“Economists have been thrown into confusion. Almost no-one in the profession predicted the oil price collapse in advance.”
The folks at 350.org might chuckle at this pre-Christmas self-flagellation from the Financial Times blog. Since embarking on its “Do The Math” divestment roadshow in November 2012, the environmental campaign group has noisily predicted the eventual collapse in value of fossil fuel reserves that underpin oil and gas company share prices. As the group’s then Chair, Bill McKibben, said at the time: “you can have a healthy fossil-fuel balance sheet, or a relatively healthy planet …. you can’t have both.”
Hundreds of institutional funds, including the Rockefeller Brothers Fund, have since opted for a healthy planet and started to offload dirty energy stocks. Many more fund trustees will be wishing they had followed suit. The energy sector of the US S&P index fell 16.5% over 2014, missing out on the all-time highs in other sectors. The oil and gas sector performance in the UK stock market was even worse.
If divestment campaigners were trading as investment advisers, this would indeed be the month for industry awards and mega-bonuses. In reality, of course, the campaign targets the long term responsibilities of investment fund managers, with little suggestion that fossil fuel assets will become “stranded” in such a short timeframe.
Nonetheless, the unusual conjunction of a predicted trend in valuation and the floundering hopelessness of investment professionals elevates the divestment movement, if not exactly to financial wizardry, at least to a position of greater strength.
I sense there are two broad directions of travel opening up in this context. One is that divestment campaigns could evolve beyond the focus on fossil fuels. Companies whose asset ratings depend on stable availability and pricing of ecosystem resources, especially food and water, are vulnerable to long term degradation. Biodiversity campaign groups might hook into the work of 350.org and its partners.
The second lesson from 2014 might be to look ahead to the challenge of empirical demonstration that the divestment scenario is being fulfilled. How can we detect the DNA of action on climate change in the cauldron of oil markets? One or two commentators have suggested that greater efficiency of energy consumption has been a factor in recent price falls. But most economic commentary on the tumbling oil price has exploited tools of supply and demand that have barely changed since the 1973 oil crisis.
If it were possible to prove by economic analysis that a fraction of the 2014 dip in share prices for the oil and gas sector was attributable to mitigation of emissions, the case for divestment would be strengthened – just as the case for climate loss and damage litigation is boosted by scientific evidence that global warming has contributed to an extreme weather event.
There’s some tough research lining up here. But fund managers are accustomed to paying top dollar for their economic advice. Traditional economists now have two chronic failures of anticipation to account for – the 2008 banking collapse and the 2014 halving of the price of oil. The first failure has been viewed charitably as misfortune; this second oversight might vacate some corporate territory for new voices.
Global Divestment Day (Feb 13/14)
The dark side of the oil shock – Gavyn Davies on FT.com