How the sale of fossil fuels could derail the energy transition

How the sale of fossil fuels could derail the energy transition

In the midst of steadily rising atmospheric carbon dioxide levels, governments around the world are facing a decades-long challenge: how to decarbonize without compromising their grip on power. Energy is the oxygen of modern civilization in the blood – an afterthought, unless something squeezes access to it, after which a crisis with several organs quickly arises. Consider the tumult following base fuel price increases in Kazakhstan in early 2022, in Iran during 2019’s bloody November, and in France, which sparked the protests against yellow vests that began in 2018.

No case provides universal insight, but when isolated elites promote ideas of energy transition that ordinary people disproportionately bear the costs and consequences of, unrest often ensues. At present, a US- and EU-centric association of political and environmental activists and money managers is increasingly promoting investment restriction and production as a viable path to decarbonisation.

In 2021 alone, climate activist money managers got board seats at ExxonMobil and Chevron; a group of Dutch non-governmental organizations persuaded The Hague District Court to order the Royal Dutch Shell to reduce the worldwide emissions attributable to both its activities and products sold by 45 percent by 2030 compared to 2019 levels; the New York State Pension Fund has divested or is in the process of selling from nearly 30 coal and oil producers; and BlackRock, the world’s largest asset manager, warned portfolio companies: “No item ranks higher than climate change on our clients’ priority lists.” Meanwhile, ructions have emerged across Europe as this winter season has revealed weaknesses in assumptions about whether and how to continue to supply conventional fuels.

In the midst of steadily rising atmospheric carbon dioxide levels, governments around the world are facing a decades-long challenge: how to decarbonize without compromising their grip on power. Energy is the oxygen of modern civilization in the blood – an afterthought, unless something squeezes access to it, after which a crisis with several organs quickly arises. Consider the tumult following base fuel price increases in Kazakhstan in early 2022, in Iran during 2019’s bloody November, and in France, which sparked the protests against yellow vests that began in 2018.

No case provides universal insight, but when isolated elites promote ideas of energy transition that ordinary people disproportionately bear the costs and consequences of, unrest often ensues. At present, a US- and EU-centric association of political and environmental activists and money managers is increasingly promoting investment restriction and production as a viable path to decarbonisation.

In 2021 alone, climate activist money managers got board seats at ExxonMobil and Chevron; a group of Dutch non-governmental organizations persuaded The Hague District Court to order the Royal Dutch Shell to reduce the worldwide emissions attributable to both its activities and products sold by 45 percent by 2030 compared to 2019 levels; the New York State Pension Fund has divested or is in the process of selling from nearly 30 coal and oil producers; and BlackRock, the world’s largest asset manager, warned portfolio companies: “No item ranks higher than climate change on our clients’ priority lists.” Meanwhile, ructions have emerged across Europe as this winter season has revealed weaknesses in assumptions about whether and how to continue to supply conventional fuels.

Policies that erroneously focus on attacking supply to reduce demand will instead create significant security damages – and potentially trigger equally large and opposite political reactions that could put energy conversion efforts back years.

The global base of power plants, cars, trucks, ships, aircraft, materials, food and fiber production is still predominantly dependent on carbon fuels. (Oil and gas combined delivered nearly 60 percent of global primary energy in 2020, with a further 27 percent from coal, and is the global platform for materials.) As such, artificial limitation of carbon-derived energy supplies and essential materials will not structurally reduce carbon consumption – but it will create scarcity and price increases that European gas consumers are now experiencing.


Actions that serve the hopes of tomorrow but neglect the reality of today will leave billions of people globally increasingly trapped in a seaweed movement. Mass economic pain (and in case of power failure and lack of food and fuel, real physical suffering) could usher in an era of violent withdrawal centered on three primary vectors.

First, restrictions that artificially restrict supply without addressing demand will drive consumer downturns, but also encourage new capital flows and financing structures that may not be as climate-oriented as the current ones. Globally, funds that use environmental, social and governance data as a key motivator for investment decisions had around $ 40 trillion in assets under management by 2020 – a huge sum. But the consequence is that about $ 70 trillion of investable assets remain outside such restrictions and can invest on a larger scale in so-called traditional energy producers.

Corners of financial markets that are more isolated from climate-related pressures, such as hedge funds and private equity firms, are already recognizing the possibility of assets that are disadvantaged in today’s consensus view. Private equity firms, for example, have invested more than $ 800 billion in fossil energy space over the past decade, according to a report by the Private Equity Stakeholder Project.

The source of capital is important for several reasons. First, hedge funds and private equity firms are typically much more expensive capital providers than banks, debt and stock markets, pension funds and other sources. To quantify the difference, a medium-sized oil and gas producer can raise capital by selling long-term bonds with an interest rate of between 3 and 6 percent annually, while loans from a specialized financier can have an interest rate of 13 to 14 percent and in some cases require, that the borrower holds large reserves of cash as collateral.

Second, while the assets of alternative investors under management together are huge, they are unlikely to sustain the $ 500 billion plus in annual investment needed to meet the demand for oil and gas globally. Third, alternative investors often end up still being held accountable to root capital providers such as pension funds, which are increasingly subject to investment restrictions on fossil fuels. Higher capital costs and probably insufficient capital utilization ultimately mean slower resource development – and if demand continues, higher energy bills paid by consumers.

Capital restrictions can also reshape the oil market in ways that are potentially detrimental to long-term environmental and strategic priorities. Private producers such as the Texas-based Mewbourne Oil Co., which at the end of 2021 ran more rigs in the US than Chevron and ExxonMobil combined, will form a growing part of global production as they acquire assets divested by traditional Big Oil , as it struggles to make itself after climate mandates. The second group will be private commodity traders such as Koch Industries, Vitol, Trafigura and others, which together handle more than a third of global oil flows and will be well positioned to acquire and integrate large upstream oil and gas producing assets. The third group consists of national and quasi-national oil companies.

Oil and gas are existential interests in Kuwait, Iran, Iraq, Qatar, Russia, Saudi Arabia and other major exporters. Although their diplomatic rhetoric increasingly accepts concerns about climate change and emissions that are deeply entrenched in Western Europe and increasingly the United States, they see themselves as the last suppliers to stand in a carbon-pressured world and will continue to invest to ensure their companies’ ability to meet global oil and gas demand.

In short, more of the world’s oil and gas supply portfolio could shift to less transparent players (to potential harm to the environment) as well as lower and more expensive capital (to the detriment of consumers) and could strengthen national oil companies located in often challenging regions such as the US tried to detach itself strategically from.

Second, lack of carbon energy would jeopardize supplies of other vital goods, especially food. The prices of several critical global commodities – including staple food grains – are often moving in close sync with oil prices due to the proliferation of oil-based agricultural inputs such as fertilizers and the use of grains to produce biofuels that compete with and are mixed with oil-derived fuels. During the last oil price recovery in 2004-2008, grain price shocks catalyzed unrest in several developing countries, including Bangladesh, Egypt and Haiti.

While food riots in the mid-2000s took place in developing countries, food insecurity is now also haunting some developed countries. The COVID-19 pandemic has revealed that many Americans are also living on an economic knife-edge in terms of food security. Consequently, an increase in grain prices due to higher oil and gas prices may drive food costs high enough to force painful household budget redistributions – or even outright deprivation. Researchers from the University of California system and Northwestern University found that by 2020, during the pandemic, nearly 25 percent of American families surveyed said the food supply “just did not last” and that they could not afford to buy more – a share , which roughly triples pre-pandemic level.

Third, tight restrictions on investing in carbon fuels could hamper Wall Street’s ability to deliver the minimum return thresholds needed to meet commitments to hundreds of millions of current and future retirees. Key asset managers are already questioning the rationale for divestiture. For example, the CEO of California Public Employees’ Retirement System, which now manages close to $ 500 billion in assets, remarked in 2018: “Disposal limits our investment opportunities. With a targeted return of 7 percent, we need access to all potential investments on across all asset classes. Divestment does the exact opposite – it shrinks the investment universe. “


Capital starvation, consumer setbacks and confidence requirements to deliver returns increasingly appear to deliver a carbon resurgence. Unlike the green uprising that became the tsunami, a push to keep carbon will no longer require much in the way of indoctrination or subsidies. Instead, economic forces will mediate based on affordability, reliability and scale.

Anti-carbon policies coexisted uneasily with pension investment policies in the golden decade between 2010 and 2020, when shale gas abundance mitigated the entry of renewable energy into the market and effectively allowed both camps to claim progress. However, as renewable energy proves unable to scale sufficiently to push carbon meaningfully out of the system in short time frames, a correction seems more and more likely. Dealing with the externalities of the energy transition will be a characteristic global challenge for the 2020s and probably beyond.

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