Storm warning for the fossil fuel industry

As extreme weather events intensify, so too will the political siege on the fossil fuel industry, and rightfully so. But Daniel Litvin warns that an unthinking backlash on Big Oil could have perverse effects for the global energy transition.

This has been a year of extreme weather events, from the “Beast from the East” that froze much of the United Kingdom in March to Hurricane Florence on the US East Coast and Typhoon Mangkhut in the Philippines. Scientists generally hesitate to say that any particular natural disaster is the result of climate change, but the overall intensity of storms certainly appears to be linked to the accumulation of human-generated greenhouse gases (GHGs) in the atmosphere.

But in the minds of many, assigning blame need not wait for full scientific certainty. There are tens of millions of people whose lives have been severely affected by natural disasters, and perhaps billions who have noticed changing weather patterns in recent years. Like a growing share of politicians and most of the media, many of these people are becoming convinced that our reliance on fossil fuels is one of the underlying causes.

The fossil-fuel industry is a legitimate target for criticism, given that its products account for the bulk of annual GHG emissions. “Big Oil” firms, in particular, have been hit by a number of actions relating to their role in climate change. In addition to protests at their sites in recent years, they have faced shareholder resolutions demanding a shift toward renewable energy sources, divestment campaigns, and a growing number of climate-related lawsuits, particularly in the United States.

Yet, if anything, the political siege of the fossil-fuel industry has only just begun. Even if extreme weather events do not turn out to be as frightening as climate scientists predict, the public will most likely increasingly direct its ire at the industry whenever there is a major hurricane, flood, typhoon, heat wave, or freezing spell.

Moreover, as awareness of climate change spreads, politicians and the public will need a simple and easy target to blame. To be sure, one could point the finger at the billions of consumers who drive gasoline-powered cars and rely on fossil fuels to heat and light their homes. But any politician hoping to win an election would be foolish to blame the voters.

In practice, this means that fossil-fuel firms—particularly those headquartered in OECD countries—will have to navigate an intensely contested operating environment in the coming years. In terms of shareholder value, managing social and political challenges will be no less important than finding and producing hydrocarbons.

Nowadays, much of the shareholder activism against the industry focuses on the extent to which firms’ hydrocarbon reserves ultimately may prove commercially nonviable as the world shifts away from fossil fuels. But in the near term, the political backlash against the industry will pose a bigger threat to valuations than will “stranded assets.”

That backlash could come in a variety of forms. Divestment campaigns are likely to gain steam and attract larger shareholders. Climate-related lawsuits could begin to extend further beyond the US, ultimately leading to multi-billion-dollar damage awards, as in the cases against Big Tobacco. Protest movements to disrupt on-shore operations could become routine. And governments could decide to impose moratoriums on new hydrocarbon development, or to levy punitive taxes on fossil-fuel firms. In fact, the government of New Zealand recently banned all future offshore oil and gas exploration—a move that other countries ultimately may follow.

Why should anyone shed tears for Big Oil and its investors? After all, many of the political pressures described here are helpful for tackling climate change, which requires reducing our reliance on fossil fuels and accelerating the shift to renewable energies. 

The global energy system cannot be turned around on a dime. The shift away from fossil fuels will take many years, during which oil, gas and coal will remain in demand. 

Still, an unthinking backlash against fossil-fuel firms could also have some perverse effects. Politicians may use it to deflect attention from the slow pace of national energy policy reform. In most countries, such reform is urgently needed to meet climate targets. Also, even in a scenario in which the average global temperature increase is kept within 2° Celsius of pre-industrial levels (the upper limit under the 2015 Paris climate agreement), fossil fuels will still need to be produced. Like a giant supertanker, the global energy system cannot be turned around on a dime. The shift away from fossil fuels will take many years, during which oil, gas, and coal will remain in demand.

In light of these realities, one risk of the intensified political backlash against fossil-fuel firms is that the industry could be pushed into the shadows. Instead of shrinking in size or focusing on a transition to renewables, the industry might shift production to private rather than publicly listed firms. Or production could migrate to less transparent firms in non-OECD countries.

In either case, these corporate entities will be less susceptible to pressure from progressive activists and socially focused investors. Less scrupulous producers will be happy to keep exploring and extracting with abandon, because they will feel even less obliged than the distrusted bosses of Big Oil and Big Coal to demonstrate that they are helping to reduce GHG emissions. As the movement to tackle climate change continues to shape its strategy for the years ahead, this is one risk that it must keep in mind.

Daniel Litvin is Managing Director of Critical Resource, a consultancy that advises resource firms on sustainability and “license to operate” risk, and the author of Empires of Profit: Commerce, Conquest, and Corporate Responsibility.

Copyright: Project Syndicate, 2018

Thanks for reading to the end of this story!

We would be grateful if you would consider joining as a member of The EB Circle. This helps to keep our stories and resources free for all, and it also supports independent journalism dedicated to sustainable development. It only costs as little as S$5 a month, and you would be helping to make a big difference.

Find out more and join The EB Circle

Advertisement
blog comments powered by Disqus
Advertisement

Most popular

View all news

Industry Spotlight

View all
Asia Pacific’s Hub For Collaboration On Sustainable Development
An Eco-Business initiative
The SDG Co