Contributed by Robert Lyman © September 2020
In late December, 2019, the outgoing Governor of the Bank of England, Mark Carney, gave a speech to a Lloyd’s of London dinner. In it, he warned members of the international financial industry that their valuation of loans and investments should be reduced to consider the losses that fossil fuel companies will suffer from a catastrophic collapse in value as a result of climate change policies. The key danger, he alleged, was that changes in government policies will leave oil drillers and coal miners with stranded assets – reserves that have little value because the fight against climate change will “require” them to be left in the ground.
In this article, I will compare Carney’s claims with what is actually happening in global energy markets, as well as what can reasonably be expected to drive energy markets over the foreseeable future, according to the best authorities available. I will try to show that the financial institutions and energy companies that pass up opportunities to invest in fossil fuels will run a far greater risk of foregoing significant profits.
Global demand for oil, natural gas and coal is now and will continue to be driven by demographic and economic trends in Asia, not in Europe and North America. The resulting large increases in demand for these fuels, which will probably become evident no later than 2022, must be satisfied. If government policies and investor reticence and/or lack of investment capital result in insufficient supply to meet this burgeoning demand, prices will rise significantly. While that, in turn, will dampen demand growth, it will yield very large profits to producers and provide them with the cash flow needed to expand reserves and production with less reliance on traditional sources of lending.
In such a future, the institutional investors can, of course, refuse to join in the profit-taking. I doubt they will.
About the Author: Robert Lyman is an economist with 27 years’ experience as an analyst, policy advisor and manager in the Canadian federal government, primarily in the areas of energy, transportation, and environmental policy. He was also a diplomat for 10 years. Subsequently he has worked as a private consultant conducting policy research and analysis on energy and transportation issues as a principal for Entrans Policy Research Group. He is a frequent contributor of articles and reports for Friends of Science, a Calgary-based independent organization concerned about climate change-related issues. He resides in Ottawa, Canada. Full bio.