We will all pay for turning Big Oil into a pariah


The irony could scarcely have been greater. There he was on the world stage at the COP26 climate change summit in Glasgow lecturing China and others on their tardiness in consigning fossil fuels to the dustbin of history. But in almost the same breath, President Joe Biden was urging Saudi Arabia and other OPEC members to increase their production of oil and gas so as to lower energy prices and reduce the pressure on inflation. You cannot have it both ways, yet as it turns out, Biden is as much a cake-and-eat-it man as Boris Johnson.

If nothing else, the apparent contradiction in aims highlights a basic truth about “Big Oil”; like it or not, the world remains overwhelmingly dependent on hydrocarbons for its energy needs; however fast we invest in alternatives, that’s not going to change for some time to come.

The world will be dependent on Big Oil for some time to come. Credit:AP

Both of Britain’s oil majors, BP and Shell, have ambitious plans to transform themselves into clean energy enterprises, yet to the fury of Extinction Rebellion activists, the bulk of their investment is still heavily focused on oil and gas. As it is, they are arguably not investing nearly enough to sustain production of hydrocarbons for as long as they will be needed.

Since the start of the pandemic, ongoing global investment in energy has fallen by around a third. According to some estimates, it is running at approximately half the level needed to power a world economy that is firing on all cylinders. The deficiency is at its most acute in hydrocarbons, where the proselytising pressures for divestment have become almost irresistible.

Nor has investment rebounded in the way it normally would in response to higher prices. With their climate change agendas, governments are perilously close to imposing a hugely costly energy crisis on themselves. Investment in alternatives is still nowhere near the critical mass needed to fill the growing gap being left by old and dependable energy sources.

“If you take away supply, but demand does not change,” Bernard Looney, chief executive of BP, said this week in response to calls to halt further North Sea drilling, “all that happens is that prices go up.” By curtailing emissions within the UK, we merely export them to places that are less choosy, notably China, whose economies benefit at our expense. It’s a high price to pay for virtue.

Today’s surge in oil and gas prices would historically have been mirrored in the share prices of the oil majors. The fact that it largely hasn’t been is not primarily about an industry in terminal decline. There is plenty of money to be made from time-limited runoff, as the growing brigade of “vulture funds” and activist investors stepping in where mainstream investment institutions increasingly fear to tread, readily appreciate.

Rather it is that the likes of BP and Shell have become pariah companies, and are shunned accordingly in much the same way as the tobacco giants were 20 years ago; once a core holding for any pension or investment fund, few mainstream money managers any longer want anything to do with them.

As with tobacco, their place is increasingly taken by the less squeamish at rock bottom prices. But despite the superficial parallel, there is a key difference. Tobacco is an indulgence. However much we might wish it otherwise, oil and gas will long remain our primary source of life enhancing energy.

And yet the industry is being driven underground by politicians and regulators too cowed to stand up to the hysteria of the climate-change activists. The enemy within is almost as bad as the holier-than-thou pressures from without; oil company boards, together with those of their bankers, are these days stacked with well-meaning do-gooders more focused on bowing to the campaigners than the demands of shareholder value.

The history of companies that attempt to jump from one horse to another is not good. Nearly always, value ends up destroyed. Virtually all past attempts by BP at “green investment” have failed.

Managements should stick to what they know, however unfashionable it might have become. Vulture funds trying to force Shell’s directors to divest itself of its renewables arm, and refocus on the old endeavour of cash generative hydrocarbons, have got a point. The collective judgment of millions of investors on where to put the money generated by oil industry runoff is likely to be a good deal better than that of those clambering aboard a politically directed bandwagon.

Rishi Sunak, the Chancellor, dreams of making the City of London the green finance capital of the world, threatening to delist companies that don’t comply with net zero targets. I imagine that this will have the very opposite effect to the one intended. Rather than acting as a magnet, it threatens a mass exodus of companies to less demanding jurisdictions, or into the hands of secretive private equity.

Boris Johnson believes the green transition offers the chance of economic rebirth. I hope he is right. Just as likely it marks another staging post in self-inflicted Western decline. You go first, says China, hoovering up the world’s productive capacity as it goes.

Telegraph, London

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