Assessing Risks of Fossil Reserves: Are They Fuel Or Feedstocks?

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By Hazel Henderson ©2016

The global tug-of-war between fossil fuels and cleaner greener renewable energy and advanced efficiency has come to a head.  Reactionary politics in the USA produce a short-term victory for its fossilized sectors the global oil industry, OPEC and Russia.

Meanwhile the cumulative $7.1 trillion already privately invested in the growing renewable green sectors as tracked since 2007 in our Green Transition Scoreboard® continues growing.  Green investors benefit from lower prices on solar, wind and faster returns on efficiency from LED lighting, electric vehicles, green buildings, smarter microgrids, and urban infrastructure.

This tug-of-war between incumbent fossilized sectors and 21st century technologies is rattling anxious asset managers, pension funds, insurance companies and individual investors.  They fear that many fossil reserves and assets may become liabilities listed on company balance sheets, mutual funds, ETF’s and 401Ks.

Financial markets are now focusing on such new risks of the accelerating global transition from the fossil-fueled Industrial Era to the 21st century Solar Age. A closer look at these newly recognized transition risks and reputation risks reveals the effects depend on whether these “stranded assets” are carried on the books as “fuel” or reclassified more accurately as “feedstocks”.  These proven carbon reserves shouldn’t be wasted by burning.  They are more valuable as manufacturing inputs in 21st century materials, like carbon fiber, plastics, in cement and new buildings, as I advocate, and in Joel Makower’s The New Grand Strategy.

The current pushback by Big Oil, global politics and OPEC’s pledged cuts in production has boosted oil prices and led to some new investments, particularly in US shale wells.  We at Ethical Markets project that whatever happens to oil prices in the short term, that the fossil fuel sector cannot derail the global transition to lower-carbon renewable economies—which is now irreversible.  Scaling and cost reductions drive  more efficiency, electric vehicles and further technological disruption.  The race is on for  better batteries, LED lighting, smart buildings and infrastructure as I describe in  “Greening Trumps Infrastructure Plan”.

The tipping point for the global green transition was in 2015 when 195 member countries of the United Nations (UN) pledged at the COP21 Climate Summit  in Paris to shift away from fossil fuels toward greener cleaner economies.  Additionally, these UN members also ratified the 17 sustainable Development Goals (SDGs).  These upend

the conventional GDP measured model of economic growth and discredit the accounting fallacies of “externalizing” social and environmental costs from company and government balance sheets.  The IMF estimates these “externalities” globally at $5.3 trillion annually – born by taxpayers, and future generations, exacerbated by subsidies to fossil fuels.  Many countries are now removing and cutting these perverse subsidies—leveling the playing field for 21st century renewable energy.

Today even Rex Tillerson, CEO of Exxon acknowledges the issues of human-caused climate change along with Mark Carney of the Bank of England and the G-20’s, Task Force on Climate Related Financial Disclosures (TFCFD).  Their December 2016 recommendations call these climate risks, transition risks and reputation risks “material information that must be disclosed to shareholders and the public.”  Fossil reserves carried on balance sheets cannot be burned without raising global temperatures beyond the now agreed 2°C.

The good news is that these fossil reserves are more valuable left in the ground, rather than wastefully burned as I first advocated on NBC TV’s Today Show in the 1960’s.  Asset managers can re-classify these fossil oil and gas reserves from “fuel” more correctly as “feedstocks” for use in 21st century production!  With the stroke of a pen, asset allocators can correctly value these fossil reserves as assets in the ground on millions of balance sheets.  Carbon is a ubiquitous element on Earth which we humans can use in many ways; from materials and construction to jewelry.  Let’s conserve it not burn it!