Former State Department Official: Investors Should Ditch ExxonMobil Stock

 

A_close_shot_of_wind_turbines_wind_farmFor decades, we’ve heard that the transition to renewable energy will be a “job-killer”: costing billions of dollars governments don’t have, and requiring staggering taxes on an overburdened populace.

Maybe… or maybe not. We could well be at–or small steps away from–a major inflection point in the history of our energy economy, where virtuous energy–domestic, low-pollution, and climate-friendly–becomes cheaper and more convenient than conventional fossil fuels like oil and gas. For any number of reasons, conventional fossil fuel use may be on the precipice of a steep decline, taking down trillions in stock valuations along with it. About those oil & gas valuations: having led the Dow Jones’ plunge the past two weeks, they’re already down 31% in the last 12 months.

Renewable energy investment is mushrooming, and the costs of renewable energy, as well as the cost energy storage to smooth intermittent production from sources like wind and solar, are plummeting.

Of course I have no crystal ball, but here’s how I see it: Renewable energy investment is mushrooming, and the costs of renewable energy, as well as the cost energy storage to smooth intermittent production from sources like wind and solar, are plummeting. Improvements and cost reductions in big data-fueled energy management systems, solar cell efficiency, wind turbine efficiency, “balance of system” efficiency for storage, electric vehicles, and batteries are driving down costs quickly. Photovoltaic solar cell costs globally declined 80% from 2008 to 2014; in the U.S., wind turbines declined in price 20 percent to 40 percent. Average global solar balance-of-system costs are expected to decline a further 40 percent by 2020. Goldman Sachs says battery costs will decline by nearly two-thirds more by 2020.

Investors know this, and are putting their dollars into renewable power and related technologies for efficiency and storage. More than 58 percent of new global power capacity in 2014 was renewable, primarily wind and solar–that’s out of the same pie with gas and coal. According to brand-new numbers, about half of all new capacity in 2015 was also renewable, proving 2014 wasn’t a fluke. In the U.S., wind generation capacity topped 70 gigawatts in 2015, and the U.S. Department of Energy (DOE) thinks there is a good chance of growth from the current 5 percent to 35 percent of grid capacity by 2050. The International Energy Agency (IEA) predicts energy-related CO2 emissions growth will slow from 2.4 percent per year globally to 0.5 percent for the next two decades as renewables grow by 3,600 gigawatts between 2015 and 2040.

Even these fairly rosy projections for renewables’ growth from august research institutions like the DOE and the IEA, like most everyone else’s, anticipate merely incremental change and improvement. But that’s often not how technological change works. Automobile ownership expanded eightfold in the U.S. from 1915 to 1928. Television ownership rose from 9% to 90% of U.S. households from 1950 to 1963. Who had a personal computer in 1985? Who knew about the smart phone in 2006? You get the idea. The adoption curves for these ubiquitous technologies follow similar S-curve trajectories, with slow adoption at first, which then skyrockets when a tipping point is reached, before leveling off at a very high level of penetration in society. The big questions are, “Which technologies will reach the tipping point?”, and “When?”

If I had the answers to those questions, I’d be a very rich venture capitalist. But here’s where the trend lines seem to be moving. Yes, right now fossil fuels enjoy a huge incumbency advantage, but with the advent of taxes, caps, and bans on emissions (not to mention divestment), the fact that fossil fuel costs money – versus free sun and wind, once your generators are installed – suggests that consumer preferences could change in a hurry. An MIT research team believes that solar energy output could quintuple and wind triple by 2030. And those projections are likely low.

We are already observing the early manifestations of this megatrend. Denmark achieved nearly 40 percent wind power generation for the year 2015. Many millions of Bangladeshis purchase solar home systems rather than connect to the grid, with growth rates above 50 percent per year. Meanwhile, dozens of coal companies large and small declared bankruptcy in 2015 and early this year.

As of September, more than $2.6 trillion in assets had been committed to divest from fossil fuels.

The recent price implosion of coal, oil and natural gas may be enduring. Rather than heralding a price spike as underinvestment in future supply catches up with the market, this time the decline could be permanent. Why? In large part because of so-called ‘demand destruction’, whereby anticipated future fossil fuel demand migrates to other energy sources, or fails to materialize at all. Because oil and gas companies’ wealth (coal companies don’t have much anymore) is predicated on the value of their proven reserves, if not enough people of the future want to buy them, those companies are in big trouble.

LDK Solar Hits a 52-Week HighWhether this scenario will come to pass is anyone’s guess. But what a recent report from Carbon Tracker explores is this: there are all kinds of scenarios that could trigger an unexpected decline in fossil fuel demand, most of which have not seriously been considered by leading analysts both in the industry and in the mainstream edifice of global energy research. In short, widely-accepted projections about population and economic growth, energy use patterns, and fossil fuel demand all have taken for granted middle- or high-growth scenarios while discounting the alternate trajectories for demographics, macroeconomics, policy, and technology. And of, course, investor preferences. Some 1,200 asset-owning entities representing $13 trillion in assets have signed the Paris Pledge for Action on climate change. And as of September, more than $2.6 trillion in assets had been committed to divest from fossil fuels.

Seeing that nearly 190 countries pledged to reduce emissions in December in Paris, the cost of renewables and energy storage is plummeting, businesses and investors are swearing off of fossil energy, and future fossil fuel demand is predicated on potentially shaky assumptions, I’ll pass on ExxonMobil stock, and the potentially fleeting $1.6 trillion in market capitalization of the top ten global oil majors. Don’t say I didn’t warn you.

Andrew Eil managed climate change foreign assistance programs at the U.S. State Department from 2010 to 2014 and is now an independent consultant in New York City.

Former State Department Official: Investors Should Ditch ExxonMobil Stock