Will Fear of Climate Change Reduce Oil Demand?

The Kelly Letter Excerpt
The following is from this year’s Note 38 of The Kelly Letter, which went out to subscribers last Sunday morning.

We know the correlation between carbon emissions and temperature increase, so we can plot roughly how much more carbon we can emit globally before exceeding the two-degree temperature limit: 565 more gigatons. Even in this global economic slowdown, our emission pace hasn’t taken a break. The International Energy Agency reported in May that CO2 emissions rose 3.2 pct last year to 31.6 gigatons. China’s love of coal-fired power plants increased its CO2 output by 9.3 pct. Japan shut down its nuclear reactors after Fukushima, so its emissions rose 2.4 pct. It’s obvious that the scant attention paid to alternative energies has produced scant results, I dare say negligible results.

If nothing changes, the fossil fuel industry will be able to operate its business at last year’s CO2 emission schedule for another 18 years. That’s just the 565-gigaton CO2 limit divided by 31.6 gigatons emitted per year. How much does industry plan to sell, however? According to a crack team of financial analysts in London known as the Carbon Tracker Initiative, which published an industry report a year ago, the world’s proven reserves of coal, gas, and oil contain 2,795 gigatons of carbon.

The first time I’ve seen the Carbon Tracker Initiative report referenced in popular media was last week in Bill McKibben’s Rolling Stone piece, “Global Warming’s Terrifying New Math.” He wrote: “Think of two degrees Celsius as the legal drinking limit — equivalent to the 0.08 blood-alcohol level below which you might get away with driving home. The 565 gigatons is how many drinks you could have and still stay below that limit — the six beers, say, you might consume in an evening. And the 2,795 gigatons? That’s the three 12-packs the fossil-fuel industry has on the table, already opened and ready to pour.”

The economic value of the 2,795 gigatons of carbon is already reflected in share prices, used as collateral in some cases, and even figures into national budgets of countries with large fossil-fuel deposits. In other words, industry recognizes their deposits as their chief asset — obviously — and is working hard to prevent regulation of the sale of that asset, and assumes that it will succeed. Industry plans to sell all of its reserves and is operating on the assumption that it will be able to do so. What if it’s wrong?


If you told Exxon or Lukoil that, in order to avoid wrecking the climate, they couldn’t pump out their reserves, the value of their companies would plummet. John Fullerton, a former managing director at JP Morgan who now runs the Capital Institute, calculates that at today’s market value, those 2,795 gigatons of carbon emissions are worth about $27 trillion. Which is to say, if you paid attention to the scientists and kept 80 percent of it underground, you’d be writing off $20 trillion in assets.

The numbers aren’t exact, of course, but that carbon bubble makes the housing bubble look small by comparison. It won’t necessarily burst — we might well burn all that carbon, in which case investors will do fine. But if we do, the planet will crater. You can have a healthy fossil-fuel balance sheet, or a relatively healthy planet — but now that we know the numbers, it looks like you can’t have both. Do the math: 2,795 is five times 565. That’s how the story ends.

I’m rooting for the planet over investors, despite my being an investor. What we need to watch carefully is the progression of resistance to fossil-fuel consumption toward the tipping point where it affects the valuation of companies in the business. I’m not sure we’ll ever get there. It’s possible that we’ll burn carbon until the planet becomes inhospitable for humanity. If so, then we should see growing fossil-fuel stock valuations along that path and this issue will become moot to investors. Civilization will not end in our lifetimes regardless of how the issue unfolds. Our job will be allocating our money for maximum return along the timeline.

Also in the letter:

A Brazilian court ruled that Chevron and Transocean may not extract or transport oil in the country, but Brazil’s desire to become a leading exporter will ensure that industry wins this fight.

Jeremy Grantham sees a tragic food crisis ahead, and thinks investors should allocate 30 pct of their portfolios to resources for rising prices to come.

We’re not getting higher stock prices for the reasons we thought, but we are getting them. We’re happy to have bought weakness and are still looking to do so ahead of a strong autumn and winter.

And more! Sign up to read the rest of this letter and all back letters, and receive future letters starting this Sunday.

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One Comment

  1. John S. Long Jr.
    Posted August 10, 2012 at 11:19 am | Permalink

    I am old enough to remember the Ecology Movement of the 1960’s where “they” tried to convince the Western world of an impending crisis. I remember the posters, sold primarily in the hippie headshops, depicting all sorts of shortages, a polluted, contaminated planet with no clean air, no clean drinking water, and nothing to look forward to except misery and chaos brought on by mankind’s abuse of the planet’s natural resources or nuclear war. All the terrible things that were forecast to take place “within 20 years never occurred. Therefore, since I have already experienced the BIG LIE once, I choose to ignore it this time around.
    As for global warming, I am convinced it is part of a natural cycle. If you do the research you will discover that in the 70’s certain leading scientists forecast a new Ice Age. It seems they cannot make up their mind.
    After conducting my own research, I am convinced that the whole global warming alarmism is more about trading carbon credits than “saving the planet”. There are a few that have profited significantly from this enterprise and others who will join in the game and profit also.
    I am up late and very tired, and it is for this reason that I don’t include documentation or reveal sources. However, those who choose to investigate will find what I have stated to be factual.
    I enjoy your newsletter. Keep it coming.

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