Big Oil’s Climate Has Changed Forever
(Bloomberg Opinion) -- It might seem as if the combination of oil selling off just as the latest United Nations climate-change assessment landed represents a sudden realization about the hidden costs of fossil fuels. But oil never sells off because we’re using too much of it. Monday morning’s drop is tied to that other natural disaster, the pandemic, and what delta might do to demand.
Oil equities, on the other hand, are more nuanced.
The social-media users among you will be aware that, in 2021, there is no shortage of people who have done their own research. The truly salient thing about the Intergovernmental Panel on Climate Change, however, is that it has done actual research and — critically — within its own area of expertise. And the panel’s message is unequivocal, which is presumably why it uses the word:
It is unequivocal that human influence has warmed the atmosphere, ocean and land. Widespread and rapid changes in the atmosphere, ocean, cryosphere and biosphere have occurred … Human influence has warmed the climate at a rate that is unprecedented in at least the last 2000 years.
There is more — much more; the full report, just the first of three, fills almost 4,000 pages. See this rundown of the highlights by Bloomberg Green. The IPCC’s message hasn’t changed, it’s just become more confident in its conclusions: Climate change is real, mostly man-made, already happening but can be addressed by cutting emissions.
That last point is the sore spot obviously, given our current dependence on fossil fuels. It demands a radical transformation of how we get our energy and use it. “Radical” can be seen as a loaded term, but there is no other word for it. Equally, not changing course or changing too slowly and just accepting the effects of climate change is also radicalism of a different variety. That stance is sometimes dressed up as hardheaded realism — people won't change, it’s too complex to deal with, etc. — but it’s really just saying humankind will blithely floor the gas as the cliff edge hoves into view. That’s quite possible, of course. On the other hand, faced with a global pandemic, we did manage to engineer a vaccine in unbelievably short order, so we shouldn’t write ourselves off just yet.
This is how Big Oil should regard the IPCC’s latest tome. Much has changed since the last assessment was published in 2013, including the relationship between the sector and its investors. Exxon Mobil Corp.’s recent defeat at the hands of a small activist fund symbolizes a broader breakdown in trust over the industry’s ability to invest wisely for its own future. It is notable that, after being given a shot in the arm last November by initial vaccine breakthroughs, the energy sector has derived less and less support from rising oil prices.
That disconnect, which good second-quarter results seemingly did little to fix, is rooted in a loss of credibility around things like budgeting and executive incentives. Climate change compounds this.
Casting doubt on the scientific consensus around climate change has been an extraordinarily successful endeavor these past few decades. Yet its continued success relies on maintaining that doubt in the face of increasing certitude — not just on the part of the IPCC’s conclave of scientists but also the likes of the International Energy Agency, a growing number of money managers and governments.
Moreover, delay has compressed the timeline for taking action: The IPCC report estimates a global carbon “budget” of 500 gigatonnes to have a 50% chance of limiting the average temperature increase to 1.5 degrees Celsius, implying roughly a decade or so at current levels of emissions. Hence, policy proposals have shifted from gradual, market-based proposals to prescriptive targets, proscriptive bans and, in the case of President Joe Biden’s administration, stimulus-backed industrial policy.
So, just as the IPCC warns of tipping points with regard to climate change, the oil sector is faced with potential tipping points on several fronts, particularly the political and technological.
A plan for adapting to this is now the sine qua non of being a serious energy company with an outlook extending beyond the next 12 months. It is also a new layer of complexity on top of the usual ones like oil-price cycles. For example, investments at scale in new technologies, be they wind farms or carbon-capture pilots, inevitably tee up a period where there will be a mismatch between the core business in terms of profits — still hydrocarbons-based — and a growing proportion of spending on tomorrow’s core businesses.
Do your research by all means. But this dilemma isn’t going away; it’s intensifying. Accepting that is the first step in addressing how, or if, this sector ever gets back its mojo.
Such budgets should be set in the context of multiple factors that can expand or contract them, sometimes significantly. These include, for example, emissions of other greenhouse gases. Also, regardless of absolute size of any budget, all emissions at this point are contributing to increased warming and the rising risk of potential impacts that could flow from that.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.
©2021 Bloomberg L.P.