Introduction
Sometimes the written word is easy to misinterpret. More than once I have written an article to find that some minor point I made became the focus, or that the point I was making was just lost. Most of the time that’s my fault, but sometimes it’s because an editor wanted to spice up the title and make it a bit more controversial. In that case, that can inflame the reader before they even begin to read, and they either make comments based on a misleading title, or they read the article with significant bias.
I think there is a risk of misinterpretation with today’s article, so I want to spell out my intent up front. This should not be read as a defense of ExxonMobil or their business practices, because that’s not what it is. It’s an attempt to get the reader to understand how they think, and why they do some of the things they do. Importantly, you may not be able to understand their actions given your view of the world. It’s not because they are simply denying reality so they can keep making money, they just don’t see the same things you see. Here is my attempt to explain that.
A Carbon Asset Bubble?
The 2009 Copenhagen Accord on climate change stipulated that if the worst impacts of climate change are to be avoided, we have to stop taking fossil fuels from the ground and burning them. Doing so has been increasing the carbon dioxide in the atmosphere for the past two centuries. Former Vice President Al Gore has been but one high profile voice advocating for leaving those fossil fuels in the ground, which would create a big problem for fossil fuel companies whose value is based on their fossil fuel reserves. Gore outlined his position last year in a Wall Street Journal editorial The Coming Carbon Asset Bubble.
This is obviously an item of significant interest for fossil fuel companies and their shareholders. In fact, in February several investor groups filed shareholder resolutions with 10 fossil fuel companies, including ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX), Devon Energy (NYSE: DVN), Kinder Morgan (NYSE: KMI) and Peabody Energy (NYSE: BTU), seeking an assessment of how they are preparing for the possibility that some of their fossil fuel reserves may become stranded under a low-carbon scenario.
ExxonMobil Responds
ExxonMobil responded to these resolutions with a 30-page report. The company indicated that its investment decisions are based on a comprehensive annual analysis of the global outlook for energy that is consistent with the International Energy Agency’s (IEA) World Energy Outlook and the US Energy Information Administration’s (EIA) Annual Energy Outlook. In other words, investment decisions are not simply based on the world according to ExxonMobil, but also on the world energy outlook from the US government and the IEA, which represents 28 member countries (including the US).
The report states that ExxonMobil takes the threat of climate change seriously, a point reiterated by ExxonMobil government affairs chief Ken Cohen in an Associated Press interview following the paper’s release. “We know enough based on the research and science that the risk (of climate change) is real and appropriate steps should be taken to address that risk,” Cohen said.
I am not going to get into the gist of the report here, except to summarize ExxonMobil’s position, which is: “World demand for oil will continue to be very strong, and our oil reserves will not be stranded.” If you want to know the basis for their argument, it’s laid out in the report.
ExxonMobil Answers the Wrong Question
Those pushing for the resolution didn’t like that answer. While acknowledging that responding was a step in the right direction, Natasha Lamb, director of equity research at Arjuna Capital, stated: “The question is not whether or not we’ll face the low carbon standard, but whether they are prepared to address it. We need to know what’s at stake. But at least now investors know that Exxon is not addressing the low carbon scenario and placing investor capital at risk.”
With all due respect, that might not have been the question you asked, but if ExxonMobil doesn’t believe it’s a credible scenario, then they aren’t going to spend a lot of time and money addressing it. As an example, how much time do you spend each day planning how you will spend your lottery winnings? If you aren’t spending any time, you will be totally unprepared for winning the lottery. Oh, you don’t spend that much time on it because you don’t believe the outcome is likely? You may fantasize about what you would do if you won the lottery, but you don’t spend a lot of time each day making financial plans based on that outcome.
Likewise, I can assure you with 100 percent certainty that ExxonMobil is spending some efforts on alternatives to oil. It’s not a lot relative to their overall business, but it’s relative to how likely they think demand is shifting away from oil. And if demand starts to shift, they will shift their spending to try to capture where the markets are headed.
That’s how oil companies operate in the real world, and not in the cartoon world many people think they inhabit. People view them through different lenses and see their own projections, but the reality is that ExxonMobil has seen a future in which oil continues to be the basis for transportation (as does the EIA and IEA), and they have been correct in that view since they have been in existence.
But that doesn’t mean they can’t change. It just means that the catalyst for change isn’t necessarily YOUR view that their oil reserves will be stranded. Which brings me to my final point, which is reflected in the title of this essay.
Cognitive Dissonance
With some extremely rare exceptions, the people who brought those resolutions forward that demanded to know how ExxonMobil would cope with leaving their oil reserves in the ground – all of them use oil. My point is not to argue hypocrisy, but rather the cognitive dissonance at play.
Those of us who are concerned about climate change – and I include myself in that group – all justify our consumption of oil in different ways. We either reason that our individual contribution won’t make that much difference, and what we would have to sacrifice to live without oil isn’t proportional to the miniscule impact on the environment from our single contribution. Or, we reason that we do what we can to minimize our personal consumption, but by using oil to travel around to urge others to limit consumption (the Al Gore/Bill McKibben sort of justification), our net impact will be lower oil consumption.
The thing is, ExxonMobil can argue exactly the same points. First of all, oil is a very small contributor relative to coal (and coal consumption is for me a very different argument), and ExxonMobil is a small percentage of global oil production. So ExxonMobil can make the argument “our impact just isn’t that great”, just as individuals do.
But oil also has few viable substitutes relative to coal. So ExxonMobil can reason that their relative contribution to climate change is very low, while the impact of affordable transportation for people is great. They can further argue (and did in the response to the shareholder resolution) that they are doing what they can to lower their environmental impact.
So just keep in mind that if you want to press ExxonMobil to leave their oil in the ground, you are on thin ice when it comes to arguing why it’s then OK for you to use the oil they produce. If you use oil, you are part of the reason ExxonMobil continues to profit from producing the oil. If you really want them to leave their oil in the ground, convince everyone to stop using it, and do so yourself. Then the asset will be stranded. But you aren’t going to have much luck stranding the asset when demand continues to grow. Every time you justify your oil consumption, ExxonMobil justifies producing more oil.
But as my friend Geoffrey Styles points out in his take on the issue, ExxonMobil does model “its projects and acquisitions at proxy costs of up to $80/ton of CO2, compared to current levels of $8-10/ton in the EU’s Emission Trading System.” And even though they believe governments are unlikely to adopt such high carbon prices, even 10 times the current value of carbon dioxide emissions in the EU is unlikely to strand Exxon’s petroleum assets because there just isn’t a good substitute.
Conclusions
In my view, the relative benefit of future oil consumption is far greater than the relative benefit of future coal consumption, because oil has fewer potential substitutes. There are many different ways of producing electricity at a price that is competitive with coal, but with lower emission of carbon dioxide. In a low carbon emission scenario, the lion’s share of the reduction effort should be directed at coal. Coal is a much larger relative contributor, and there are potential replacements.
Thus, I think ExxonMobil gave a reasonable answer in saying that it has looked at the risks, and doesn’t believe any of its reserves are likely to be stranded. There are no alternatives capable of supplanting oil as the main global transportation fuel in the foreseeable future. There will continue to be contributions from biofuels, and electric transportation will continue to make inroads, but crude will continue to do the heavy lifting.
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