Coupled with proposals to curtail sales of cars fueled by gasoline and diesel, the possible shedding of oil and gas investments by Norway's sovereign wealth fund can seem ominous for oil. Environmental groups, such as the Safe Climate Campaign of Washington, DC, welcomed the recommendation by Norges Bank. "With Norway's move, the campaign to divest from dirty fuels will graduate from environmental groups and small businesses like Ben & Jerry's and colleges to the big time," the group's director told the New York Times. "Norway's move will fuel divestment even more because Norway is a major oil country."
The Nov. 17 advisory to the Norwegian Ministry of Finance came at a giddy time for environmentalists disdainful of oil: toward the end of the United Nations World Climate Conference in Bonn, one of those gatherings where officials from around the world address an ambiguous problem with impossible goals and hopeless promises. Overlooked in most press coverage is the Norwegian recommendation's omission of any mention of climate change.
Many news reporters seem convinced that energy markets soon will discard hydrocarbons. Too many of them accept without question extremist assertions that leaving most unproduced oil and gas in the ground is desirable-or even feasible.
Norges Bank stipulated that its motives were economic when it recommended that oil and gas equities be removed from the benchmark index of the $1-trillion Government Pension Fund Global (GPFG), which it manages. The Norwegian government's wealth is triply vulnerable to oil price risk, its leaders noted in a letter to the ministry. The government depends heavily on revenue from oil and gas production and holds a 67% stake in Statoil. An oil price drop thus not only devalues the GPFG, 4% of the investment of which is in oil and gas, but also cuts the present value of future revenue from the other sources. The caution acknowledges that oil prices might well remain, as the expression goes, lower for longer.
In an era of new hydrocarbon abundance and moderating consumption growth, this judgment is not astonishing. Other investors see the same realities and will adjust holdings accordingly-if they haven't done so already. For as long as oil and gas can be produced profitably, however, capital will disappoint extremists by remaining available in amounts needed by the industry.
Just as disappointing to antihydrocarbon activists will be the demand lift oil and gas receive from extended affordability. Governments have boosted electric vehicles with date-certain bans on sales of new petroleum-fueled vehicles. But predictions about the rapid electrification of cars tend to overlook the improved competitiveness of gasoline and diesel and engines fueled by them. A transition certainly has come into view for transportation energy. But transitions take time.
On this point, the International Energy Agency provides useful perspective with its new World Energy Outlook. The agency expects oil demand to continue growing through 2040, albeit at a diminishing rate. In its view, growing oil supply from the US suppresses prices through about 2025, after which the increase in oil use slows. But demand still climbs to 105 million b/d in 2040 from 97.7 million b/d now. The increase occurs despite an assumed surge in electric cars because of fleet expansion and growth in demand sectors other than cars: petrochemical manufacture, trucks, airplanes, and ships. About oil's competitiveness, IEA says, "With the US accounting for 80% of the increase in global oil supply to 2025 and maintaining near-term downward pressure on prices, the world's consumers are not yet ready to say good-bye to the era of oil."
Meanwhile, IEA expects demand for natural gas to increase by 40% through 2040, when the light hydrocarbon will account for one quarter of energy demand.
Contrary to press reports and environmentalist wishes, oil and gas still have a future. Sector uses will change. But that has happened throughout the era of oil and gas, which, as IEA attests, is far from over.