in the meantime, the world will still need oil to manage the transition (if and when it happens). So it’s little wonder that Saudi Arabia’s energy minister, Prince Abdulaziz bin Salman, has reportedly sworn to pump out “every molecule of hydrocarbon”, says Bloomberg.
No stranded assets there.
To be clear, I’m fairly optimistic that the oil era will come to an end at some point. I’m hopeful that we’ll find cleaner, more renewable forms of energy, and hopeful that technology will make those forms cheaper than our existing energy sources (though that’s a tough call).
But in the meantime, we need this stuff. And the drive to push it into the hands of what adds up to lower-efficiency producers, implies that oil will be more expensive than it otherwise would be during the transition period.
That’s probably good news for big oil’s profit margins. And I suspect that most of those companies will be wary of spending too much of that cashflow on alternative energy projects that might not work. So you’d think it’d be good for the dividends they’ll pay over time too.
We’ll have more on the oil sector in MoneyWeek in the near future. If you haven’t subscribed already, get your first six issues free here.
Executive editor, MoneyWeek
John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
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