The end is nigh: The fossil fuel reckoning is upon us

Photo credit: Jim Mendell

The headlines are coming fast and furious:

“Exxon Used to Be America’s Most Valuable Company. What Happened?”[i]

“BP Says the Era of Oil-Demand Growth Is Over”[ii]

“Stop Expecting Oil and the Economy to Recover”[iii]

“The End of the Oil Age Is Upon Us”[iv]

Clean Yield has been advocating for fossil fuel divestment since the inception of the broad divestment campaign in 2012. In addition to the moral imperative, we have argued. that there are grave financial risks of investing in an industry that has vast assets on its balance sheets that are likely to end up as “stranded assets,” namely fossil fuel reserves that humanity cannot afford to burn if it is to maintain a livable planet.

So we are not surprised that the oil and gas sector has underperformed the broad market benchmarks. But we did not see this coming.

This chart shows the performance of the S&P 500 index and the S&P energy sector since the middle of 2012, when Rolling Stone published Bill McKibben’s clarion call for fossil fuel divestment. The S&P 500 has gained about 150%, while the energy sector (composed of large oil and gas companies) has lost more than half its value. If you started with $100 of each, you’d now have $250 if it were invested in the S&P 500 and just $49 if you invested in the energy sector. Oil and gas stocks have shrunk from 12% of the S&P 500 index in 2012 to just 2% today, while Dow Jones recently booted ExxonMobil from the Dow Jones Industrial Average, a sharp blow to its corporate ego.

It is gratifying to note that countless individual investors and institutions have divested their assets from fossil fuels over the past eight years, saving themselves literally billions of dollars. 350.org has been tracking the movement and counts 1,243 institutional divestment commitments with total assets of $14.4 trillion. Some of those are narrow commitments to just divest from coal or allow the institution to continue investing in commingled funds that have fossil fuel exposure, but that doesn’t change the big picture: Investors have awoken to the fact that the end of the Oil Age is fast approaching and are valuing fossil fuel companies on that basis.

We don’t claim that the divestment movement caused the fossil fuel reckoning, but we think it’s fair to say that it hastened it. The decline of the industry is due to a confluence of factors, including depressed oil prices thanks to petropolitics (e.g., Russia and Saudi Arabia continuing to pump oil to hurt U.S. frackers), a glut of oil from fracking, slowing oil consumption, and rapid deployment of clean-energy technologies.

Photo credit: Jim Mendell

Meanwhile, growing mainstream investor awareness of climate risks has been driven by a combination of the increasing frequency and severity of climate catastrophes (floods, droughts, and wildfires) and the broad climate movement successfully sounding the alarm about the need for urgent climate policy action. The divestment campaign played a critical role in raising awareness on Wall Street and throughout corporate boardrooms of the risk of stranded assets on oil company balance sheets.

Now even BP says the Oil Age is coming to a close. According to Bloomberg’s story, “Oil consumption may never return to levels seen before the coronavirus crisis took hold, BP said in a report…. Even its most bullish scenario sees demand no better than “broadly flat” for the next two decades as the energy transition shifts the world away from fossil fuels.”

While we can celebrate the demise of Big Oil in the stock market, the work necessary to mitigate climate change remains daunting and urgent. We must continue to press for dramatic and speedy emissions reductions while also investing in solutions to draw down carbon from the atmosphere (our favorite is soil carbon sequestration). Further, we must make sure that plans to adapt to the climate change that we have already locked in over the coming decades are just and equitable.

[i] https://www.wsj.com/articles/exxon-used-to-be-americas-most-valuable-company-what-happened-oil-gas-11600037243?st=9eub7me9vpax5hj

[ii] https://www.bloomberg.com/news/articles/2020-09-13/bp-says-the-era-of-oil-demand-growth-is-over?sref=AgsaEEIU

[iii] https://www.artberman.com/2020/09/03/stop-expecting-oil-and-the-economy-to-recover/

[iv] https://www.vice.com/en_us/article/3aze8j/the-end-of-the-oil-age-is-upon-us