‘Keep the oil in the soil, keep the coal in the hole,’ so goes the chant of divestment activists affiliated with the environmentalist group 350.org, leading the famous campaign for fossil fuel divestment. The campaign to “decarbonate portfolios” was started by a professor in a college in Vermont and was subsequently taken on by students, who created the official group previously named. Although the movement used to be mainly restricted to students, it is now gaining momentum, attracting many organizations, including the Guardian newspaper, which has launched a high-profile campaign called Keep it in the Ground. The UN has also backed the cause, aiming to shift public opinion on the importance of climate change.
The Fossil Free campaign is lobbying over 750 groups from across the globe, mostly including universities, churches, and local governments, and has, so far, succeeded in persuading some 220 organizations to disinvest in fossil fuels. These organizations vary from the very small to the very large, such as Stanford University, which agreed to remove their US$21 billion investment in fossil fuels. Another successful story involves Norway’s decision to sell the coal company stocks in its US$890 billion sovereign wealth fund, although this country refused to touch its oil and gas assets. Campaign proponents urge divested money to be ploughed into renewable energy projects.
Supporters of the movement argue divestment is not only necessary for environmental and moral motives, but that it would also be financially beneficial, as organizations would no longer be subject to the strong volatility present in oil investments. Following announcements, such as the one by Governor Mark Carney, that “the vast majority of reserves are unburnable”, there has been growing concern surrounding a possible “carbon bubble”. If a significant amount of reserves proved to be unusable, then the price of oil would increase to represent the new circumstances, possibly sending the world into another economic crisis. The Bank of England is to investigate the veracity of such claims.
Meanwhile, oil giant Shell has refuted the concept of such a bubble, predicting that fossil fuels would still account for 40-50% of the energy supply in 2050 and beyond. As much as proponents of the cause would like to believe that the sun has set on oil, the reality is that we have not yet seen the end of it. Not so long ago, just when we thought the world was running out of oil, the US started fracking and uncovered colossal reserves, the end of which has yet to be established. As put by Oxford Professor Yuval Noah Harari, the extent of our energy resources are only limited by our current knowledge.
The question is not so much whether we have enough oil, but rather whether we want to continue utilizing it. Evaluating the necessity for oil from a financial perspective, research from the former head of the University of Chicago’s law and economics program corroborated the importance of fossil fuel in portfolios. According to his study, US$100 invested in an optimal portfolio in 1965 would yield US$14,600 by 2014. The same portfolio, deprived of fossil fuel investments, would yield 23% less, that is to say US$11,200. Furthermore, there is no denying the negative impact it has had on the environment, and if governments are to fulfill their pledge to keep climate change below the danger limit of 2°C, the production and use of fossil fuels will undoubtedly have to be reduced. On the other hand, certain experts argue that the effects of fossil fuels on the environment are being exaggerated, with aggregate emissions of the six main pollutants having dropped by more than two thirds since the 1970s, and global warming having stalled since the late 1990s.
Rather than a real and immediate threat to the oil and gas industry, the call for divesting in fossil fuels should be seen as a reminder that our world is continually seeking increased efficiency and that we have found less environmentally harmful ways to produce energy. Nonetheless, Bill Gates rightfully stated that current renewables were not yet close to being able to meet projected energy needs by 2030. He takes the stand that there will still be a strong need for oil in the decades to come, but that investment in renewables, and particularly renewable technology, should nonetheless be increased. He announced he would both invest US$2 billion in renewable technology initiatives and keep his investment in fossil fuel companies. Bill Gates also added that certain new renewable technologies, such as solar-chemical power, would not be viable on their own and would have to piggy-back on oil pipelines and gasoline tanks inside existing cars, confirming oil is nowhere close to being replaced by cleaner alternatives.
Given the current cost of renewable energy production, the rate of growth of developing nations and the world population itself, demand for oil is likely to increase eventually. Although certain companies are choosing to divest, which may well prove to be motivated more by CSR than by genuine environmental concerns, the industry should not worry. There will always be investors looking to finance fossil fuel production. Furthermore, should the movement’s magnitude increase, it may be reassuring that the bulk of the oil producers (Saudi Arabia, Venezuela, Iran, and Iraq) is shielded from the campaign, as its shares are not traded on public markets.