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Glad to see you again. One would think that this would be a consistent moment for investors in American oil and gas companies, because the Trump administration promises to release a new era of the expansion of fossil fuels. However, these actions have underperformed the wider market recently. The American oil and gas index of Dow Jones is down 1.2% in the past year, against an increase of 11.3% for the S&P 500.
The prudence of investors in this sector is justified, as I point out below. And a new study suggests that they should be ready for much more important declines to follow over time.
Have a good weekend.
Green transition
Who will be left by holding oil assets when the music stops?
The latest long -term OPEC forecasts, the Club of Petroleum Exporting Nations, predict That the world will use 120 million barrels of oil per day in 2050 – compared to 104 million barrels today. Exxonmobil oil companies in Equinor increase their fossil fuel investments in anticipation of a high demand for decades to come.
But what happens if they are wrong? With an American president who cries “Drill, Baby, Drill”, some have dismissed the chances of the world to wean fossil fuels to a significant extent by the middle of the century. However, the risk of peak oil demand remains real for oil companies and their investors, including governments and savers worldwide.
A new attempt to quantify this risk came yesterday, in a study Directed by the United Kingdom Sustainable Investment and Finance Association with the Trex analysis company. They have examined the prospects of the assets of fossil fuels as part of the scenario of the commitments announced developed by the International Energy Agency, which depicts how the global energy system could develop if governments achieve their climatic objectives.
Count the cost
The researchers found that this would lead to 2.3 TN of 2 TN of asset stations and other financial losses by 2040, because the resources have been left in the soil due to insufficient demand, which would also weigh prices. They also modeled how these losses would be distributed – an exercise that led to interesting results.
In absolute terms, governments and investors in the United States, Russia and China would take the greatest blow, with respective losses of $ 546 billion, $ 402 billion and $ 184 billion. In fourth position was the United Kingdom, with potential losses of $ 141 billion – despite its relatively modest position in the world fossil fuel industry.
While the United Kingdom represents only 2% of world GDP and only 1% of physical assets of fossil fuels vulnerable to “stranding”, it represents 6% of the potential financial losses in the world because of blocked assets. These losses, according to researchers, would represent more than £ 2,000 by British citizen, reflecting the country's disproportionate financial exhibition to the world fossil fuel industry. A large part of this blow, they have noted, would be taken by the British sector of pension funds, which would be on the hook for losses of 15.2 billion pounds sterling ($ 19.6 billion).
Of course, all of this assumes that governments will respect their commitments to reduce emissions – something that was in doubt before Trump even shouts American climate policy. However, it should be noted that the IEA Scenario of promises announced used in this study is considerably less ambitious than its Zero net emission scriptwhich assumes that net carbon emissions can be eliminated by 2050.
And even under the much less ambitious IEA Scenario of declared policies – in which governments are barely further to achieve their climatic objectives than the policies they have already announced – the world's blocked assets would amount to $ 872 billion, according to researchers, with the share of the United Kingdom totaling $ 49 billion.
Who are the optimists?
The hopes of achieving the objectives of the Paris Agreement are now very optimistic. But in its own way, OPEC forecasts also have a strong continuous growth in oil demand. The transition to electric vehicles is a terrible threat to the greatest source of this request. Chinese sales of electric vehicles should exceed those of combustion motor cars this year. Other nations evolve in the same direction, although especially at a slower pace, because the costs drop and the billing infrastructure is improving.
Although the sea and in particular air transport are more difficult to decarbonize, they represent only 15% of the demand for crude oil. Oil purchases for petrochemical production continue to grow – but that the sector represents less than a sixth of the total demand for crude oil, which means that even rapid expansion is unlikely to prevail over the drop in demand for road transport.
This is confirmed by the latest AIE annual annual oil report, which predicts that demand growth will become negative in 2030. Maybe the IAI is swept away and OPEC analysts have a more reliable perspective? Perhaps – although it should be noted that the AIE must have repeatedly revised its conservative predictions for clean energy growth.
For investors who manage their financial exposure to fossil fuels, this is largely a calendar issue. Despite low performance in recent months, those who have been overweight in the sector in the past five years have been rewarded: the Dow Jones US Oil and Gas index has increased by 105%, compared to an increase of 94% for the S&P 500 index. But as soon as it becomes clear that oil demand comes into structural decline, the re -evaluation of asset values can be painful.
“The energy transition is already underway, even without any additional policy implemented,” said Willemijn Verdegaal, co-chief of Trex. Investors of fossil fuels companies should wonder, “she added:” Is it the risk that we want to take? ” Do we want to be left by holding this when music stops?
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