Energy Analysts Dismiss ‘Carbon Bubble’ Warning
By Paul Homewood
GWPF report on an article in the Financial Times, which unfortunately is behind a paywall:
Oil and gas companies are valued largely on reserves that will be produced over the next 15 years, meaning that their investors are not vulnerable to longer-term changes in energy markets, a leading industry adviser has said.
Daniel Yergin of IHS Markit rejected warnings of a “carbon bubble” that could destabilise financial markets as policies to combat climate change hit fossil fuel producers, saying the transition to renewable energy would take decades and investors would have time to adjust their holdings.
The dangers for financial assets created by climate change have become an increasingly prominent issue for investors. Last year, ministers from the Group of 20 countries instructed the Financial Stability Board of their regulators and policymakers to start looking at the risks and how to address them.
Mark Carney, governor of the Bank of England who chairs the FSB, argued in a speech last year that regulators needed to address the problem now, because “once climate change becomes a defining issue for financial stability, it may already be too late”.
The action by regulators could restrict the flow of capital to oil and gas companies by making it harder for banks and other financial institutions to lend to and invest in the industry.
In a paper published on Wednesday, Mr Yergin argued that the concerns expressed by Mr Carney and others have been overdone, because investors generally look at relatively short time horizons when valuing oil and gas assets.
It is a point I have been arguing for a while. There is simply no way that renewable energy can make more than a dent in demand for fossil fuels in the next couple of decades, regardless of what might happen in fifty years time.
Stock valuations of oil companies are essentially based on their earning potential in the short to medium term, just as most companies are. Maybe they won’t be around in 2050, but exactly the same argument could be made about Apple or Google.
Earning potential in the long term is ignored in valuations, not just because it is so uncertain, but also because when discounted back to NPV it is too small to be relevant.
The real danger to the fossil fuel industry is not what might happen in 30 years time. It is that interventions from the likes of Mark Carney could make it harder to raise new capital, thus leading to reduced investment in new fields.
This in turn will inevitable lead to oil prices spiking, with all the ensuing damage to the global economy.
What I had not appreciated that Carney’s intervention arose from a decision by those ministers from G20.