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By Geoffrey Styles on Nov 1, 2013 with 30 responses

Five Myths About the “Carbon Asset Bubble”

In their Wall St. Journal op-ed this week, Al Gore and one of his business partners characterize the current market for investments in oil, gas and coal as an asset bubble. They also offer investors some advice for quantifying and managing the risks associated with such a bubble. Their article is timely, because I have been seeing references to this concept with increasing frequency, including a recent article in the Financial Times, as well as in the growing literature around sustainability investing.

Although bubbles are best seen in retrospect, investors should always be alert to the potential, particularly after our experience just a few years ago. In this case, however, I see good reasons to believe that the case for a “carbon asset bubble” has been overstated and applied too broadly. The following five myths represent particular vulnerabilities for this notion:

1. The Quantity of Carbon That Can Be Burned Is Known Precisely

Mr. Gore is careful to differentiate uncertainties from risks, which he distinguishes for their amenability to quantification. For quantifying the climate risk to carbon-heavy assets, he refers to the widely cited 2°C threshold for irreversible damage from climate change, and to the resulting “carbon budget” determined by the International Energy Agency. As Mr. Gore interprets it, “at least two-thirds of fossil fuel reserves will not be monetized if we are to stay below 2° of warming.” That would have serious consequences for investors in oil, gas and coal.

The IEA’s calculation of a carbon budget depends on a parameter called “climate sensitivity.” This figure estimates the total temperature change resulting from a doubling of atmospheric CO2 concentrations. The discussion of climate sensitivity in the recently released Fifth Assessment Review of the Intergovernmental Panel on Climate Change (IPCC) sheds more light on this parameter, which turns out not to be known with certainty. Their Summary for Policymakers includes an expanded range of climate sensitivity estimates, compared to the IPCC’s 2007 assessment, of 1.5°-4.5°C with a likelihood defined as 66-100% probability. It also states, “No best estimate for equilibrium climate sensitivity can now be given because of a lack of agreement on values across assessed lines of evidence and studies.”

The draft technical report that forms the basis for the Summary for Policy Makers provides more detail on this. It further assesses a probability of 1% or less that the climate sensitivity could be less than 1°C. That shouldn’t be surprising, since temperatures have already apparently risen by 0.8°C above pre-industrial levels. At the same time, the report indicates that recent observations of the climate — as distinct from the output of complex climate models — are consistent with “the lower part of the likely range.”

In other words, while continued increases in atmospheric CO2 resulting from increasing emissions are widely expected to result in warmer temperatures in the future, the extent of the warming from a given increase in CO2 can’t be determined precisely before the fact. For now, at least, the CO2 level necessary to reach a 2°C increase would be consistent with calculated carbon budgets both larger and smaller than the IEA’s estimate. That means that the basis of Mr. Gore’s suggested “material-risk factor” — as distinct from an uncertainty — is itself uncertain.

2. The Transition to Low-Carbon Energy Is Occurring Fast Enough to Threaten Today’s Investments in Fossil Fuels

There is no doubt that renewable energy sources such as wind and solar power are growing at impressive rates. From 2010 though 2012 global solar installations grew by an average of 58% per year, while wind installations increased by 20% per year. Yet it’s also true that they make up a small fraction of today’s energy production, and that the risks for investors of extrapolating high growth rates indefinitely proved to be very significant in the past.

For some clarity on this, consider the IEA’s 2012 World Energy Outlook, the agency’s analysis of global energy trends. (The latest annual update will be published on November 12.) As of last November, the IEA expected global energy consumption to grow by 35% from 2010 to 2035 in its primary scenario, which reflected an expansion of environmental policies and incentives over those now in place. In that scenario, the global market share of fossil fuels was expected to fall from 81% to 75%, but with total fossil fuel consumption still growing by 25% over the period. Only in their “450″ scenario, based on similar assumptions to its carbon budget, would fossil fuel consumption fall by 2035, and then only by 10%.

Moreover, in its April 2013 report on “Tracking Clean Energy Progress,” the IEA warned, “The drive to clean up the world’s energy system has stalled.” This concern was based on their observation that from 1990 to 2010 the average carbon dioxide emitted to provide a given unit of energy in the global economy had “barely moved.” That’s hardly a finding to be celebrated, but it serves as an important reminder that while some renewable energy sources are growing rapidly, fossil fuel consumption is also growing, especially in the developing world — and from a much larger base.

The transition to lower-carbon energy sources is inevitable. However, it will take longer than many suppose, and it cannot be accomplished effectively with the technologies available today. That’s a view shared by observers with better environmental credentials than mine.

3. All Fossil Fuels Are Equally Vulnerable to a Bubble

As Mr. Gore correctly notes, “Not all carbon-intensive assets are created equal.” Unfortunately, that’s a distinction that some other supporters of the carbon asset bubble meme don’t seem to make, particularly with regard to oil and natural gas. The vulnerability of an investment in fossil fuel reserves or hardware to competition from renewable energy and decarbonization doesn’t just depend on the carbon intensity of the fuel type — its emissions per equivalent barrel or BTU — but also on its functions and unique attributes.

The best example of this is coal, which was in the news this week for a major transaction involving the sale of a leading coal company’s mines. What’s behind this isn’t just new EPA regulations making it much harder to build new coal-fired power plants in the US, but some fundamental, structural challenges facing coal. Power generation now accounts for 93% of US coal consumption, as non-power commercial and industrial demand has declined. This leaves coal producers increasingly reliant on a utility market that has many other (and cleaner) options for generating electricity. That’s particularly true as the production of natural gas, with lower lifecycle greenhouse gas emissions per Megawatt-hour of generation, ramps up, both domestically and globally. Coal accounts for about half of the global fossil fuel reserves that Mr. Gore and others presume to be caught up in an asset bubble.

Compare that to oil, which at 29% of global fossil fuel reserves, adjusted for energy content, still has no full-scale, mass-market alternative in its primary market of transportation energy. Despite a decade-long expansion, biofuels account for just over 3% of US liquid fuels consumption, on an energy-equivalent basis. They’re also encountering significant logistical challenges and concerns about the degree to which their production competes with food. This has contributed to recent efforts in the EU to limit the share of crop-based biofuels to around 6% of transportation energy. Biofuels have additional potential to displace petroleum use, particularly as technologies for converting cellulosic biomass become commercial, but barring a prompt technology breakthrough they appear incapable of substituting for more than a fraction of global oil demand in the next two decades.

Electric vehicles offer more oil-substitution potential in the long run, though they are growing from an even smaller base than wind and solar energy. Their growth will also impose new burdens on the power grid and expand the challenge of displacing the highest-emitting electricity generation with low-carbon sources.

Meanwhile, natural gas, at 20% of global fossil fuel reserves, offers the largest-scale, economic-without-subsidies substitute for either coal or oil. In any case, it has the lowest priority for substitution by renewables on an emissions basis, and so should be least susceptible to a notional carbon bubble.

4. A Large Change in Future Fossil Fuel Demand Would Have a Large Impact on Share Prices

Although Mr. Gore’s article includes a good deal of investor-savvy terminology, it is entirely lacking in two of the most important factors in the valuation of any company engaged in discovering and producing hydrocarbons: discounted cash flow (DCF) and production decline rates. Unlike tech companies such as Facebook or even Tesla, the primary investor value proposition for which depends on rapid growth and far-future profitability, most oil and gas companies are typically valued based on risked DCF models in which near-term production and profits count much more than distant ones.

At a conservative discount rate of 5%, the unrisked cash flow from ten years hence counts only 61% as much as next year’s, while cash flow 20 years hence counts only 38% as much. Announced changes in near-term cash flow due to unexpected drops in production or margins would normally be expected to have a much bigger impact on share prices than an uncertain change in demand a decade or more in the future.

This is compounded by the decline curves typical of many large hydrocarbon projects. If the first 3-5 years of a project account for more than half its undiscounted cash flows, it won’t be very sensitive to long-term uncertainties, nor would a company made up of the aggregation of many projects with this characteristic. This is even truer of shale gas and tight oil production, which yield faster returns and decline more rapidly.

I can’t speak for oil and gas analysts, but I’d be surprised based on past experience in the industry if the risk of a 10% or greater drop in global demand for oil or gas in the 2030s would have much of an effect on their price targets for companies — certainly not enough to qualify as a bubble.

5. Fossil Fuel Share Prices Don’t Already Account for Climate Risks

The assertion of a carbon bubble in fossil fuel assets ultimately depends on investor ignorance of climate-response risks, presumably because companies haven’t quantified those risks for them. To the extent the latter condition is true, it represents an opportunity for companies seeking to capitalize on the boom in sustainability-based investing.

However, you needn’t be an adherent of the Efficient Markets Hypothesis for which Eugene Fama was just named as a recipient of this year’s Nobel Prize in Economics to realize that thanks to the Internet, average investors have access to most of the same information on this subject as Mr. Gore and his partners. Institutional investors, who make up the bulk of the shareholding for at least the larger energy firms, along with the analysts who follow these companies, have the resources to access even more information.

Nor is the idea of a carbon bubble exactly new. I’ve been following it for a couple of years, as it took over from waning interest in Peak Oil. It’s not an obscure risk, either, in the sense that sub-prime mortgages and credit default swaps were in the lead-up to the failure of Lehman Brothers in 2008. It’s becoming more mainstream every day, but the burden of proof that this risk is mispriced rests on those advocating this view.

Conclusions – A Real Bubble, Or An Attempt to Project One?

Before concluding, a word of disclosure is in order. As you may gather from my bio, I spent many years working with and around fossil fuels, though my ongoing involvement in energy is much broader than that. As a result of that experience, my portfolio includes investments in companies with significant fossil fuel holdings. I strive for objectivity, but I can’t claim to be disinterested. However, neither can Mr. Gore. As a major investor in renewable energy and other technologies through the firm cited in the article and other roles, he has as much at stake in promoting the idea of a carbon bubble — and on a very different scale — as I might have in dispelling it.

The carbon bubble is an interesting hypothesis, even if I don’t yet find the arguments made in support of it convincing. Despite that, I see nothing wrong with investors wanting to track their carbon exposure, consider shadow carbon prices, or ensure they are properly diversified.

However, the biggest risk I see that might eventually warrant considering divestment isn’t based on the merits of this analysis, but on the possibility of creating a self-fulfilling prophesy by means of drumming up social pressure on institutional investors. You might very well think that applies to this Wall St. Journal op-ed. I couldn’t possibly comment.

  1. By Jennifer Warren on November 1, 2013 at 5:43 pm

    Nice analysis Geoff. Actions toward a lower carbon economy are good and the aspiration for such, desirable. But the way to get there needs to be balanced with where we are, how to give energy players time to adjust (and incentivize them) in a way that does not drastically damage an economy and the folks who do the hard work, often very tough jobs in providing us all energy. Institutional activism in the name of good intentions is often done by a certain layer of society that does not bear the burden of their own aims that are put into practice.

    There is a middle way (not to sound too Zen)…I think we are trying to find it here, and your analysis and information helps with that.

    • By sueblue on November 12, 2013 at 5:53 pm

      The oil and gas industries have been aware of the climate repercussions for decades.They have had ample time to prepare, just as the auto industry had ample time to start (and continue) building seriously energy efficient vehicles but didn’t until government bailouts in 2008 were paired with higher efficiency standards. Voluntary measures don’t seem to work well with large industries used to huge gov. subsidies and special treatment

  2. By TruckerMark on November 4, 2013 at 4:42 am

    Why slam Al Gore for an idea that wasn’t even his to start with? In fact there are multiple sources to choose from that are all pointing to an oil & gas industry valuation bubble due to the fact that large amounts of their yet to be recovered reserves may never be recovered as we move toward renewable energy. Already several States have adopted renewable energy targets (Colorado is 20% by 2020, for instance) and there is considerable pressure to rapidly adopt even stricter goals, say 50% to 80% renewable-source energy by 2030.

    Richard Heinberg and several of his associates from the Post Carbon Institute are one of the groups that is pushing the notion of a fossil fuel industry valuation bubble, and another group is the UK-based Grantham Institute on Climate Change and the Environment, which put out a 40-page scientific report on this very subject before Al Gore more recently touched on the same subject. Their report is available here:

    My own academic field is regional sustainability and I also have 30 years’ worth of national-scale heavy freight and wholesale fresh food logistics experience. I have been conducting a major study yet to be released this fall on water supply
    sustainability in the Rio Grande Basin, a complementary piece to another one that I did last spring that was more-heavily on the Lower Colorado River Basin. Other recent study issues involve regional and continental-scale food supply sustainability.

    One of the major issues facing the southwestern US has been the fracking industry wasting huge amounts of water, which has rapidly drained local aquifers in Texas and New Mexico over the past two years. There were more than 30 cities and towns in
    Texas that ran out of water this past spring plus agricultural damage in the hundreds of millions of dollars due to immense water shortages, and yet the oil & gas industry has been throwing many millions of dollars at misinformation campaigns wherever local resistance to fracking has developed.

    Have you seen this piece from Texas where it is claimed that the fracking industry is grossly under-reporting their water use? [quote] “Ron Green, a research scientist with the Southwest Research Institute, had previously estimated that fracking in the arid southern Eagle Ford Shale could amount to as much as one-third of the annual aquifer recharge”. [end quote]

    The same guy that recently defended fracking in central Texas by pointing out how much water is wasted on residential lawn irrigation is today in Colorado outspending opponents of several local fracking initiatives by a 50-1 margin. David Blackmon has been repeated quoted all over the US defending the fracking industry as “safe” and then it turned-out that he is the director of the local office of the $4 billion worldwide energy industry promoter CTI Consulting, in addition to being on the Board of the Independent Oil & Gas Association as well as employed by another oil & gas industry promotional firm in Texas too. How could anyone trust what this guy says considering who is paying him?

    Say, did you hear about the record methane releases in the Arctic and Alaska this past summer and this past week? Did you know that numerous climate scientists are worried sick that we may be looking at rapid climate change that could raise global average temperatures by 5-10 degrees Celsius before the end of this century? Did you also read that University of Colorado study from last week that showed through carbon dating that temperatures on Baffin Island were warmer this past summer than for the last 44,000 to 51,000 years?

    Did you know that Fairbanks, Alaska, in the central part of the State, had by-far its warmest summer on record this past summer, with 36 days of over 80 degrees including 5 days of over 90 degrees, as opposed to a historical average of just 11 such days per summer? Did you know that in Fairbanks that the month of October, 2013 saw 14 new all-time record high temperatures, which correspond all-too-well with record methane releases? Did you know that since October 1st there has only been a single day in Fairbanks with the day’s high temperature below average? Yesterday (November 3rd) the high there was 35 degrees, just 16 degrees above normal, though just in the last 5 weeks Fairbanks has seen 7 days with high temperatures more than 25 degrees above normal too.

    Anyway, here is some of the science behind rapid climate change due to methane emissions, a phenomenon that the recent IPCC report chose to ignore despite substantial opposition, including from the IEA itself:

    This item on last week’s record Arctic methane emissions is only two days old:

    Even the IEA’s major climate change study from June, which was in-part based on their World Energy Outlook from last November, also predicted a much greater global temperature rise of between 3.6 and 5.3 degrees Celsius before the end of the century if we can’t move quickly enough away from fossil fuels, along with a sea-level rise of between 4 and 6 meters. Why quote from the 2012 WEO and ignore the IEA’s June, 2013 companion piece on climate change, and then try to discredit Al Gore for an idea that was not his own?

    If you are interested here is the IEA’s climate change study that is obviously more worrisome than the IPCC’s recent study.

    Why would you ignore the IEA’s climate change study and then try to slam Al Gore over an idea that was not his to start with? Why don’t you go after Richard Heinberg or the Grantham Institute instead?

    Probably because you know you can’t win doing that!

    Here is a source on the effects of climate change that I’ll share with you. Just concentrate on the 2-5 degree Celsius rise in global temperatures, which according to numerous high-end scientific sources outside of the IPCC, is quite possible yet
    this century. The item is a condensation of a Mark Lynas book that appeared in the Sunday Times Magazine (UK) on March 11th, 2007

    Another decent futures study that I recommend is the Global Trends 2030 Alternative Worlds study by the US National Intelligence Council, as 2030 is only 16 years away.

    Why slam Al Gore when the idea of a fossil fuels valuation bubble isn’t originally his? He is just the messenger essentially, one of many in-fact.

    • By Geoffrey Styles on November 4, 2013 at 10:22 am

      Nothing I wrote here constitutes a “slam,” but rather respectful disagreement. As for why Mr. Gore, when you submit an op-ed to the Wall St. Journal you are inviting comments and debate. I also acknowledged that the idea isn’t new to him, but when I saw his piece in the Journal I realized how tardy I’ve been in addressing it. But regardless of which messenger I chose to respond to, the idea rests on equally shaky foundations.

      • By ben on November 4, 2013 at 3:43 pm

        “Why slam Al Gore……?” Huh? You’ve got to be kidding. There very little in the way of a slam in Geoff’s piece. And, no, the former VP is hardly the inspiration for the “unburnable carbon” or “carbon asset bubble” thesis (the folks behind Investor Watch have been leaning into this for a half-dozen years and, more recently, issuing a series of
        The Carbon Tracker reports).
        Geoff was simply offering to help separate some wheat from the chaff. As ever, no good deed goes unpunished:) Nothing like a dose of gratitude out of folks who get up in the morning looking to take offense to something that may not align with their own predisposition. That’s okay, as it generally takes an awful lot of sifting to get through the
        sack of flour.
        Thanks for wading into the no-nonsense analysis regardless of where the chips may fall. It would be good to see a little more objectivity about viable trade-offs from the Limits to My Kind of Growth

        • By TruckerMark on November 4, 2013 at 11:50 pm

          Since you mentioned Limits to Growth (a 41 year old book) why not check out Richard Heinberg’s book “The End of Growth” for free here? Chapter #3 is the most-exciting part in my opinion, though it is about resource depletion. You might enjoy Heinberg’s assessment of the effect of resource depletion on investment markets more than I do, and that analysis is contained in other chapters. I don’t agree with his solutions though, as I don’t that outcome as possible.

          My current work is on water-supply and food supply scarcity in the southwestern US and in Mexico due to the ongoing effects of record drought, record heat, declining annual runoff, and declining potable groundwater reserves, which together are threatening to render numerous large urban areas unable to support continuing growth, with some unable to continue to support current populations, such as those in Chihuahua, El Paso and Juarez, Las Vegas, Lubbock, Monterrey, Palm Springs, Phoenix, Tuscon, Yuma, among others. Did you see the projected water shortage through 2100 in either Ackerman and Stanton, 2011 or US Bureau of Reclamation, 2012?

          I wonder what a shortage of 1.4 billion acre feet of fresh water just in California by 2100 will do considering that desalinization is very expensive and uses a whole lot of energy too? What is going to happen when both Lake Mead and Lake Powell run dry and are limited to annual runoff in just 7-10 years for Lake Mead and 20 years after that for Lake Powell, considering that both hydropower dams will also be rendered non-viable too.? Did you know that both USBR and Ackerman & Stanton, as well as Patricia Pina, 2011 forecast a 40% shortage in the necessary amount of fresh water supply to continue economic growth just through 2050 due to the ongoing negative effects of climate change?

          Elephant Butte Reservoir is already virtually dry, as are numerous major Texas reservoirs too. Did you know that this past summer’s growing season in southern New Mexico, south Texas, and northern Mexico only had one month of surface water supply before it was drawn dry in the Rio Grande Basin, caused by spring runoff at only 28% of normal there? Perhaps we should keep burning-up carbon resources as fast as we can before spring runoff drops a lot more? Heck, the Colorado Basin was down to 40% this past spring too.

          Wasn’t it something like 112 degrees in Danbury, CT last summer for an extended period? I was in Grand Rapids, MI in August, 2006 when they shattered the all-time high temperature record by 5 degrees and posted 109 degrees for two straight days, I was in Chicago during that same heatwave when it was still 101 at Midnight and the fire department was having to evacuate elderly high rises after a major power failure, and I was here in Denver when we set an all-time record high twice in 3 days in June, 2012 with a 106 followed by a 108 reading, which was 5 degrees hotter than the previous record high before 2012 too. Better get used to that if we continue burning fossil fuels for more than a few more years, as atmospheric carbon levels won’t drop for 30-40 years after major output reductions. In-fact, numerous recent studies are calling for such heatwaves to be 4 times as frequent and as much as 5-10 degrees F. hotter by 2050 no matter what we do on carbon emissions before then. Imagine that, in just 30 years NYC and Chicago could be almost as hot as Phoenix is today, which will greatly increase cooling costs as well as fresh water surface evaporation. If that happens seawater will be up to 2nd floor windows on Lower Manhattan though.

          My own feeling is that by 2030 you had better have almost all of your recoverable fossil fuel resources out of the ground before the adoption of majority percentage renewable energy targets worldwide make your remaining untapped resources worth increasingly less. Alas, doing so will in itself make those recovered resources worth less because the mass recovery effort will produce a market glut.

          I wonder if pending renewable energy targets, quite likely majority percentage targets by 2030, are not one of the main reasons behind the seeming rush to frack our planet dry that we have seen over the last decade or so?

          Did any of you oil & gas industry promoters read that Mexico City had discovered a new aquifer at 5000 feet of depth that will meet their growth demand for the next 50 years or more, which might very well be a good reason not to pollute our deep depth aquifers too?

          Here is an interesting piece on all of the EPA laws that the oil & gas industry are exempt from. What would happen if the EPA and the Democrats took a harder-line stance on this issues, in combination with ever-larger renewable energy targets?

          Anyway, like I said, the oil & gas industry has 16 years (+/-) to get 70-80% of its known reserves out of the ground before the mass adoption of increasingly-stringent renewable energy targets worldwide will render whatever remains in the ground increasingly worthless, and those renewable energy targets will become more-stringent the worse that ongoing climate change presents itself. As I mentioned previously, the recent IPCC report has plenty of detractors and failed to mention the issue of melting methyl hydrates and methane emissions from melting permafrost, over strong objections, which the June, 2013 IEA-WEO follow-up climate change report did include when it forecast a 3.6-5.3 degree Celsius jump in average global temperatures by 2100.

          According to many sources, any jump in global average temperatures of more than 4 degrees Celsius is unlivable for half of our planet’s population, any jump of over 5 degrees Celsius would be fatal to more than 80% of the world population at that point, over 6 Celsius is fatal to over 90% of the population, and 7 Celsius might only see a survival rate of 1-2% only underground with captive treated atmospheres and a recirculating water supply. Where do any of you oil & gas industry promoters see enough water supply within the Continental US to support 600-700 million people (including much of Mexico’s population) once we warm by 4 degrees Celsius, by 2060-2075? Do you think that just the northeastern US, the northern Great Lakes region, and the Pacific Northwest has enough of a water supply to support that kind of population, as if that happens, most of the Continental US south of I-80 plus the northern Great Plains States will be too warm and too dry to support large urban populations???

          Or are you trying to tell the rest of us that you could care less what happens to our children and grandchildren as long as you can sell most of your yet to be extracted fossil fuel reserves before then?

  3. By TruckerMark on November 4, 2013 at 4:44 am

    PS: “I can’t speak for oil and gas analysts”

    Why not, as you are the Director of a firm that specializes in oil & gas industry investments???

    • By Geoffrey Styles on November 4, 2013 at 10:22 am

      Good question. The Wall St. analysts I had in mind are in a different category than the kind of advice I provide. They provide investment advice based on detailed examination of a company’s earnings, cash flow, financial structure, governance, etc. My services are more strategic, overlapping with analysts mainly in the area of market fundamentals.

  4. By ben on November 4, 2013 at 6:56 am

    Geoff should be applauded for taking on the handiwork of Mr. Gore and his colleague. They certainly command the heights these days. In fact, Mr. Gore’s global travel to maintain his swashbuckling status as a politician turned international gadfly really does produce quite a carbon footprint. Ah, but that’s fully justified given his unique talents and abilities to shape public opinion on issues of such far-reaching consequence. Yes, his remarkable repository of knowledge must be shared with the international community lest we face a terrible fate brought on by our shortsighted interests. And to think, if only the former vice president had managed to carry his own home state in the 2000 election, we would be so much further along in saving ourselves and the planet.
    What are doing in resisting such sage counsel out of this prophet from Carthage–or is that the Fairfax Hotel in Northwest DC? Ah, that may be problem right there. Where does the heart of this man actually reside? If I were to offer any insight from a survey at fairly close quarters, well, I’d say it’s somewhere close to a place called Ambition. Yeah, this old Volunteer who grew up planting, tending and harvesting tobacco only to later acknowledge the error of his ways, is generously offering to help save us from ourselves. Gosh, what a kind and thoughtful fellow. And Mr. Blood, too!
    Alas, Americans are feisty and, frequently, uncooperative characters bent on doing things their own way. This obviously leads to plenty of frustration in pulling off big crusades like changing the consumer preferences of 300 million citizens. The, of course, there are those 1.2 billion Chinese looking to make more than a couple of bucks a day in income. Damn, if this doesn’t introduce some complications. Talk about inconvenient truths!
    I guess we’re going to just muddle along with market-based motives toward a cold, dark future with little hope of achieving the soft landing that that middle of the pack student from St. Albans might otherwise have assured us, if only we were enlightened enough to follow his lead. Gosh, it’s enough to wish I’d moved to Tennessee to cast a few of my own votes back in 2000. Talk about missing a millennial moment!:)
    Thanks for you objectivity, Geoff, and for offering the disclaimers. Wouldn’t it be nice to see a few of those out of the politician!

  5. By Ted on November 4, 2013 at 3:19 pm

    Certainly some good points raised here. However, a few deserve additional clarity:

    First, the proponents of the “carbon bubble” are not suggesting that assets currently on the books are overvalued. The concern is that continued expenditure on resource growth may not produce the expected returns for a variety of reasons, and therefore underlying assumptions need to be reexamined.

    Second, your (correct) statement that “most oil and gas companies are typically valued based on risked DCF models in which near-term production and profits count much more” should be an indication that their concern may have some merit. If the industry is in fact incentivized to maximize near-term profits, a large conflict of interest exists, since (as you know) investments in fossil fuel resources are typically (until recently) made years, if not decades before production, and often in different political, economic, and social contexts.

    Lastly, the burden of proof is not on those advocating this view, but those “defending” the status quo. Gore and other investors have simply asked a question: do your assets and investment strategies still make sense in a lower-carbon scenario? If the business model of the industry is in fact sound, then this should be an easy question to answer.

    • By Geoffrey Styles on November 4, 2013 at 9:44 pm

      When someone suggests that 2/3rds of the assets on the books of a company or companies cannot be monetized, then the strong implication is that any valuation that includes those assets is excessive. Mr. Gore describes the presumed bubble as ,”still growing.” Doesn’t that suggest he sees a bubble here, now? It seems disingenuous to characterize the op-ed as merely posing a hypothetical question. Underlying assumptions should be reexamined continuously. However, if investors are going to be asking questions about carbon risk, they need a less superficial understanding of the basis for them than the one provided by Mr. Gore and his colleague.

      • By ted on November 6, 2013 at 12:03 pm

        Because you are influencing public discourse and possibly advising on the issue, you should diversify your understanding of the issue. Investors’ basis of understanding has not been provided by Mr. Gore nor his colleague – it has been provided by petroleum geologists, financial analysts, and organizations that employ them like HSBC and the IEA.

        Valuations are a product of expectation and perceived worth. Investors have begun to recognize that one or both sides of this equation has changed. The degree to which these variables change, however, is based on each individual’s perception (this is the fundamental basis of investing). I would avoid assuming Mr. Gore’s views reflect those of all concerned investors.

        • By Geoffrey Styles on November 6, 2013 at 2:06 pm

          I wasn’t assuming that at all. See #5 above.

  6. By Ruth Ann Barrett on November 4, 2013 at 3:27 pm

    To me the characterization of reports and presentations as “myths” that challenge the continued investment in high risk energy sources and designated so by someone with their feet firmly planted in oil and coal reserves, is not respectful disagreement but propaganda and a contributing factor in the stalling of “the drive to clean up the world’s energy system.”

    Extraction of fossil fuels is now in the category of extreme high risk, along with

    fracking and nuclear power as we can now more plainly see here in the U.S. in our own backyards, beaches, oceans, farmlands, and ground water supplies. Without the practice of externalization of costs and risks these investments are unsustainable and as the insurance industry is finding out, uninsurable.

  7. By TruckerMark on November 5, 2013 at 12:40 am

    Just one more climate change piece that a new associate from Harvard University shared with me today. This piece was authored by the World Bank in 2012.

    The fact is that if we can’t greatly reduce fossil fuel use by the 2030-2040 range, by 2075 be will see a global average temperature rise of 3.5 to 4.0 degrees Celsius, which is also just about the time frame for world phosphate supplies to enter critical shortages that will eventually cut crop yields in half and require twice as much land and water to grow the same yield as previously.

    There is little doubt that a global average rise in temperatures of 4 degrees Celsius would render a majority of our planet’s 100-largest urban areas non-viable due to water supply shortages and cause immense refugee flows. The only thing that we can do at this point to reduce this projected rise, and the ancillary human and economic costs, is to greatly reduce carbon emissions which will involve a 30 year lag time for major atmospheric improvement.

    Anyway, like I said below in greater detail, the oil & gas industry has 16 years (2030 +/-) to get 80% (+/-) of its known reserves out of the ground before the mass adoption of increasingly-stringent renewable energy targets worldwide will render whatever remains in the ground increasingly worthless, and those renewable energy targets will become more-stringent the worse that ongoing climate change presents itself.

    Alas, doing so will in itself make those recovered resources worth less because the mass recovery effort will produce a market glut as ever more renewable energy sources come online.

    • By Geoffrey Styles on November 6, 2013 at 3:42 pm

      It looks like you’re starting with the result you want and ignoring what would be necessary to make it a reality, particularly with regard to the finances and construction capacity necessary to build the new energy sources necessary to displace all that oil and gas in less than 2 decades. Extrapolating growth rates for intermittent wind and solar won’t plug that gap.

      • By ben on November 7, 2013 at 1:01 am

        Yes, it appears that TruckerMark has an opinion in search of the facts. Funny thing is that the future often has a real penchant for proving most of us wrong over the long haul.
        As for the citation of Donella Meadows et al and the publication of their Limits to Growth, well, I will hardly bad mouth a thoughtful piece of professional research by not only top-flight academics, but by all accounts first-rate citizens. As an old Middlebury man, I had the distinct pleasure of spending more than a few weekends over at Cobb Hill with Prof. Meadows and friends tilling the soil and practicing what many simply prefer to preach. She was as unpretentious and kind as one could possibly hope to find. She was, tragically, lost in her prime. She is still sorely missed by those who knew her, admired her devotion to the students at Dartmouth and by all the treasured “friends of the farm.” Of course, her work on sustainability still lives via the institute that bears her name.
        There is much to be learned as we advance into this brave new world, but one thing that we can definitely count on: There will most likely be a stunning array of innovations offered up by resourceful primates originating from places far beyond our modest abilities to comprehend.
        Like it or not, the process of creative destruction is alive and well and we might do well to focus on both ends of the construct. This is, in effect, what Geoff Styles has consistently shown is the objective of his analysis from my humble vantage point in the wilds of New England.
        Hey, but what does a transplanted African know about such complexities. Maybe I should just stick to my plowing:)

  8. By Ruth Ann Barrett on November 6, 2013 at 11:38 am

    Another note via today’s mail in my inbox on risk that takes us beyond so-called social pressure on institutional investors to the informed and realistic pressure on investors,

    WASHINGTON, D.C.///NEWS ADVISORY///Four leading organizations in sustainable investing – As You Sow, Boston Common Asset Management, Green Century Capital Management, and the Investor Environmental Health Network – will hold a phone-based news conference at 1:30 p.m. EST on November 7, 2013 to issue a report scoring 24 top oil & gas companies on their disclosure (or lack thereof) to investors of the key risks associated with hydraulic fracturing operations.

  9. By Dimitar Mirchev on November 11, 2013 at 8:13 am

    There are much more reasons that will lead to fewer fossil fuel consumption – not only CO2 regulations.

    New renewables are now cheaper than most of new fossil fuels plants and soon will be cheaper than old fossil fuels plants.

    China will start reducing their pollution and also we will finally see the problem with the $500 billion/year fossil fuels subsidies being solved.

    Read the wikpedia article:

    • By Geoffrey Styles on November 14, 2013 at 2:56 pm

      Aside from the fact that Wikipedia is not exactly the gold standard on such things, you need to dig a little deeper into your claims about “new renewables”, which usually means wind and solar. They’ve come a long way in cost reduction, and solar has further to go. Onshore wind is competitive in regions of strong wind resources with coal equipped with best-in-class pollution controls (not CCS), but isn’t declining very fast any more. Experience curves only get you so far, and onshore is a nearly mature technology.
      Solar is competitive (without subsidies) with peak grid power in regions with strong solar resources (e.g., California) but only kept alive by large subsidies elsewhere. If you doubt that, watch the uproar when governments cut subsidies. (Germany’s Energiewende and the current debate over who will bear the burden of €20 billion/year and rising is a good example of this.) PV will continue to get cheaper, but both solar and wind are intermittent/cyclical/seasonal and need storage (currently very expensive) to fully displace baseload fossil or nuclear power.
      As for the $500 billion/yr of fossil subsidies, they’re mainly consumption subsidies in the developing world, and the politics of removing them look even more challenging than the current gridlock in Washington, DC. They’re causing massive distortions, but how do you tell someone living on a few $ a day that the price of cooking and heating fuel must double or triple to protect the environment?

      • By Dimitar Mirchev on November 15, 2013 at 3:39 am

        Well, they will continue to be poor unless they understand that the consumption subsidies benefit the rich, not the poor, and that there is a better way to spend the money.

        As for the OECD countries, fossil fuel support is still bigger:

        I don’t think that the experience curve for wind has flattened. AWEA stated that by 2018 they wont need PTC anymore. Currently it reduces the price of electricity from wind farms by 2.2 cents/kWh – from 6-8 cents/kWh to 4-6 cents/kWh. That it extremely cheap for a new power generating capacity. New nuclear, new coal, even new gas cost way too much. In order to be correct we must compare new with new.

        And solar is not going to be competitive in the market soon (the next 2-5 years) – it will be competitive behind the meter – the so called “socket parity” – if the electricity produced from the roof PV is cheaper than the electricity brought from the grid… Guess what?

        The biggest Germany FiT at the moment for the smallest roof PV is 14 eurocents/kWh compared to 25-29 eurocents/kWh household electricity prices so logically most of the new roof PV is primary for self-consumption. That is why the new 3.5 GWp added in 2013 will increase the EEG Umlage by only(!) 0.07 eurocents/kWh (0.0007 euros/kWh).

        The 20 billion/year distributed through the EEG are not a problem – over 70% of the Germans think that Germany spends too little to speed up Energiewende – so no political drama here – slowing Energiewende in Germany is a political suicide – look what happened to FDP in the last elections. The only anti-renewable pro-big nuclear and big coal party in Germany did not entered the parliament.

        As for the displacement of the base-load. They dont need storage to make baseload obsolete – all they need is to produce more electricity than the demand. That is enough.

        Base-load is obsolete.

        • By Geoffrey Styles on November 15, 2013 at 1:17 pm

          I know just enough about Germany, having lived there for a while, to know that its politics can’t easily be translated into a US framework. If German voters want to make their industrial sector uncompetitive by running up the cost of power and gas, it’s not for me to judge. However, the lessons are clear enough for others considering emulating their example. They may achieve the goals of the Energiewende, but the cost in both Euros and additional emissions will be high.
          As for baseload it is only obsolete if you can balance the grid without it. I’ve seen plenty of studies showing renewables can reach 30% or more of grid penetration, but none showing that the grid can function without baseload–a good share of which can be from renewables like hydro, geothermal and biomass. If you’ve seen one showing zero baseload, please share the reference.

          • By Dimitar Mirchev on November 18, 2013 at 3:50 am

            You missed the point of Energiewende. It is not making Germany industrial sector uncooperative. Quite the opposite.

            The electricity price at EEX is the lowest in EU thanks to the Merit Order. Lower than in France and Benelux. And the export sector can get exemptions from paying the EEG Umlage.

            The whole Energiewenede turned out to be a very complicated cross-subsidy for the Germany export sector.

            Plus. BECAUSE of the feed-in tariffs, the streamlined permitting process (it can take as much as 3 days to get a roof PV running in Germany) and the efficient PV installers (all a result from Energiewende effort) germany industry can install PV on their roofs at the lowest cost in the world.

            Electricity produced on their roofs is cheaper than that brought from the grid (even after the exemptions).

            So – the Energiewende is making Germany industry sector more competitive, not less.

            Gas is another matter.

            • By Geoffrey Styles on November 18, 2013 at 10:40 am

              Your response sidesteps the current debate about the unsustainability of leaving consumers paying the entire burden of the subsidy structure, while industry enjoys the artificially low prices you cite.
              Germany has made great strides in reducing solar costs. The extremely high FIT in the early years didn’t just support German firms; it attracted lower-cost Asian competitors and ultimately unleashed a wave of bankruptcies in Germany’s cell, module and panel makers. Germany has also figured out how to drive down non-module costs in ways the US should emulate. All in all, though, the rest of the world benefits more than Germany from this. Germany must get its solar costs down, because it has some of the poorest solar resources around. Californians and others in more suitable areas reap the benefits every day.

            • By Dimitar Mirchev on November 19, 2013 at 3:19 am

              Yes. Its a sophisticated cross subsidy. However according to resent polls german people dont mind it and it makes the industry more competitive ;)

              Nevertheless the problem are not the new renewable additions that we will see in the coming years – they will be primary for self-consumption and with near market prices FiTs thus increasing the EEG Umlage minimally.

              The problem are the old ones – specifically all those PV above the PV corridor of 2.5-3.5 GWp that Merkel-FDP government allowed to be installed:

              Installed 2010 7,377,678
              Installed 2011 7,485,234
              Installed 2012 7,604,142

              That’s 12 GWp more than original EEG intention.

            • By Dimitar Mirchev on November 19, 2013 at 3:24 am

              And back to the original discussion.


              Monday, November 18 2013
              Brazil’s A-3 tender has awarded 868MW of wind-power contracts at an average cost of R$124.43 ($54.5) – an increase of almost 13% in the price compared to the last auction.

              The last auction:
              Friday, August 23 2013

              Brazil’s wind-only power tender saw 1.5GW of capacity contracted in a competition held today in São Paulo.

              The average price was R$110.51 ($46.32) per MWh.

              The cheaper new renewables.

  10. By Optimist on November 19, 2013 at 3:07 pm

    TruckerMark: I wonder what a shortage of 1.4 billion acre feet of fresh water just in California by 2100 will do considering that desalinization is very expensive and uses a whole lot of energy too?

    The one word answer: Direct potable reuse.

    In English: toilet-to-tap. As is already happening:

    As the City of Windhoek, Namibia, has been doing for 50+ years. New? Hardly. Public outrage? Not if you list and price the alternatives.

    And, BTW, if desalination is so expensive, why is the Carlsbad project going ahead?

    Question: Do you have a vested interest in overstating the (non) problem?

  11. By Rahmat Hidayat on April 30, 2014 at 1:42 am

    Fossil fuel is finite resource, I think signals from peak oil are very clear such as marginal oil wells, etc. We may experience the difficulty like limited clean water nowadays. And also impact of fossil fuel emission to the climate change is happening and we are feeling it. How do you consider such myths against facts ?

    • By Forrest on April 30, 2014 at 8:42 am

      Fossil fuel is a finite resource, true, but the earth is a big place. It’s speculation to know carbon fuel reserves in future. Same with the climate change and cost to society as compared to unknowable “normal” weather. We need to restrain emotional reactions and decisions to such important economic foundational structures as cost of energy. We need intelligent leadership, planing, and cost effective solutions. Also, we need to shame those attempting to exploit safety of earth fears for partisan gain. The biological mechanics of CO2 sequestration, very anemic. In the final analysis, we need man man process to capture and convert the gas as nature is not efficient, especially if the gas is proven to be induce hazardous environmental conditions.

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