Preemptive fantasies

July 3, 2017
Nothing jeopardizes capital more thoroughly than do-or-die bets on the future of oil. That lesson from history should demolish efforts to make oil and gas companies account today for economic and regulatory conditions years or decades from now.

Nothing jeopardizes capital more thoroughly than do-or-die bets on the future of oil. That lesson from history should demolish efforts to make oil and gas companies account today for economic and regulatory conditions years or decades from now.

A loony initiative of climate politics asserts that companies should be discounting future value heavily to reflect regulation that might be imposed to resist global warming. Groups pressing this case claim that potential oil and gas production worth trillions of dollars must remain undeveloped to limit postindustrial warming to 2°C. They fault companies for not warning shareholders about regulations that will create this financial catastrophe.

Laughable certitude

So goes climate activism: asserting conclusions, treating radical policy goals as accomplished facts, punishing questions. The strategy is obvious. Activists want policies to be in place before reality disproves the rationale. The certitude is laughable. Temperature sensitivity to greenhouse-gas levels remains very uncertain. Science about it is not nearly settled-contrary to the standard propaganda, relayed without question by most news media. Arithmetic reliant upon climate sensitivity and other hazy factors, such as hydrocarbon reserves and future commodity prices, lacks precision useful in financial reports.

Most oil and gas companies already discount project values to reflect current or prospective levies on carbon dioxide emissions. Where governments now tax carbon, the calculation is straightforward. Elsewhere, companies must guess.

Because results of these exercises don't foretell the demise of oil and gas production and use, however, activists aren't satisfied. So they're doing what activists do, trying to make civil, even criminal cases out of companies' reluctance to fix their improbable extinctions in time.

In fact, much can happen to repudiate assumptions on which activists base their demands. Much probably will.

Long-term projections about oil and natural gas seldom turn out right. They're necessary for planning, just usually wrong.

In its International Energy Outlook of 1998, for example, the US Energy Information Administration projected global oil consumption in 2015 at 105.5 million b/d. Actual consumption that year was 95.4 million b/d. When EIA made the 1998 projection, worry was rampant that global oil production would peak within a few years and start declining irreversibly. EIA didn't share the supply pessimism. But it expected big gains from deep water, the Caspian Basin, and specific members of the Organization of Petroleum Exporting Countries outside the Persian Gulf: Nigeria, Venezuela, Algeria, and Indonesia.

A company or investor risking everything on a 20-year projection about 2015 conditions thus would have bet on a market 10% too big and supply too small, too costly, or too far from where supply eventually grew. Such an investment would have come to grief.

Most companies and investors don't behave that way, of course. They understand the perils of oil-market forecasting. They know markets respond to unforeseeable events and adapt over time to unpredictable influences. Investors account for evolution.

Climate policy is no more predictable than oil prices or supply jumps from transformative technology. When activists demand that oil companies discount assessed values to reflect future policy, they assert regulation able to satisfy the 2° warming limit. That's wildly nebulous inasmuch as no one really knows how much emission reduction might achieve the temperature target. It also assumes people will tolerate the sacrifice needed to measurably influence global average temperature.

Political resistance

That's fatuous. Where implemented so far, the first layers of hardship undertaken to manipulate climate have met fierce political resistance; some have gone into retreat. Physics makes the dream of 100% renewable energy unachievable within any realistic planning horizon. Politics makes the regulatory siege needed to bring it about even less promising.

In every available forum, oil and gas companies should resist activists' attempts to make them base accounting on preemptive fantasies. Their investors deserve nothing less.

CORRECTION

Last week's editorial misidentified the research group that uses the acronym EPRINC (OGJ, June 26, 2017, p. 16). The correct name is Energy Policy Research Foundation Inc.