Stranded Assets and Carbon Bombs

One of the open secrets in the climate change community is that the fossil fuels industry is facing a reckoning, perhaps even a complete and total meltdown, possibly on the scale of the financial industry’s collapse in 2008. However, it is likely to be less impactful on the average person than 2008 was, because while the financial industry runs, well, everyone’s finances, the oil industry is a cog in the machinery of the transportation industry and transportation is starting to move on from fossil fuels anyways. While the destruction of the fossil fuel industry may sound like a bold and arrogant prediction, I can back this wild assertion up with some pretty simple overall trends. I will get to those in a moment.

First, some context. CBC’s Front Burner podcast recently touched on this looming collapse, although they took a bit of a doom-and-gloom perspective on it. They noted that the oil and gas industry is investing billions upon billions in exploring and digging new oil wells, which is a problem because further developments in the oil and gas industry will push us over the limit of the amount of greenhouse gasses we can release into the atmosphere before we experience runaway climate change. If all of the current wells, reserves, and potential reserves are explored and extracted, that will put us well into the worst-case scenario for climate change. In this scenario, the oil companies become extremely wealthy while the global climate, and the biosphere, collapses. I give this scenario the worst odds in Vegas of actually happening, but we’ll come back to that.

Meanwhile, Tom Rand’s The Case for Climate Capitalism, a venture-capitalist’s guide to how to use the climate crisis to become absurdly rich, looked at the unfettered expansion of the oil industry in an entirely different light. Rand suggested that most oil companies are currently valued not by the amount of oil they sell every year, but on the proven reserves they own and could hypothetically access over the next several decades. He also notes, as Front Burner did, that if all of these reserves are exploited, we will hit the worst-case climate scenario. Rand, however, posits that there is no way in Hell that governments will allow unabashed extraction of fossil fuels, because, again, that would be apocalyptic. Instead of seeing billions of dollars on bets for new oil wells as our downfall, Rand suggests that that oil stocks are in the colossal bubble because oil companies’ valuations are based almost entirely on ‘stranded assets’ that is is extremely hazardous to exploit. Once investors realize these untapped oil reserves can be accessed and as the world’s demand for oil dwindles, the bubble will burst, the industry will collapse, and the world’s fossil fuels will stay in the ground. Yay. Unless you work for Shell or Exxon, I guess.

But which version of the future is more likely? Both Front Burner‘s and Tom Rand’s scenarios are based on opposing assumptions. The former assumes the oil and gas companies will be given unrestricted access to dig up whatever they want, face no consequences for doing so, and that they will face continual demand over the next decade; the latter assumes that oil demand will drop with the rise of electric vehicles, heat pumps, and new measures in energy efficiency. The former would result in colossal increases in greenhouse gas emissions and likely the destruction of the human race, and the latter would result in the destruction of oil companies. Hmm… which would I bet on…

The latter, hands down. I’d bet the farm on it. I’d go so far as to say the oil company’s exploring new wells is a bit like a dying millionaire planning to add an elaborate ballroom to his castle while he is on his death bed. Not practical, but just what you do when you’re rich and powerful in your decline. Furthermore, I give apocalyptic climate change worse odds than a Vegas slot machine, because of the answer to a simple question: Who benefits from the total destruction of the planet? The oil companies, maybe? Yeah, they’ll make buckets and buckets of money (north of 20 trillion, according to Rand), but what good is money in a world with hugely diminished fresh water reserves, lifeless oceans, over a meter of sea-level rise, and the destruction of the majority of plant life by 2100? A climate apocalypse would destroy life on this planet. And I think even oil executives, however much they may want to ignore climate change, like life. Particularly their own lives. The reason I very much doubt we’ll see the destruction of the planet, is because it benefits no one. We’ve had the ability to destroy the planet for decades with a colossal stockpile of nuclear weapons and have chosen not to. Because, again, doing so benefits no one.

I don’t see all the oil still in the ground as a bomb as much as bad debt owned by people who are desperately insisting it’ll be worth something someday. But as each day gets just a tiny bit warmer, I think even they will realize we need to keep our atmosphere-warming substances in the ground.