Money Walks, Fossil Fuel Talks

Earlier in September, a group of investors from around the world with over $13 trillion under management issued a statement calling on governments to agree at the United Nations Climate Change Conference in Copenhagen this December to require greenhouse gas emission reductions of 25-40% below 1990 levels by 2020.

$13 trillion. That's a lot of money. It's the kind of money that makes decision-makers sit up and take note.

This money is telling world leaders that maintaining the status quo -- of essentially doing nothing substantive to mitigate the prospects for human-induced climate change -- will be expensive and risky relative to undertaking prudent and prompt action to reduce greenhouse gas emissions.

Since investors are the engine of the global economy, without which productive growth cannot occur, you'd think that industries seeking to be major players in world markets for decades to come would want to be arm-in-arm with the big sources of capital.

In few industries is access to capital as critical as the conventional energy industry. It takes billions of dollars to make a major oil discovery or build a new baseload powerplant. Energy requires massive amounts of capital, no two ways about it. And, in a world where energy demand growth has resumed and is likely to continue unabated to satisfy the increasing appetites of China, India and other developing economies, many trillions of dollars will need to be obtained by energy industry players from the world's capital markets in the decades to come.

Yet, many of the main purveyors of fossil fuels -- the bedrock of the energy sector -- are fundamentally at odds with the growing ranks of investors clamoring for global government action on climate change.

For instance, here in the U.S., an "astroturf" (i.e., false grassroots) organization called Energy Citizens, backed (according to this recent article in The Economist) by the American Petroleum Institute and other oil/gas interests, is sponsoring rallies around the country denouncing the American Clean Energy and Security Act that passed the House a few months ago -- a bill that would lead to substantially less emission reductions than the aforementioned investors wants to see.

Now, it must be said that the fossil fuel industry -- oil, gas and coal -- represents one of the strongest aggregations of political muscle on the planet. And, although maybe not as much as the financial centers of the planet, the energy companies have plenty of financial resources to throw at an opposing "call to inaction". After all, consumers worldwide spend roughly $5 trillion per year on energy, putting lots of dough in the coffers of the energy suppliers.

So, over the coming months running up to Copenhagen, it will be interesting to see which side can amass more force: finance or fossil fuels.

In the U.S., it is doubtful that any climate change bill will become law this year, with Congress being mired in the ongoing health care debate. Without a U.S. climate bill passed in Congress, representatives in Copenhagen will be challenged to achieve anything meaningful. Thus, the fossil fuel folks may well win this round of the battle.

But the energy companies must remember that they will need to go to the capital markets, hat-in-hand, many times in the coming decades if they want continued successful growth. And, investors are going to be less and less willing to fund management teams for business growth if the same management teams are stifling progress on something that represents a bigger wealth-destroying factor for their overall portfolios.

Energy companies like to say that they fuel the economy. That may be true, but capital fuels the economy at least as much -- and fuels the energy companies to boot.

In the long-run, I'd put my bets on the money managers making change happen, than on the energy industry preventing change from happening. Because when money walks away from them, all that fossil fuel interests will have are declining resource extraction businesses starving for capital. All they will have left, is talk. And talk is cheap.

 

Comments

[envirogy]

with the new agreement to stop fossil-fuel subsidies this past weekend at the G20 summit I think that money just gained a lot more leverage. VC and investment bankers realize that without government subsidies provided to the fossil-fuel business, green energy has a lot of potential ground to make up, in a lot less time.
http://envirogy.wordpress.com/2009/09/28/g20-eliminates-fossil-fuel-subsidies/

[joevecchio]

Starving for capital? Energy citizens and the API are evil??????????????.
Richard, How are the energy companies not doing their part again. Why so afraid to critizise MTV?

Watch MTV. Cribs. All the kids love the big Hummers and suvs. MTV's female executives say they started a " break the oil addiction" campaign two years ago yet all the shows feature the hosts still driving around in luxury 18 mpg vehicles. Is Exxon responsible for this of is free speech? The DNC didn't advertise small subcompact 45mpg GM Geo Metros, Toyota Yaris, Honda Fit, etc, over the last 20 years during their televised primary debates, did they? No the DNC, the liberal democrats and Terry Mc. decided to advertise Mercede SUVs that get 19mpg. WHY? Explain this? Cap and trade will not work. The CAFE standards did not work. 45 mpg cars exist. Liberals never supported or bought them. Not cool enough. Why did Pres Obama who I voted for, never buy a 4 door 42mpg subcompact cars instead of his SUVs. So why blame the evil energy industry. We democrats are the polluters, we create the demand. Blaming the energy companies is another escapism for the dems. CAFE didn't work. Cap and Trade won't either. Watch what happens.......

Joe Vecchio

[Greenhance]

Today, most major corporations recognize the wisdom of eco-friendly initiatives. It is no surprise that most leading companies across a variety of industries have major green initiatives in place. Sustainable practices are proving to make business sense and the finance guys know it. When the finance guys talk, that's when thing will change.