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Concentration of CO2 in the Atmosphere

Warning on Investments in Fossil Fuels

By George Harvey

We should start with a disclaimer. No one at Green Energy Times is a stock market analyst. Nevertheless, we can see a hand writing on the wall, and what it writes looks a lot like, “Divest – before it is too late.”

Oil industry analysts are in a bit of a tizzy. There are a number of market factors whose combination is so hard to explain that a lot of informed people seem speechless. First, here are some facts.

  • Oil prices are the lowest they have been in years.

  • CNN reported on November 22 that tankers have lined up off the U. S. East Coast because there is no place to put the oil they carry.

  • CNN reported on February 4 that storage facilities in Cushing, Oklahoma are running out of room. This is the largest oil storage hub in the country, and if it runs out of space to take more, oil prices could go much lower.

  • According to the January 2016 US Energy Information Administration report, “Weekly U.S. Field Production of Crude Oil,” the US oil production is near a record high.

So producers are pumping more oil, despite the fact that they are running out of places to put it, and the price they are getting it is at a low. What is going on? Here are a couple more details.

  • According to Bloomberg New Energy Finance, in its “2016 Sustainable Energy in America Factbook,” growth in the gross domestic product has become decoupled from fossil fuel consumption for the first time. Our economy is growing at a rate many call healthy, but our consumption of fossil fuels is declining. This is extremely significant.

  • The Federal Energy Regulatory Commission’s “Energy Infrastructure Update for December 2015” shows that new natural gas installations in that year had a capacity of 5,942 MW, down from 9,162 MW in 2014, a decline of 35%. At the same time, new wind power installations had a capacity of 7,977 MW in 2015, up from 5,319 MW in 2014, an increase of 50%. And renewables accounted for about two-thirds of all new generating capacity of 2015.

  • Financial advisers Lazard Associates’ “Levelized Cost of Energy Analysis,” published last December said the costs of renewable power are currently falling below those of fossil fuels and nuclear power, regardless of incentives.

Clearly, the oil and gas companies are in trouble. Investors and banks are aware of this, as we can see from a couple more facts.

  • According to a report by Bloomberg on January 20, 2016, 42 US oil companies went bankrupt in 2015, owing a combined $17 billion. In some cases, there were no bidders for the assets.

  • A check of current market data shows the Dow Jones Oil and Gas Index is down over 46% from the highs it hit only last year. Astonishingly, the Dow Jones Coal Index is down 97.5% from its highs of 2008.

  • A report in the Los Angeles Times of last August 13 said the decline in the value of fossil fuel investments had already cost two state retirement funds in California about $5 billion. This is probably the tip of the iceberg.

For what they are worth, here are a few summary observations.

The oil and gas companies borrowed a lot of money to finance new exploration and develop new infrastructure. This happened just as the market struck peak demand and peak prices, from which it has declined.

The nature of a peak is that it is followed by a decline. Peaking demand was followed by declining demand precisely because of a combination of factors that were set to drive it down. Efficiency and rapidly dropping prices for energy from renewables are increasingly taking their toll; both demand and prices of renewables are projected to continue dropping. That is why so many oil companies went bankrupt.

The option oil and gas companies normally use to deal with declining income is to pump more oil and gas. The fact that the inventories are full and demand is declining means that the prices of their products will continue to be depressed as more products are pumped.

This is a vicious cycle, from which the fossil fuel industries may never recover. They are losing a competitive edge, in a market that is shrinking, while environmental concerns make it clear they should stop bringing their products to market altogether. The term “death spiral” comes to mind.

We could easily see the situation with fossil fuels as a bubble about to burst. If that is the case, it might be as bad as the banking crisis of 2007.

Our advice is “Don’t play with fire! Divest now!” And for those who would hesitate, “Do your due diligence!”

See “Should We Divest?” on page 7.

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