I have become a climate optimist. I now believe much of the world will achieve net-zero emissions by 2040 or earlier, well before the 2050 deadlines set by many governments.
And no, I am not taking any mind-bending medicine, legal or illegal. I have not yet had my first Scotch, but I am well-caffeinated.
I also understand the predictions offered by many of the great modeling teams that have studied the issue. I am a modeler myself, although now quite old and out of date. The models are good. The dire predictions would likely be correct if the assumptions underlying them were to be realized.
However, I have come to recognize that one of the most critical assumptions underpinning the forecasts of global warming is wrong. The assumption concerns the fossil fuel industry. Soon it will be gone, at least in most if not all OECD countries.
The oil, gas, and coal businesses are hurtling toward extinction in Europe, the United States, Canada, and much of Asia today. In many cases, the shareholder-owned companies have chosen to commit the corporate equivalent of suicide. In other cases, customers have turned their backs on these suppliers. Finally, investors are shunning the industry, effectively denying the firms the capital they require to keep operating.
The industry’s death can be seen in the equity markets. Forty years ago, the energy industry dominated the S&P 500. In January 1981, energy accounted for 29 percent of the index by market capitalization. As late as June 2008, energy’s share was 17 percent at a time when oil prices were at $140 per barrel. Today, energy is the smallest sector in the S&P 500, accounting for 2.3 percent.
The decline in energy can be seen by comparing the market cap of the seven largest oil companies to the market caps of Apple, Microsoft, or Amazon. Each of the three technology companies is now valued at more than $1 trillion; Apple is valued at more than $2 trillion. In contrast, the combined value of BP, Chevron, ENI, Equinor, ExxonMobil, Shell, and Total, the last of the “supermajors” formed at the turn of the century, is less than $700 billion.
Gone are the days when the oil company CEOs could tour the world and be treated like heads of state, as described in Steve Coll’s great book Private Empire. Gone also are the days when the industry can lumber across the globe, mindlessly causing damage while laying the groundwork for global catastrophe as described in Rachel Maddow’s bestseller Blowout.
Today, it is the likes of Apple CEO Tim Cook and Amazon CEO Jeff Bezos, who get treated like visiting royalty when they travel, even as the chief executives of BP and Shell must stand in line at Customs like the rest of us. Today, tech companies dominate the world, not the energy industry. Apple’s market capitalization is $2.2 trillion, while ExxonMobil’s is $169 billion.
If Tim Cook wanted, he could buy ExxonMobil with Apple’s spare cash today. Technology stocks rule. Investors now have a profound distaste for oil companies and fossil fuel companies in general.
The oil price collapse initiated in March by the Russia-Saudi Arabia price war has accelerated the fossil fuel industry’s demise. The price decrease sent Exxon’s market cap plunging from $300 billion to $140 billion in mid-March. It has since barely recovered. Other energy companies experienced similar declines.
The market cap dive cripples the industry. To stay in business, coal, natural gas, and oil firms need to drill more wells and expand mines. These projects are funded in part from the returns from selling production from existing mines and wells and in part from money raised by borrowing, issuing debt, or selling new shares. For example, ExxonMobil planned to spend $33 billion on investments in 2020, although that number has been reduced. Meanwhile, it had to borrow $9 billion in the spring to cover general expenditures and cover its dividend.
The low coal, natural gas, and oil prices associated with the March price war and the global economic slowdown caused by the coronavirus pandemic are insufficient to fund the investments required to sustain their businesses. At the same time, banks and investors have abandoned the industry. To maintain any position in equity markets, the solvent companies must pay shareholders large dividends. The less-solvent companies must cut operations to the bone. Many are going or will soon go bankrupt.
The European supermajors are trying to save themselves by abandoning oil. BP, Shell, and Total have all announced plans to expand their activities in renewable energy while cutting expenditures on oil. BP has gone further than Shell and Total, which both still see a role for natural gas. Investors have not been fooled.
BP is leading the way here. The company has announced a tenfold increase in its investment in low-carbon energy sources, reaching $5 billion per year by 2030, according to Reuters. The company also intends to achieve a twentyfold boost in renewable generating capacity and eventually produce 50 gigawatts. BP has indicated as well that it will sell oil assets in various countries. In addition, it will allow its oil production to decline by 40 percent over the next five to ten years, even if prices rise.
Russia and the OPEC members can be blamed for the sorry shape of the oil and natural industry in the OECD, particularly the frackers. Igor Sechin, the head of Russian oil producer Rosneft, led the attack by convincing Russia’s president Vladimir Putin to maintain the country’s oil production in March when global oil demand collapsed. In the price war that followed, crude trade briefly at a minus $40 per barrel.
Prices have recovered some since March after President Trump intervened. But Sechin and Putin have ensured that prices remain low enough to accelerate the gradual demise of the shareholder-owned oil industry in much of the OECD.
Sechin and Putin will make sure the industry continues to disintegrate. The key oil-exporting countries within OPEC will follow their lead.
Meanwhile, the coal industry is also slowly dying in the United States because new forms of generation are more cost-effective. The industry will expire because, despite the efforts of Trump-appointed regulators to revitalize it, it still cannot compete.
It is the shrinkage of energy firms in the OECD that makes me optimistic about climate change. The survival of the energy industry, or any industry, rests on the public’s support. More than a century ago, the advocates of horse-drawn transportation tried to slow or stop the expansion of the auto industry by imposing regulations intended to frustrate or prevent the transition. The attempt failed as Henry Ford’s innovations made car ownership possible for average individuals, not just the rich.
The fossil fuel industry has managed to cultivate similar support from the public for decades. Jobs in coal mines kept coal popular in the United States, Britain, Germany, and Poland. Today, though, Great Britain offers a warning of things to come. The end of the coal era that began with the Thatcher government’s mine closings in the 1980s has now concluded with the shutdown of the country’s last coal-fired generating plant in April 2020. By June 10, 2020, the country had gone more than two months without consuming coal in producing electricity.
Public support for coal remains in nations such as Poland and even Germany, in part because some mines still operate. This support will vanish as soon as the mines close.
Public support for oil will disappear as well in most OECD countries as the oil companies fade into oblivion. This support has always been tenuous. Ted Levitt, the marketing professor who coined the term globalization, once described gasoline stations as tax collectors, an institution necessary for consumers to achieve mobility. He also famously observed, “It [the institution] would never be popular, only less unpopular.”
Today the gasoline station is becoming increasingly unnecessary to consumers across the globe, given the advent and growth of electric vehicle use. Tesla cars can be charged in one’s garage. Owners of such vehicles may never again have to pull into a commercial facility for fuel.
Obviously, petroleum products and natural gas will continue to be consumed in OECD countries even as the oil firms shrink. Airlines need jet fuel, truckers need diesel, and conventional car owners need gasoline. More and more, though, these products will be refined from crude produced in the Middle East, Russia, or Brazil.
It is this change that makes me an environmental optimist. Today, crude oil and natural gas suppliers have far less influence over decisions made in Brussels, Tokyo, or even Washington than the domestically domiciled oil companies once had. The industry’s loss of its ability to sway public opinion against measures to reduce carbon emissions is apparent.
Here, California offers a classic example. The Western Oil and Gas Association used to have considerable influence in the state. (The organization is now called the Western States Petroleum Association, or WSPA). In its heyday, the association could count the headquarters of three large petroleum firms in California: Arco, Union of California, and Chevron. Of the three, only Chevron remains, and its CEO bemoans the situation there. The company will likely move soon.
Perhaps it is a coincidence, but California has become much less friendly to the oil industry. The state has resisted the Trump administration’s efforts to ease vehicle fuel economy standards. Furthermore, it has instituted low carbon fuel standards that require the carbon content of petroleum products to be gradually reduced.
Of course, one cannot repeal the laws of chemistry to cut gasoline or diesel carbon content. One can, however, require firms marketing the fuels to purchase credits that, if properly designed, have the same effect. California has done this. Firms selling gasoline or diesel fuel must buy credits. Among others, firms that generate electricity using renewable energy, which is sold to Tesla owners and others, can create such credits. In effect, the state has created a mechanism to make owners of petroleum-powered vehicles subsidize electric vehicles.
The cost to those who own gasoline and diesel-fueled cars and trucks will increase over time as the standards are tightened. Efforts by WSPA to moderate the regulations have failed. The organization today is almost entirely impotent.
The industry’s loss of political clout has become especially apparent in California this summer. Two large refineries, and one small one, have been or will soon be shuttered in what is still one of the world’s largest gasoline markets. Two of the refineries will convert to produce renewable diesel. Renewable diesel is manufactured from soybean oil or cooking grease using hydrotreaters, refining units that once made gasoline. The combustion of renewable diesel emits minimal amounts of greenhouse gases compared to conventional diesel.
The resulting product meets standard specifications for diesel fuel. It also generates credits under the California low-carbon fuel program that can then be sold to firms that manufacture gasoline to enable them to meet the tightening regulations.
Europe will follow California in pushing hydrocarbons out. The EU may adopt a carbon equalization tax (CET). Such a tax would penalize exports from nations that are not as aggressive in reducing carbon emissions. The most obvious targets are the United States and China.
The CET measure is contentious. The US and China will resist. However, I am confident that the EU will implement the CET within a few years. I also have few doubts that China will adapt to the measure to maintain its markets in Europe. China has proven extraordinarily adept at adjusting in the past and will likely do so again, even as it expands its coal-fired generating capacity.
The United States government will fight the CET, particularly if President Trump is reelected. However, the ostracization of United States firms, especially the large technology firms that now dominate the S&P 500, assures that the reluctance of any administration to cooperate with the European measures will be overcome.
Here again, I look to the example of California. Several auto manufacturers negotiated agreements with the state to continue following the strict fuel economy requirements imposed by the Obama administration even after the Trump administration relaxed the standards. The cooperating automakers did this because California is the world’s largest single market for cars and trucks. Astute executives knew that their survival depended on being on the right side of California regulators.
Executives at Alphabet, Amazon, Apple, Facebook, and Microsoft all understand that the European market is essential to their business. I am confident they will work to moderate US policies when the European knee begins to press on their necks.
For these reasons, I am quite confident that petroleum will be quickly pushed from markets in OECD countries. The rapidly shrinking supermajors and vanishing frackers will ease the shift away from oil. Russia and OPEC will be surprised at how fast their market disappears.
I am less confident regarding natural gas but still expect that it, too, will be mostly gone from industrialized nations by 2040 or so. Natural gas is not the fuel of the future that Shell and a few other companies suggest it is. It contributes to global warming, particularly when methane escapes.
Gas will be pushed out of the fuel cycle as electricity rates drop and heat pumps become more efficient. There is an irony here. Electric heat pumps and electric heating were forced out of the market forty years ago when I was a young economist because natural gas was less expensive. Electric heating survived only in areas that were not connected to the natural gas grid. Now it can be the low-cost source of heating and cooling as the cost of generating with renewables falls.
Of course, natural gas will remain a source of supply in manufacturing plastics. It is anybody’s guess today as to whether plastics, too, will be shoved from the market over the next twenty years.
I am convinced, though, that the world will be using significantly less natural gas by 2040 than today. This means natural gas prices will likely be low, and the market will suppress further efforts to find and develop gas fields. The primary suppliers will be in the Middle East, Russia, and perhaps Brazil. As with oil, these nations have little clout in the major industrialized countries.
I conclude as I began. I am a climate optimist. The optimism is based not on a belief that the measures proposed to reduce emissions through taxation or regulation will succeed as proponents hope but rather because the industry that produces the fossil fuels is dying, just like the oak tree across the street from my office. The companies will be closed, just as the oak will be cut down.
This result will be very like the outcome of the 1992 presidential election. In January of that year, a young governor from Arkansas was asked how he could hope to become president. Bill Clinton answered, “Because George Bush is going to lose and no one else is running.” The global warming situation will improve drastically because the key companies producing the fossil fuels will die and there will be no replacements.
Philip Verleger is an economist. He completed his PhD from MIT in 1971. Over the last 49 years he has specialized in the study of energy markets serving in two administrations (Ford and Carter), taught at Yale, held the David Mitchell/Encana Chair at the University of Calgary, and been a senior fellow at the Peterson Institute for International Economics. He now leads his own very small consulting firm PKVerleger LLC.