Gauis Publius: In Surprise Move, Norway’s $1 Trillion Sovereign Wealth Fund May Divest From Fossil Fuels

By Gaius Publius, a professional writer living on the West Coast of the United States and frequent contributor to DownWithTyranny, digby, Truthout, and Naked Capitalism. Follow him on Twitter @Gaius_Publius, Tumblr and Facebook. GP article archive  here. Originally published at DownWithTyranny

Two broad points before the specifics of this story.

First, the Divest from Oil and Gas movement is a real threat to Big Oil as an industry in the same way the Divest from South Africa movement was a threat to South African apartheid — it hits them where the money sits, in the wallet and not in the reputation, the latter of which can always be papered over with expensive ad campaigns telling us how wonderful the industry is.

It’s a real advantage having more money than any of your enemies, isn’t it.

The Divest from Oil and Gas movement is as threatening to the industry as lawsuits, which are also going on. A divestment movement essentially threatens to collapse the price of oil and gas company stocks, which impoverishes the investing class and, more particularly, the industry’s CEO class, since a good part of their pay is in stock.

Once stock prices fall below 50% of their value, it takes forever to build them back up, if indeed they ever recover.

Second, a collapse of oil and gas stock prices is, at some point, inevitable. Consider: If most or all of current in-the-ground fossil fuel reserves — a major basis of valuation of these companies — will stay in the ground as “stranded assets,” at some point the value of Exxon, Conoco and Shell will and should be nearly zero.

The only questions are when that will occur and what will be the triggering event. I’ve written before about the precariousness of Big Oil as an industry — see “Big Oil In Trouble, Enters “No Man’s Land” of Collapsing Balance Sheets” — and that reasoning still holds. Big Oil faces either death by government intervention (the world of power grows an aggressive conscience) or death by market (a permanent fossil fuel glut keeps prices unprofitably low).

Death by global panic as chaos overtakes our shiny, smart-phone world is also on the table. Death of the industry by one of those three forces will certainly occur, and sooner rather than later.

In the earlier piece I wrote:

But one of the unique ways of disrupting supply is to disrupt (degrade, destroy) the financial health of the companies doing the extraction, for example, Exxon. Divestment campaigns — making the holding of Exxon stock morally toxic for institutional buyers like universities — are a form of disrupting supply by disrupting corporate financing. Unfortunately, though divestment campaigns do work — witness the divestment campaign against South African apartheid — they can be slow and spotty, not broad enough to effect an entire industry.

Enter the “magic of the market.” If the price of oil is so cheap that it’s not profitable to dig it, because it’s so plentiful relative to demand, companies will collapse, go bankrupt. We’ve already seen that with small and mid-size U.S. fracking companies, many of which are so highly leveraged that they can’t make a profit on sales and they can’t finance their debt.

I don’t see the price of oil and gas recovering anytime soon, not with (a) the present market oversupply, and (b) a race to monetize remaining in-the-ground assets by frightened companies, large and small, a race that will guarantee the glut will continue indefinitely.

All we’re waiting for is a trigger. Will this be it? Bloomberg (h/t Hunter Cutting via Twitter):

Norway’s proposal to sell off $35 billion in oil and natural gas stocks brings sudden and unparalleled heft to a once-grassroots movement to enlist investors in the fight against climate change.

The Nordic nation’s $1 trillion sovereign wealth fund said Thursday that it’s considering unloading its shares of Exxon Mobil Corp., Royal Dutch Shell Plc and other oil giants to diversify its holdings and guard against drops in crude prices. European oil stocks fell.

Norges Bank Investment Management would not be the first institutional investor to back away from fossil fuels. But until now, most have been state pension funds, universities and other smaller players that have limited their divestments to coal, tar sands or some of the other dirtiest fossil fuels.

Norway’s fund is the world’s largest equity investor, controlling about 1.5 percent of global stocks. If it follows through on its proposal, it would be the first to abandon the sector altogether.

This is an enormous change,” said Mindy Lubber, president of Ceres, a non-profit that advocates for sustainable investing. “It’s a shot heard around the world.” [emphasis added]

The fact that it’s Bloomberg reporters covering this, the nation’s business best, all with concerned looks on their faces, and not just the good people at Friends of the Small County News, is itself convincing evidence that the Norwegian move to divest, if it occurs, will indeed be an industry problem.

The Bleak Future of Oil and Gas

Norway as a nation is in a unique position. A great deal of its wealth — more than 20% of its GDP — is already tied up in oil and gas production. This by itself represents a large exposure to industry pricing shocks. For that country’s sovereign wealth fund to also be owners of oil and gas stock makes no investment sense at all. Thus their discussion about divesting from that sector and diversifying, or even hedging by investing in the renewables sector.

But Norway’s problem is a general problem for other investors as well. At some point no investor will want to hold those stocks, given the “poised to fall” nature of the entire fossil fuel industry. An industry doesn’t have to falter before its stock prices falter; a price collapse could easily precede an unstoppable and escalating worldwide transition to renewables. After all, investors want either future growth or future dividends, or both, from their investments. “No growth on the horizon” plus “poised to collapse” is not a happy prescription for the price of any stock.

Call it “the magic of the market,” working for you for a change.

You Too Can Divest

Feel free to accelerate that magic. If your college or university is still invested in fossil fuel, consider asking them to follow Norway’s lead — and remind them that their money too could be vulnerable to a future “price shock.”

If your mutual fund is invested in fossil fuel, at Vanguard, say, or Fidelity, say the same thing to their customer representatives.

And if you are invested in fossil fuel, directly or indirectly, give some thought to transferring your investment elsewhere. After all, that would not only make good financial sense, but good moral sense as well.

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18 comments

  1. The Rev Kev

    If Norway insists on following this “error of its way” in divesting itself of oil and gas investments, I am sure that the oil industry could take a leaf from the attacks on the Boycott, Divestment and Sanctions Movement on Israel and launch assaults on Norwegian financial institutes and banks by making it illegal for the US and other countries to have any financial interests in such entities if they partake in this divestment.
    Perhaps oil stocks will fall but because of the wide range of products that come from oil such as plastics, they will always have value. Which do we need the most – oil for transport or oil for plastics? Still, it may be a step in the right direction as our whole industrial civilization is completely beholden to this one resource and I mean everything – farming, industry, transport, energy production, suburbs, etc. Far, far too many eggs in this particular basket IMHO.

    Reply
    1. kimyo

      Which do we need the most – oil for transport or oil for plastics?

      also on the list… ‘oil for food’: (al bartlett)

      “Modern agriculture is the use of land to convert petroleum into food”

      Reply
      1. The Rev Kev

        Very good point that. Oil is used in pesticides, fertilizers, tractor fuel & lubricants plus appears in a myriad of ways in modern industrial farming. When oil prices get far too high one day as the last of the easy to pump oilfields run dry, que the food riots in three, two, one…

        Reply
    2. pat b

      perhaps the USMC can invade Oslo and force them to invest in Oil stocks.

      Perhaps President Jeb Bush can make getting a Norwegian oil law the top priority
      of his administration.

      Reply
  2. kimyo

    last week’s article portrayed the ‘oil billionaires’ as the enemy. today, it’s ‘morally toxic exxon share-holders’.

    what if the actual threat is population growth? if so, wouldn’t divestiture then be an essentially worthless symbolic gesture? doesn’t such a focus serve primarily to prevent us from moving forward?

    Climate Change Isn’t Our Biggest Environmental Problem, and Why Technology Won’t Save Us

    Our core ecological problem is not climate change. It is overshoot, of which global warming is a symptom. Overshoot is a systemic issue. Over the past century-and-a-half, enormous amounts of cheap energy from fossil fuels enabled the rapid growth of resource extraction, manufacturing, and consumption; and these in turn led to population increase, pollution, and loss of natural habitat and hence biodiversity. The human system expanded dramatically, overshooting Earth’s long-term carrying capacity for humans while upsetting the ecological systems we depend on for our survival. Until we understand and address this systemic imbalance, symptomatic treatment will constitute an endlessly frustrating round of stopgap measures that are ultimately destined to fail.

    Reply
    1. Skip Intro

      Pointing to population growth is certainly a useful perennial distraction. As long as our society lives on borrowed fossil energy that also destroys our planet’s habitability, population size will drive further consumption/destruction. I think it is more of a symptom than a cause, and populations tend to die off quickly when they exceed carrying capacity.

      Reply
    2. Mel

      What if it’s two things? What if it’s the unsupported drawdown of resource capital AND the increasing numbers that our drawing-down has to support.

      Maybe it’s due to advertising. An ad tells us that there’s One Question (having a good sex life, say) and One Answer (drinking that brand of beer.) This comment and thousands of others before it show us how citizens here can’t think of two things at the same time.

      Reply
      1. Anon

        Yes. The solution to AGW is multi-faceted. And it will take time (the faster the better). The discussion above asks, ‘what about oil for big Ag ‘, the solution, of course, is CONSERVATION. Which is easier with a smaller population (that better matches the planets semi-equilibrium—ecology)

        While fossil fuel is reduced, renewables must expand AND awareness of population limits espoused.

        Reply
  3. divadab

    Norway a small player – note the magnitude of the price effect of their move – 0.21% – which is mere noise. Note also that Norway has not stopped developing new offshore exploration blocks

    It is critical that humanity end the energy feast and develop sustainable systems that respect the living planet, and this is a small step in the right direction. I don’t agree with @kimyo that the current world human population is necessarily in overshoot – only at current levels of consumption and waste. If everyone were vegetarian and fossil-fuel power eliminated, implying a much simpler material existence, human populations could be as large overall as they are now, although certain locales would experience depopulation.

    Would that the transition could be planned and orderly but I expect rather chaos and the four horsemen in much of the world. Let us as humans work locally to build sustainable food and social systems and weather the coming storm.

    Reply
    1. kimyo

      If everyone were vegetarian

      what is the ‘natural’ number of large ruminants? there was a time, not too long ago, when there were ‘too many to count’. if you want a north america covered by forest, then, you also desire ruminants galore.

      if you want dessicated, pesticide-poisoned land, then you want soy a-plenty.

      Bison or Buffalo & Native Americans

      Buffalo once ranged from the eastern seaboard to Oregon and California; from Great Slave Lake in northern Alberta to northern Mexico. Although no one will ever know exactly how many bison once inhabited North America, estimates range from twenty-five to seventy million. William Hornaday, a naturalist who spent considerable time in the West, both before and during the most severe years of the slaughter, comments on the seemingly infinite bison population and the impossibility of estimating their quantity:

      It would have been as easy to count or to estimate the number of leaves in a forest as to calculate the number of buffaloes living at any given time during the history of the species previous to 1870.

      cafos will destroy the planet, absolutely, sure. but, the ‘natural’ state of things? it’s a lot closer to cows from coast to coast than millions upon millions of acres of ‘archer daniel midlands sustainable soy’.

      Reply
      1. divadab

        We are now the herd, @kimyo. Buffalo a memory, never to return to their former glory, destroyed in order to destroy the Comanche empire’s economic base.

        Who said anything about “natural”? We are well past that point – humans are, like it or not, managers of the garden. Which means managing it with respect to the living processes of the planet. No more roundup, all organic, coast to coast.

        And vegetarian includes milk and eggs. Bovids and fowl can be managed sustainably. Perhaps we can breed buffalo for bigger udders and restore part of their range?

        Reply
    2. PKMKII

      Norway a small player – note the magnitude of the price effect of their move – 0.21% – which is mere noise. Note also that Norway has not stopped developing new offshore exploration blocks

      Yes, but their overall production is down. They’re going to try to make money on it where they can, but that doesn’t stop them from seeing the long-term picture of where fossil fuels are headed.

      Reply
  4. Thuto

    This could be just a strategic reallocation of capital and nothing more. To give it the type of teeth that make it a trigger event tantamount to hammering another nail into the fossil fuels coffin (as the author hopes), two things would have to happen imho:

    1. The sovereign wealth fund would have to declare explicitly what its motives/drivers are for this move (ecological concerns, reallocation of capital, negative sector outlook, all of the above ??). Otherwise everyone is just reading between the lines and arguments will persist with analysts on both sides of the for/against fossil fuels debate parsing this move in line with their perceptions (e.g. “for” analysts seeing it as a trigger event, “against” analysts seeing it as normal capital reallocation).

    2. Divestment in big oil stocks by itself isn’t enough to send the type of message the author hopes for imo. A gradual wind down, starting immediately, of Norway’s oil and gas explorations in the North sea would have to accompany this move to sharpen the message and make it both indelible and the the type of trigger event we hope it is.

    I was too young to vote in 94 when apartheid “ended”, but what the subsequent 25 years have taught me as a South African is that big trigger events may scare entrenched power structures into making concessions, but the power brokers have the resources, patience and will to reorganize and reverse revolutions. I hope i’m wrong but I wouldn’t write off big oil and its capacity to “fight back”. It’s likely going to be a war of attrition as opposed to one trigger event tipping the domino that tips all other dominos that take the industry down.

    Reply
    1. Jim Haygood

      Norway’s sovereign wealth fund HAS declared its motive for divesting from energy equities — namely, Norway has plenty of exposure to the energy industry via oil production and the state oil company, Statoil. Avoiding added concentration in global energy companies is simply prudent sector diversification on Norway’s part.

      Gaius Publius’s crude attempt to conflate Norway’s divestment with the Divest from Oil and Gas movement is totally off base. He’s just projecting his own ideological fantasies as fact.

      More ludicrous still are Gaius outbursts such as “a collapse of oil and gas stock prices is, at some point, inevitable” and “I don’t see the price of oil and gas recovering anytime soon.”

      WHUT? Take a look at this chart, son, and tell me whether the line labeled “Brent crude” is rising or falling. Hint for the visually challenged: lower left corner to upper right corner means it’s goin’ up — DUH!

      http://ibb.co/dRsAhm

      Reply
  5. Louis Fyne

    when you have 7+ billion people, a sizable number of whom still burn wood/charcoal for kitchen fuel and numerous developing world megacitie, fossil fuel ain’t going away for a long time.

    You think America needs low fossil fuel prices, so does the Dhaka tuk-tuk driver and mill owner.

    Reply
  6. Amit

    Unlikely the stocks will be impacted, look at how institutional investors avoiding tobacco impacted those stocks. Oil is more likely poised for price spikes. The natural depletion rate is about 8-9mbpd and the world consumes 95ish mbpd. You basically need another Saudi Arabia to find each year. Most of the oil that’s been found and depleted is in the easier to access / lower cost conventional plays. The “good” news is this means longer term oil will be less competitive as an energy source vs renewables but in the short-term small changes to demand can lead to upward price shocks with price of oil.

    The oil cos are also working on renewables. Shell jsut announced the biobean deal, I believe Statoil launched the first floating wind farm, Shell also bought NewMotion to roll out EV charging stations across Europe…obviously the profits from fossil fuels dwarf everything else but don’t be surprised to see these guys survive.

    Reply
  7. albert

    Norways divestment is only 3.5% of their sovereign wealth fund, certainly not enough to affect anything important. I see it as an ideological move, but then again, that 35 billion could be very useful for Norway.

    Reply

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