A strange thing is happening on the way to our energy future. The North American hydrocarbon bubble that the oil industry has been inflating is now suffering some serious punctures.
For one thing, a decrease in consumer demand is depressing prices, which is bad news for Canadian oil sands, deep sea, and tight shale extraction, all of which require high and increasing prices to make a profit, attract investment and stay in business.
A new and even more ominous hole has now been opened in the hydrocarbon energy bubble: the investment community is beginning to back away from the fossil fuel industry. When the investment community begins to pull its money from an economic sector, we know that a long-term bell is tolling its financial demise.
Bevis Longstreth dropped the latest bombshell in this dramatic scenario at the Harvard Law School on September 29th. In speaking to an audience of pension fund managers at the Boston Carbon Risk Forum, he pulled no punches about what smart money should now be doing. He argued strongly for disinvesting from fossil fuels including all hydrocarbons.
Who, you might ask, is Bevis Longstreth to issue such dire warnings to the managers of vast investment fund portfolios?
Well, it happens he is the former head of the United States Securities and Exchange Commission – the foremost regulating agency charged with the prudential oversight of the most powerful investment environment in the world. President Regan twice appointed him to this position. He is a former member of the Board of Governors of the American Stock Exchange and a former trustee of College Retirement Equities Fund. For many years he served on the Pension Finance Committee of the World Bank.
He probably knows what he is talking about, and what he is talking about now is very bad news for the fossil fuel industry. You can read his speech at http://www.huffingtonpost.com/bevis-longstreth/homer-describing-big-oil-_b_5909420.html
The movement for disinvestment from fossil fuels started with student groups going after the investments of their college and university endowment funds over the climate disruption issue. But now, the prospect of big oil running into big time stranded assets has spread the momentum of disinvestment into mainstream, conservative minded, financial analysis and advice.
The argument for prudential investors is pretty straightforward: The train has left the station on the control of carbon. Carbon control is coming, and when it does big oil and big coal will have to leave the deposits of black gold in the ground that they now count as assets against their debt load, and on which they depend to attract investment.
According to Bevis Longstreth, and to an increasing chorus of analysts at major financial institutions like Goldman Sachs, Citibank, HSBC and Standard & Poors, long-term investment in the fossil fuel industry is moving into a high-risk zone, and pension fund management, in particular, should be heading for the exit.
If the international control of carbon does not gain the political traction these analysts foresee, and the fossil fuel industry continues to maximize the extraction and consumption of hydrocarbons, all bets are off for preventing a level of climate disruption that will trigger catastrophic economic and societal collapse. After laying out his investment analysis in the light of this scenario, Longstreth offers the following advice:
The financial case advanced above rests on the claim that fossil fuel companies will prove to be bad investments over the long term and, therefore, with foresight that anticipates this result, should be removed from the long-term holdings of an endowment before the strengthening likelihood of this result becomes commonplace in the market.
This is applying the precautionary principle to fiduciary responsibility. This is good conservative thinking for pension funds and institutional endowments, but bad news for the coal and hydrocarbon industries, including the natural gas sector.
Although it’s hard to imagine the scale of change in store for our energy future, it’s not hard to see what will happen to smart money as financial leaders of Longstreth’s stature counsel disinvestment. This is serious business. As the saying has it, “Follow the money.”
Written by Keith Helmuth, a member of the Woodstock Sustainable Energy Group.
Energy Futures column published in the Bugle-Observer, October 10, 2014.