back to article Guardian: 'Oil reserves will soon be worth NOTHING!' (A bit like their stock tips, really)

It's not going to come as all that much of a surprise that those who worry excessively about climate change aren't really all that up to speed with economics as a subject in general. But it should produce a little amazement (or a chortle or two perhaps) when said usual suspects launch a new campaign that deliberately ignores a …

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  1. Steve Davies 3 Silver badge

    There will be a need for Carbon stuff in the Economy

    Even if we stop using all forms of Petrol and Diesel/Fule Oil tomorrow.

    We will still have machinery in all those leccy thingies.

    That machinery will need lubricants most of which will be derrived from a carbon based resource.

    Sure it will be a lot less than now but we can't totally elimiate Carbon use from our lives.

    Plastic 'stuff' will mostly be a thing of the past because that comes directly from Oil.

    any analyst who preticts that we will be able to survive using no carbon originated stuff at all is a total idion IMHO. Even the most fervent Greens I have met accept that for some things we will have to use some oil in our lives but this is the Grauniad so all bets are off as to the sanity of the writer (joking!)

    1. John Sager

      Re: There will be a need for Carbon stuff in the Economy

      If we're talking about keeping all the carbon in the ground, then the energy we use has to come from somewhere. This - http://www.withouthotair.com - is a very good analysis of the options. Worstall's slim volume, 'Chasing Rainbows' is worth a read too. Unless we all go back to pre-industrial-revolution energy use with all that entails in terms of reduced population, disease, starvation et al.

      Personally I don't see certain forms of carbon use disappearing at all. If we carry on flying then kerosene is going to be very hard to replace. I don't see the energy density of hydrogen or electrical energy storage approaching kero any time soon if ever. Same thing for container ships & bunker oil/diesel. Plenty of people have tried to build upscaled sailing ships but we don't see them around in more than prototypes.

      Of course we could make kero/diesel from atmospheric CO2 but that needs a lot of hectares of sunshine, even if we have an optimised natural or artificial photosynthesis process - see the ref above.

    2. Anonymous Coward
      Anonymous Coward

      Re: There will be a need for Carbon stuff in the Economy

      Pre-cooked hydrocarbons will indeed be in use for a long while; the future world where it's cheaper to synthesise all molecules from scratch feels closer to Banks' "Culture" than to us. But the Guardian's argument that a big price correction could result isn't on those grounds daffy: a rapid halving of demand would be very bad news for OPEC & friends.

      But of course it won't be that rapid and betting on this as an investment strategy is betting that you the newspaper reader are smarter & better-informed than the oil companies, who of course are already spreading their bets into other energy products, etc.

      It's almost mythic to believe that BP & co are so wedded to their dark satanic wells that they won't aggressively reorient their businesses with the winds of change, be those winds economic, technical, or regulatory. It makes for a nice morality play to regard them as Mordor but really they're more like the firm in "Point Blank": thoroughly amoral but also pragmatic.

      1. Steve Davies 3 Silver badge

        Re: There will be a need for Carbon stuff in the Economy

        Didn't BP change all their advertising so that BP meant 'Beyond Petroleum?'

        1. DiViDeD

          Re: BP Rebranding

          Indeed they did. And they changed their logo to the current Flora Margarine lookalike. In fact, in that year they spend £116 million changing logos, mission statements and stressing to the public that they were about alternative energy and sustainability.

          That £116 million was, of course, completely overshadowed by the £2.57 million they spent in research on all alternative energy sources.

          1. Danny 14

            Re: BP Rebranding

            aha but the 2.57m was spent on hushing up the tin foil hat brigade, afterall, big oil already has the tech for fusion etc.... :)

    3. JeffyPoooh
      Pint

      The 80/20 rule, common sense vice religion

      All that's required is a significant reduction in CO2 emissions. It doesn't need to hit zero.

      Anyone that uses vocabulary that contains an assumption of Zero Carbon should have their forehead tattooed with the words 'Dangerous Moron'.

      1. PNGuinn
        Flame

        Re: The 80/20 rule, common sense vice religion

        Or publicly branded on the butt. Not nearly so visible later, but much more fun for the rest of us at the time.

        Might even replace Clarkson as a tv spectator sport.

        1. Dodgy Geezer Silver badge

          Re: The 80/20 rule, common sense vice religion

          "Might even replace Clarkson as a tv spectator sport."

          NOTHING can replace Clarkson as a TV spectator sport.

          And at the moment the BBC are indeed trying very hard to ensure that nothing IS going to replace Clarkson...

      2. Dodgy Geezer Silver badge

        Re: The 80/20 rule, common sense vice religion

        "All that's required is a significant reduction in CO2 emissions..."

        Er...no, it's not.

        For the last 20 years our CO2 has gone up, but the temperature has stayed the same. The CO2-warming hypothesis is PLAIN WRONG.

    4. Anonymous Coward
      Anonymous Coward

      Re: Plastic 'stuff'

      Fortunately, we've discovered ways to produce some plastics from plants. Not carbon free still, but at least it doesn't require oil. Recycling is also likely to become more valuable if it turns out to be hard to manufacture some types of plastics with low/no oil consumption.

      1. Anonymous Coward
        Anonymous Coward

        Re: Plastic 'stuff'

        The problem with all the alternatives is that no one is keeping track of all the inputs and their requirements compared to all the alternatives. One reputable analyst that I came across performed the econometric analysis of ethanol and it came out negative when you factor costs & especially CO2 in the inputs. Biggest change was factoring in fertilizers (manufacture, transport to site), transporting crop to ethanol plant, and distributing ethanol product.

        We absolutely must do detailed breakdowns, including ranges, before we commit to a process if we are serious about energy reduction and especially CO2 reduction. Politically driven feel good solutions are exactly what is not needed.

        1. Tim Worstal

          Re: Plastic 'stuff'

          That's why you just change one price. The carbon price. Once that is done you can leave the market to do all that calculating for you.

    5. Dodgy Geezer Silver badge

      Re: There will be a need for Carbon stuff in the Economy

      ...Even the most fervent Greens I have met accept that for some things we will have to use some oil in our lives...

      ..but it should all be 'natural', of course...!

      Votes to bring back Whale Oil?

  2. Anonymous Coward
    Anonymous Coward

    You seem to be the one who doesn't know any economics

    Just because Shell has assets it MIGHT eventually pump out and sell in the future doesn't mean that the company's value today should be equal to those assets theoretical value today. It would be like valuing Toyota based on the value of cars that its factories are capable of producing 5 years from now. Sure future earnings (whether through manufacturing or resource extraction) do figure into how much a company is valued at today, but they are always discounted. If Shell was to attempt to extract all of those assets and sell them today, it would suddenly find they were worth alot less then their book value because the price of oil would crash down close to the cost of production. So no extra profits and no benefit to the companies stock valuation. Those oil reserves do, however, figure into making it clear that Shell is a going concern that can maintain its current levels of productions and sales well past any time horizon that investors normally consider. So the above is why current company value != book value of oil reserves. As for whether those reserves figure into the value of the company at all, try a little thought experiment. What if Shell was to suddenly announce that its math was wrong? It didn't have decades worth of proven reserves. It only had six months. People would bail out of the stock immediately.

    No profits in 6 months, no (potential) dividends. So those reserves do matter to the current valuation, but it isn't a one to one thing. This next part gets tricky. What if instead Shell was told that it wouldn't be allowed to sell oil to be burned in 6 months? How is that any different from the math on reserves not being right? Most sales end in six months, no profits, no (potential) dividends. Stock price tanks. So IF at some point the world changes its mind about whether burning oil should be legal (the same way it has changed its mind about burning household/industrial garbage in many places) that would drastically change the value of those assets and Shell's valuation. Now while I think climate change is real and we need to do something about it, I think that it is unlikely that world wide we will ban burning oil. There is enough uncertainty there, however, that a prudent investor would at least monitor the politics of this and be prepared to bail if things look problematic. Even if only a few industrialized nations were to move towards those kinds of bans (or even just restrictions), it could change valuations significantly.

    1. DaveDaveDave

      Re: You seem to be the one who doesn't know any economics

      Silly. Go read some basic definitions.

      "Just because Shell has assets it MIGHT eventually pump out and sell in the future doesn't mean that the company's value today should be equal to those assets theoretical value today"

      Yes, yes it does. Because those values are discounted by various factors like the ones you mention, the discount rate, and so-on.

    2. Mike Street

      Re: You seem to be the one who doesn't know any economics

      "Even if only a few industrialized nations were to move towards those kinds of bans (or even just restrictions), it could change valuations significantly."

      And if they did, they wouldn't be industrialized nations for much longer, so would very quickly be irrelevant.

      The only thing that would make any difference is a world-wide ban of fossil fuel use. Since that ain't going to happen in any foreseeable timescale, the point is moot.

      1. dan1980

        Re: You seem to be the one who doesn't know any economics

        @Mike Street.

        "The only thing that would make any difference is a world-wide ban of fossil fuel use. Since that ain't going to happen in any foreseeable timescale, the point is moot."

        What?

        At the further ends of this argument, the same ridiculous extreme is claimed - that only total cessation will achieve anything. On the one side, this is used to try an say how catastrophic and urgent this all is and on the other side, it's to say how bad it will be for society if we do cut down.

        Would our environment suffer if we stopped burning fossil fuels? No. Would we enjoy cleaner air and water if the whole world moved completely to renewable energy? Yes.

        But is such wholesale change actually necessary to make a difference? No. And no reasonable person would claim that. To do so is like saying that just because one person in your street does not recycle, that no one should.

        I think once we do make the transition to real renewable power, it will be a great boon for society as a modern standard of life does require high power usage and the cheaper the energy, the better. Sure, renewable energy is not cheap at the moment but one day it WILL be much cheaper than burning what is left of our fossil fuels.

        The fact that it is difficult to see air-travel survive in the near medium-term without fossil fuels does not mean that driving an electric car is pointless. The aim of most reasonable people here is to reduce the usage that we feasibly can so that what reserves we have can be used where there really aren't viable alternatives.

        If these reserves are not infinite - and they are certainly not - then one can almost discount the environmental angle: when something becomes scarce, uses that are most critical must be attended to first. If you can predict this scarcity then it is prudent to transition what you can to alternate sources before you reach that point and things like air travel become prohibitively expensive.

        1. Danny 14

          Re: You seem to be the one who doesn't know any economics

          publically traded companies "worth" is based on the price of its shares. Most shared are set on a price based on an expected future performance. In a parallel to big oil, some mining companies have had shares decline not due to lack of demand or lack of reserves but because the countries that have the existing mines and reserves are looking to "go green" etc. The future of those mining companies looks bleaker as it will cost more to operate; workers safety, local pollution, swathes of land disappearing etc will all have to be taken into account and paid for - it wont be viable to dig in some countries.

          1. dan1980

            Re: You seem to be the one who doesn't know any economics

            I don't know why someone down-voted this - it mirrors the truth of what the author was saying. 'Reserves' are proven viable with current practices in current conditions. In other words, there is an assessment of how much it will cost to access the reserves. If that cost increases, things change.

            If you have reserves of shale gas and the country in question bans fracking, that changes things.

        2. Dodgy Geezer Silver badge

          Re: You seem to be the one who doesn't know any economics

          "Would our environment suffer if we stopped burning fossil fuels? No. Would we enjoy cleaner air and water if the whole world moved completely to renewable energy? Yes"

          Would our environment suffer if we stopped burning fossil fuels? Of course it would. CO2 is plant food, silly!

          Would we enjoy cleaner air and water if the whole world moved completely to renewable energy? Of course not! The only way that could happen is if the world dropped technologically back to the 1800s. Guess how clean things were then...

  3. js1975

    The main point of the petition isn't economics, it's ethical

    This is a lazy and misleading piece of journalism. The point of the petition is to call on two science funding organizations to divest from fossil fuels, because continued investment would be against their core principles. The Wellcome Trust, and the Bill and Melinda Gates Foundation, both exist for the betterment of humanity, so they should either divest from fossil fuels, or say why they think continued investment is in line with their remit.

    1. Mike Street

      Re: The main point of the petition isn't economics, it's ethical

      "The point of the petition is to call on two science funding organizations to divest from fossil fuels, because continued investment would be against their core principles"

      Presumably, their core principles are to do good by spending money on worthy projects.

      If they fail to get the maximum return on their investments, by taking investment advice from numpties with an axe to grind, then they can do less 'good' in their chosen areas of operations, thus violating their core principles.

      It would really help if people were introduced to the concept of 'Opportunity Cost' early in their education. Most people who regard themselves as educated seem never to have heard of it.

      1. Steve Knox

        Re: The main point of the petition isn't economics, it's ethical

        Presumably, their core principles are to do good by spending money on worthy projects.

        If they fail to get the maximum return on their investments, by taking investment advice from numpties with an axe to grind, then they can do less 'good' in their chosen areas of operations, thus violating their core principles.

        So pharmaceutical companies should pursue their core principles by ensuring they get maximum return on their R&D investments?

        Because all of these initial animal tests really cost a lot and slow the process down. It would be much more efficient to start tests on humans to begin with.

        Yes, this is an extreme example, but it comes down to the same principle: the idea that ends alwats justify the means.

        There are negative ethical consequences to pursuing even an ethical goal with disregard for the ethics of your other actions. A reasonable individual or organization understands this, and accepts less than perfect performance on core principles for benefits elsewhere.

      2. js1975

        Re: The main point of the petition isn't economics, it's ethical

        Would you encourage the Wellcome Trust to invest heavily in big tobacco, if you thought it was a good investment?

        1. DaveDaveDave

          Re: The main point of the petition isn't economics, it's ethical

          As you point out, the question is whether it's a good investment.As here, the ethical argument depends on an economic one.

        2. Tom 13

          Re: Wellcome Trust to invest heavily in big tobacco

          If it were a good investment, yes. But the ethical nazi's have turned it into a bad one, so no.

    2. Anonymous Coward
      Anonymous Coward

      Re: The main point of the petition isn't economics, it's ethical

      Then don't attempt to underpin the ethical argument with economics, since that certainly risks the argument being fought (as in these comments) and possibly there lost on the minor grounds of economics.

      This is analogous to the common point that it is false and dangerous to defend homosexuality on grounds of it being an involuntary orientation rather than a choice: because this admits the possibility that it might be "cured" (gene manipulation, etc). If there is a moral point then don't stand it upon an unrelated base.

      1. js1975

        Re: The main point of the petition isn't economics, it's ethical

        I completely agree. The point I was making was that this article makes no mention of the core purpose of the petition, and is thus misleading.

        Whatever your opinions on climate change or associated economics, it's dishonest to represent the guardian's petition as about making money, because it's not: it's about whether it is right for these trusts to invest in fossil fuels because - the argument goes - doing so runs counter to their core purpose.

    3. Anonymous Coward
      Anonymous Coward

      Re: The main point of the petition isn't economics, it's ethical

      Only if they stop using products that were produced from, or by the use of, petroleum. For example, pens, cars, planes, electronics, and most basically, food.

      Once they do that (and perhaps you'd like to do it as well,) then I'll listen to what they have to say.

      1. bep

        Re: The main point of the petition isn't economics, it's ethical

        "Only if they stop using products that were produced from, or by the use of, petroleum. For example, pens, cars, planes, electronics, and most basically, food.

        Once they do that (and perhaps you'd like to do it as well,) then I'll listen to what they have to say."

        Pardon? The point is to stop burning oil. I've heard plenty of oil men say things like: "You know in the future people won't believe we actually burned all this irreplaceable stuff." One of the reasons not to burn oil is that its by-products are too useful. Coal has somewhat fewer other uses I'll admit, which is why it's value is likely to collapse before oil does if we decide to not burn so much stuff to make energy.

    4. Matt Bryant Silver badge
      Facepalm

      Re: js1975 Re: The main point of the petition isn't economics, it's ethical

      ".....The point of the petition is to call on two science funding organizations to divest from fossil fuels....." Well, if they have smart fund managers they probably have already (unless they're taking a long bet on an oil rebound in a few years). The current low price of oil is the Saudi's trying to kill off competition and hurt Iran, and they have the reserves to keep oil's price below the Sauid cost of production for years (some say for four years possibly). So oil companies are not going to be making as much of a return for a while and smart fund managers have already re-invested their money in other less volatile short-term bets (such as the bonds mentioned in the article). You can see this in the stock price of Royal Dutch Shell (stock ticker RDSA), which was at a high last summer but has deteriorated since (though I'm told their decline is also partially to do with some bad shale oil investments). Exxon Mobil (XOM) has also shown a similar decline from last year. All of which indicates the "advice" from The Guardian is totally irrelevant unless it is driven by the AGW creed.

  4. hutneab

    Furiously agreeing?

    Is the author and the Grauniad not furiously agreeing?

    The author is saying that the market value of any of these companies pretty much does not reflect the value of today's reserves in 50 years time (i.e. the reserves currently contribute next to nothing to the current market price). The Guardian is saying that in 50 years time, there's no way we can allow those reserves to be used so by then they'll have to be worth nothing.

    So, as time passes, the value of *today's* reserves will make up a bigger proportion of the actual market value of these companies, and it should still be next to nothing because we can't allow them to be burnt. Therefore, the value of these companies is going to collapse, and you probably don't want to be caught out when it does happen. If *today's* reserves will never have any substantial monetary value, then why would reserves discovered tomorrow? Thus the absurdity of these companies continuing to spend billions in discovering new sources of fossil fuels.

    So despite all the bluster at the start of this article, I don't really see the contradiction.

    1. DaveDaveDave

      Re: Furiously agreeing?

      You've missed the point. The Graun thinks (entirely wrongly) that the companies' valuations _today_ include all that future oil at full prices. But the valuations do not include any such thing. That oil is already regarded as worthless by the markets, so there's no need to have some kind of market correction to a point where it's regarded as worthless.

      1. hutneab

        Re: Furiously agreeing?

        Ok, I'll agree that with the economics arguments made here, the use of "massively too high" appears to be wrong. Having read much of the Guardian's output on this issue though, I'm hardly left with the sense that the (incorrect) idea that oil companies are massively-overvalued-based-on-reserves is an especially critical part of their argument; nor does being wrong on that issue substantially weaken their campaign.

        1. DaveDaveDave

          Re: Furiously agreeing?

          It's fundamental to their argument. If there aren't immensely valuable reserves which will lose their value if left in the ground, there's no need to campaign to leave them in the ground.

  5. Graham Marsden
    Holmes

    Oh look...

    ... another piece of TW "journalism" that relies on cherry-picking bits of a story for one more round of Lefty-Bashing.

    We start off with a classic "if you don't know what I (claim to) know, then you're not allowed to have an opinion" and assertions of "ignorance" there and then throw in a bit of name-calling and ad hominem attacks ("dunderheads"? "Crayon eating", Tim? Really, is that the best you can come up with?) and we get a classic piece of Worstall trolling.

    Naturally TW ignores where the piece says "The intention is not to bankrupt the companies, nor to promote overnight withdrawal from fossil fuels – that would not be possible or desirable" and "Divestment serves to delegitimise the business models of companies that are using investors’ money to search for yet more coal, oil and gas that can’t safely be burned. It is a small but crucial step in the economic transition away from a global economy run on fossil fuels" because they don't fit in with his agenda of telling us how wonderful the Market is for solving all the world's problems (as if it hadn't got us into them in the first place...)

    1. DaveDaveDave

      Re: Oh look...

      You appear to be accusing the Graun of deliberate (and illegal) price manipulation. Of course the GMG pension fund has always been as ruthlessly exploitative as you'd expect from the bunch of hypocrites over there, but I'm not aware they've begun leveraging their media platform to move into organised crime. Frankly, I think your assertion is ludicrous. They're just idiots, not very clever crooks.

      1. Graham Marsden
        WTF?

        Re: Oh look...

        > You appear to be accusing the Graun of deliberate (and illegal) price manipulation.

        I do? Please can you point out the part of my post which caused you to draw this fantastic conclusion?

        1. DaveDaveDave

          Re: Oh look...

          "Please can you point out the part of my post which caused you to draw this fantastic conclusion?"

          The part where you claimed the Graun is deliberately and flagrantly lying in an attempt to shift the market price.

          1. Graham Marsden
            WTF?

            @DaveDaveDave- Re: Oh look...

            > The part where you claimed the Graun is deliberately and flagrantly lying in an attempt to shift the market price.

            Are you sure you're talking to the right person here?

    2. Tim Worstal

      Re: Oh look...

      ""Crayon eating", Tim? Really, is that the best you can come up with?)"

      Not in my opinion, no. I can do better than that. The original line was truly insulting and most rude. Toned down by the subs (probably wisely) on the grounds that it was truly insulting and most rude.

      And you really have missed what I've said about climate change around the place, haven't you? That it's not actually a problem that the market unadorned can solve, there will have to be intervention in order to solve it? Hell, I even recommend exactly the same thing the Stern Review does (also, all the other economists who have studied the problem, Tol, Nordhaus, Weizman etc), a carbon tax at the social cost of carbon.

      Using, of course, the appropriate discount rate.

      1. Graham Marsden
        Boffin

        Re: Oh look...

        > Toned down by the subs (probably wisely) on the grounds that it was truly insulting and most rude.

        Right, thanks for making it clear that you can't put together a good argument *without* calling people names.

        > you really have missed what I've said about climate change around the place, haven't you? [...] That it's not actually a problem that the market unadorned can solve

        Well, you're right that "markets place very little value on things beyond the near future", but when someone suggests actually *using* market forces to influence that behaviour, somehow you don't like that because they use an "inappropriate discount rate", not whether it's a good idea or not.

        1. Tim Worstal

          Re: Oh look...

          "Well, you're right that "markets place very little value on things beyond the near future", but when someone suggests actually *using* market forces to influence that behaviour, somehow you don't like that because they use an "inappropriate discount rate", not whether it's a good idea or not."

          Well missed, the point being made that is. The G's argument is: oil companies have too high a value because they will not be able to pump up all their reserves. They should have a lower value therefore.

          I am pointing out that they already have a lower value because we discount the value of those reserves. This isn't an argument about whether we should be doing something about climate change (see my support for a carbon tax). It's an argument about whether these campaigners have understood the economics of the thing they're trying to campaign upon. They don't.

          1. Graham Marsden
            Facepalm

            Re: Oh look...

            > This isn't an argument about whether we should be doing something about climate change (see my support for a carbon tax). It's an argument about whether these campaigners have understood the economics of the thing they're trying to campaign upon.

            Congratulations, Tim, you have pointed out that they have incorrectly re-arranged the deckchairs on the Titanic! I'm sure that makes you feel *so* much better and will keep you warm(!) as the ship sinks...

            1. dogged

              Re: Oh look...

              I thought being warm wasn't going to be the problem?

              1. mrjobby
                Coffee/keyboard

                Re: Oh look...

                "I thought being warm wasn't going to be the problem?"

                That brightened up my otherwise quiet afternoon!

              2. Graham Marsden
                Facepalm

                @dogged - Re: Oh look...

                > I thought being warm wasn't going to be the problem?

                Note the bracketted (!) after warm, implying irony...

            2. fandom

              Re: Oh look...

              "You have pointed out that they have incorrectly re-arranged the deckchairs on the Titanic!"

              Unlike endlessly nitpicking an argument in these forums which, as we all know, is earth-shattering important.

              1. Ossi

                Re: Oh look...

                "You have pointed out that they have incorrectly re-arranged the deckchairs on the Titanic!"

                No, I think he's pointing out that the Guardian is claiming that rearranging the deckchairs on the Titanic will help stop it sinking.

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