The Companies in Your Portfolio Have Yet to Disclose This…
The Paris Climate Change Conference is underway. Today, President Obama and about 150 other heads of state will meet to secure an agreement to cut greenhouse gases worldwide.
This could render many of the fossil fuel reserves held by major oil and gas companies unburnable. Why? Because the only way to reduce greenhouse gas emissions is to cut back on the burning of fossil fuels like coal, oil and natural gas.
Have the energy exploration companies in your portfolio disclosed this possibility? Probably not.
I’ll review the risks to your portfolio in a minute. First, let’s look at another goal of the Paris climate talks.
The Climate Conflict
Another aim of the Paris climate talks is to limit the rise in global temperatures. The plan is to keep global temperatures at 2 degrees Celsius or less above the average temperature at the start of the Industrial Revolution. Any rise higher than 2 degrees Celsius would cause the polar ice caps and Greenland’s cap to melt faster than they already are.
If that happens, many low-lying areas of the world would be underwater and uninhabitable. Others would be subject to frequent flooding.
So why are temperatures rising?
Carbon dioxide (CO2), the primary greenhouse gas, traps heat in the atmosphere that would otherwise escape into space. It’s widely believe that this trapped heat is slowly raising the Earth’s temperature.
CO2 is a byproduct of burning fossil fuels. Increased fossil fuel consumption leads to higher levels of CO2 in the atmosphere and, subsequently, higher global temperatures.
Lowering CO2 Emissions
There are several ways to combat climate change and control greenhouse gas emissions. All of which can have a huge impact on your energy portfolio.
One is to put even stricter limits on power plants that burn fossil fuels. That would mostly affect coal-fired generating plants.
In the U.S., Republicans are generally opposed to climate change legislation. They are currently trying to pass a bill that will gut Obama’s power plant CO2 emission limits.
The House vote on the bill is due during the Paris meetings. If passed, Obama won’t be able to deliver the promised 26% to 28% cut in emissions by 2030.
Another way to lower emissions is to boost vehicle fuel efficiency standards. This becomes more difficult and expensive the higher the limits.
In a low gasoline- and diesel-priced environment, it will be difficult to pass higher fuel efficiency standards.
Electric vehicles are an easy step toward meeting America’s emissions goals. Unfortunately, few cost-effective vehicles are available that have the range of their gasoline or diesel counterparts.
In terms of your energy portfolio, I don’t think you have much to worry about… yet. You see, the rest of the world is adopting stricter carbon emission rules.
It will eventually result in less oil use on a global scale. Big oil companies will have to lower their reserves to account for unburnable oil.
This will lower the values of these companies. Shares will drop accordingly.
So will the shares of every other oil producer. When will it happen? It’s hard to say. I expect you could see a scenario like this play out within the next five to 10 years.
What will happen to oil prices? As demand for oil wanes, prices will drop, but so will production. That will eventually force prices higher. Stay tuned…