“Living is easy with eyes closed, misunderstanding all you see.” — John Lennon, Strawberry Fields Forever
We just came across this Marketwatch opinion article by Michael Brush, a contributor to the New York Times and The Economist, among other news outlets. He espouses the traditional contrarian take on the down-and-outers, which are, in this case, fossil fuel companies. Mr. Brush’s thesis is that “the most hated companies will eventually bounce back strongly.” He cites five reasons:
- At around $44 a barrel for West Texas Intermediate (WTI), oil will probably hold its ground near the lows it hit twice earlier this year before bouncing higher.
- Investors are too worried about Iran.
- Saudi Arabia will get what it wants: less supply from others. But not the way many investors think, and it will still take a while. But it will happen.
- Meanwhile, lower oil prices are boosting demand. A lot.
- Energy insiders just turned very bullish.
All eminently reasonable, with a dash of geopolitics thrown in for good measure. But Mr. Brush, who may reflect the state of conventional thought within the investment community, ignores the largest macro influence on fossil energy companies today. We emailed Mr. Brush to ask: “In your column on energy stocks you're currently recommending, you made no mention of the effect of climate change on the supply/demand equation for fossil fuels. Why?” We have not yet received a response, but would be happy to publish his comment should we receive it.
Here's one climate-aware answer to Mr. Brush's Saudi point from the Financial Post a few months ago: "Naimi and other Saudi leaders have worried for years that climate change and high crude prices will boost energy efficiency, encourage renewables, and accelerate a switch to alternative fuels such as natural gas, especially in the emerging markets that they count on for growth." And this leads to a question: How is it that the Saudis, with their vast reservoirs of oil, are worried about the effects of climate change on oil markets, and Mr. Brush isn't? If the Saudis are rational actors, their assumption of shrinking oil markets due to climate change would lead them to sell every last barrel they could before the energy market takes a sharp turn towards renewables. This is what holders of oil reserves will do if they are concerned about stranded assets. Do you really think they are ignorant of what's happening in coal?
It may well be that Mr. Brush and, earlier this year, Mr. Skorina, opining on the fossil fuel divestment issue, are surveying the known universe when they reach their conclusions. If, as a small random sample of Wall Street thought, they left climate change out of their portfolio considerations, perhaps it's because conventional analysis defines the playing field as supply/demand influences within the oil markets and related macro-economic factors but not the climate change tidal wave (figurative and literal) whose approach turns conventional assumptions upside down.
If Mr. Brush and Mr. Skorina are examples of conventional Wall Street group think, it explains how hedge fund managers and professional investors, supposedly the best and brightest, can be so easily fooled by tribal considerations, and sometime affinity fraud, as they ignore matters most linked to the health of their portfolios.
Fingers on the Scale of Science
Science, folks, is science. Investors generally don’t have a problem with scientific conclusions; to the contrary, they generally want to be the first onto the new research, since that’s where the money will be. Note the phrase “will be”, not “was”. That’s key to understanding the current attempts to obscure climate science. There is now information in the public domain highlighting the efforts of at least two mega-investors to put a finger on the scale of climate science.
Several years ago, the Koch Brothers tried to rent a scientist and hired Richard Muller, a physics professor at UC Berkeley who was a prominent climate science skeptic. As you can see, it appears they did not get what they paid for; we don’t know if they asked for their money back. But Dr. Muller, upon a careful review of the evidence, concluded that “the average temperature of the earth’s land has….an increase of 1 1/2 degrees F. over the most recent 50 years” and that “essentially all of this increase results from the human emission of greenhouse gases.” It should also be noted that the Koch Brothers are known to be active against solar energy as well at the government level. One might conclude that they believe in free markets for themselves more than for their competitors, and support government interventions for their own interests, but not for others. If their actions suggest they don't really believe in free markets.......well, that's a different discussion.
Paul Singer of Elliott Associates, who reportedly provided a significant percentage of funding for a Danish climate denier has been more fortunate thus far, as his protege has had articles published in the Wall Street Journal, among other places.
Suppose 100 years ago buggy whip and horse-drawn cart makers had started a disinformation campaign against the automobile in its early stages, maintaining that: a. the science wasn’t proven; b. the rise of automobiles would cost people in the affected industries their jobs. Creative destruction is an accepted notion of capitalism. We wonder why the same free-market business owners who will happily shrink their workforce the moment they can find other efficiencies will remember to support job creation just when their own profit streams are most at risk from market forces. Change creates jobs, just not in your company if you're making today's buggy whips.
Do you want to be persuaded to take a position contrary to accepted science just because a few guys with a lot of money and power want to protect their positions? For a billionaire, the incremental cost of sowing doubt is minute compared to the economic benefits. When the cost of trying to buy and disseminate faux scientific conclusions is the equivalent of leaving a tip for a waiter in a fine restaurant, the burden of due diligence for the other investors becomes considerably greater.
Coal as Harbinger of Broader Fossil Fuel Price Deterioration
The value of coal stocks have generally fallen about 80% in the last four years. And this has occurred in spite of the coal industry’s ability to socialize private costs by offloading substantial ancillary health and clean-up costs onto the taxpayer. Apart from that, the beloved free market is speaking, as noted in this recent Bloomberg article:
"King Coal is dying of natural causes: Market forces, technological advances, and public demands for clean air and climate action have combined to make alternative sources of energy more financially attractive. The price of new wind power, for example, is lower than that of coal in most parts of the country."
Perhaps Mr. Brush should be asking: what are the broader forces at work behind the shift away from fossil fuels? How quickly will negative fossil fuel impacts on climate affect the fossil fuel companies in investor portfolios? Will the carbon-related forces that are causing the extinction of a surprising number of animal species on Earth have an ironic reflexive effect, causing the extinction of companies I now hold?
Increasing Delta of Climate Change
Delta measures the degree to which an option price changes relative to shifts in the price of the underlying stock or commodity. As applied to climate change, you might look at your stock portfolio as a handful of options increasingly influenced by the rate of climate change. Which is to say that the rate of change of the physical world may soon approximate the rate of change in the internet world, where mega-companies can now arise (and sometimes disappear) in a mere ten years.
Here are a few anecdotal indications to paint a clearer picture of the world you are living and investing in today:
- NASA reports three-inch sea level rise since 1992, with the rate of the rise increasing. “People need to understand that the planet is not only changing, it’s changed,” NASA scientist Tom Wagner told reporters on a conference call. It was only four years ago that the question was asked, here at AllaboutAlpha, is it worth washing away your Hamptons beach house just to make a few bucks on carbon emitters?
- Major corporate movement in support of climate change solutions. Companies like Gap, Ebay, Mars, KB Home, and Dignity Health are supporting a California state bill to reduce petroleum use by 50%. Dignity Health said, “Climate change threatens to undermine 50 years of advancement in population health.” The oil industry is opposed.
- Firefighters are seeing material changes in nature and generation of wildfires in the western United States. These brave gentlemen have a unique perspective on the problems generated by a changing climate, dealing with it in the most intimate terms.
- Climate change affects electric grid reliability. "According to the U.S. Department of Energy, or DOE, extreme weather is “a leading environmental risk” to electricity transmission, storage, and distribution systems," as per this linked report.
- Citibank says that the cost of not acting on climate change is $44 trillion. As reported on CNBC. That's trillion with a 't'. But seriously, folks, they're bankers, not scientists. Some US investors might follow the line that GOP presidential candidates are fond of saying, and ask, they're not scientists, so how could they possibly know?
- Reuters reports: "Global food shortages will become three times more likely as a result of climate change and the international community needs to be ready to respond to price shocks to prevent civil unrest, a joint U.S.-British taskforce warned on Friday." This is in line with the US Defense Department's highlight of climate change as a national security threat for this reason, among others.
Climate Change = Opportunity and Changes in Assumptions
Naomi Klein's recent book This Changes Everything, which explores the effects of and solutions to climate change from a different perspective. This New York Times book review will give you a quick take on the essence of the book, although it will raise a larger question too, noted in the book's subtitle, Capitalism vs. the Climate.
To us, the entire debate about the rights of companies versus individuals is neatly summed up in the actions of ExxonMobil ceo Rex Tillerson recently. The WSJ reported in early 2014 that Mr. Tillerson had joined in a suit objecting to construction of a water tower designed to provide water for nearby fracking operations. According to the WSJ, "The tower would be almost 15 stories tall, adjacent to the 83-acre horse ranch Mr. Tillerson and his wife own and a short distance from their 18-acre homestead. Mr. Tillerson sat for a three-hour deposition in the lawsuit last May, attended an all-day mediation session in September and has spoken out against the tower during at least two Town Council meetings, according to public records and people involved with the case." News of Mr. Tillerson's participation in the suit was reported also in Forbes, Reuters, and USA Today, among other sources. It was not as widely broadcast that he subsequently dropped from the suit. Since he didn't publicly comment, it's impossible to say whether he was embarrassed by the apparent hypocrisy of objecting to actions he oversees at ExxonMobil when those same actions affect him negatively at a personal level. Being a CEO is, after all, hard work with many difficult decisions.
Apart from the ethical conflicts for any investors burdened with ethics, this is a story of market forces which seem likely to overwhelm a rear guard action by the fossil fuel interests. As you can see from a small sample of news in the last week, climate science has effects on almost everything in your investment portfolio -- from beach property to healthcare, from fossil fuels to agriculture. You may not be able to find a single industry sector where climate change is not a primary future influence. So you had best start working on algorithms to sort out where the winners and losers are from a global influence of which some of your peers are blithely unaware.
At the end of the day, much of the movement behind the divestment of fossil fuels from institutional portfolios is based on the notion that it's the right thing to do from the standpoint of all humanity. This is in conflict with the portfolio manager's mandate to invest only for those humans who are also clients, not all humanity. But, O Thou who desirest to outperform your peers, you may find your portfolio reflecting the humanistic view as you begin to see the connection between the events mentioned earlier and the stock prices you watch dancing on your screen every day. Your future success as an investor will likely be aligned with the forces recognizing climate change as a serious threat to human quality of life. Buying into the fossil fuel narrative might well leave you in the position of the Woody Allen investment character who was in the business of "managing the money till it was all gone."