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Fossil Fuels Aren’t Even a Very Good Investment

Turbulence in the oil industry is making for strange bedfellows.

Ina Fassbender/AFP/Getty Images

Jim Cramer is done with fossil fuel stocks. It’s not that the fundamentals are bad, the irascible investment guru and Mad Money host told CNBC anchor Becky Quick last week. The dividends are great. But “nobody cares,” he explains. “The world has changed. There’s new managers [trying to] appease younger people who believe that you can’t ever make a fossil fuel company sustainable. In the end they make fossil fuels. We’re in the death knell phase.”

Quick rushed to clarify. “The death knell phase for the stocks, but not the death knell phase for us using fossil fuels, right?” Cramer didn’t offer much comfort, comparing multinational oil and gas companies—historically, some of the world’s most profitable—to the comparatively meager and maligned tobacco industry. “You can tell that the world’s turned on them.”

Cramer has been wrong before—most infamously in emphatically advising investors to buy Bear Stearns days before it went belly up in 2008. Still, it’s rare to see such dire projections about the health of the world’s biggest polluters come from outside the ranks of climate campaigners, much less from CNBC talking heads. Yet the array of threats facing the fossil fuel industry in 2020 could make for other strange bedfellows. “What Jim Cramer’s talking about is definitely a sign of the times. This is a topic that has gone a long way up people’s radar in terms of priorities, but in particular these last three years,” said Andrew Grant, head of Oil, Gas and Mining at the British think tank Carbon Tracker.

Overall, oil and gas producers have lost $400 billion in market value over the last four years. ExxonMobil, the world’s most valuable public company in 2012, saw its stocks drop to nine-year lows this week, and Goldman Sachs recommended that investors cash out. It’s hard to pinpoint any one factor as the source of the oil and gas industry’s stock troubles, Grant said. Public perception looms large. Big polluters face ever-louder criticism from activist outfits like the Sunrise Movement and Global Climate Strikes, as well as a string of climate-related lawsuits and activist investors who—controlling some $35 trillion worth of assets—are demanding emissions cuts, as activists on college campuses and within pension funds call for outright divestment from producers. “Fossil fuels have a P.R. issue,” Ben Cook, a portfolio manager at BP Capital Fund Advisors, told CNN.  “As long as the market perceives them to be the culprit for carbon emissions, they will have a difficult time.”

Activists’ complaints are well founded. For decades, popular wisdom suggested that the world would at some point run out of oil. What’s clear now is that there’s far more of it than we can safely afford to burn. Recent estimates suggest oil and gas companies would have to forgo almost $900 billion—one-third of the sector’s current value, representing 84 percent of reserves—if the world’s governments moved aggressively to cap global warming at 1.5 degrees Celsius (2.7 degrees Fahrenheit); meeting a two-degree target would still mean writing off nearly 60 percent of reserves. Across the board, meanwhile, traditional energy executives have been loath to invest more than token amounts in carbon-free energy, preferring to spend big on new unconventional drilling and exploration. Exxon has been more bullish than most on this front, with BP and Shell taking a slightly more conservative approach.

There are any number of ways countries could strand assets with new regulation, but not all emissions reduction methods are created equal. According to the energy consultancy Rystad Energy, for instance, the impact of banning fracking on federal lands—seen as a bold progressive policy within the Democratic primary field—would have a negligible effect on domestic production in the short term, with some modest impacts in New Mexico, where a much higher proportion of drilling happens on public lands. Last week, Senator Bernie Sanders and Representative Alexandria Ocasio-Cortez introduced more holistic proposals that would ban fracking nationwide by 2025, stopping new federal permits for fossil fuels and imposing a 2,500-foot buffer between drill sites and sensitive areas like homes, schools, hospitals, and other populated areas. A new report from Greenpeace USA and Oil Change International recently found that reinstating the crude oil export ban, as Sanders has proposed doing through executive order, could save as much emitted carbon as closing between 19 and 42 coal plants—savings equivalent to over three times the annual emissions of New York City, every year. Removing the generous direct and indirect subsidies available to fossil fuel companies could go a long way, too. Traditionally, policy debates about emissions cuts have tended to focus on curbing consumption through demand-reducing measures like a carbon tax, but experts say a mix of demand- and supply-side policies will be needed to get the job done.

Whatever suite of policies ends up being implemented, the broader state of the oil and gas sector isn’t making its executives lives’ any easier. The “Shale Revolution,” as the turn to fracking and horizontal drilling in recent years has been termed, was something of a historical fluke. Relatively high oil prices and low interest rates—a response to the Great Recession—made drilling techniques that had previously been too costly to use at scale a good investment in the years after the crash. When the price of oil sank a few years later, drillers in oil fields like the Permian Basin in West Texas were buoyed by the repeal of the crude oil export ban in 2015, which opened up new markets for them abroad. In the time since, the U.S. has come to fill a role once played by Saudi Arabia, as the world’s “swing producer” of oil.

That boom may not last forever. Wall Street investors have seemed to have an appetite to keep furnishing notoriously unprofitable drilling companies with debt and equity, hoping a payoff would come in the form of efficiency and technological improvements. Those good graces have started to wear in the last year, as companies continue struggling to make a profit and pay off mountains of existing debt. Traditionally, firms that went under might be swallowed up by bigger companies. There’s only so much toxic debt that can be taken onto their balance sheets, though. In the midst of a supply glut that’s keeping prices low, the case for more buyouts gets even weaker. Twenty-six U.S.-based oil and gas companies had filed for bankruptcy by August last year, nearly as many as in all of 2018. “These companies are extremely capital intensive … the drain on cash flow is quite extreme, and we come in and help make the hard decision to shut down rigs or not,” one Houston-based consultant said at a December panel entitled “Crisis in the Oilpatch—Danger or Opportunity for Lenders and Distressed Investors?”

As detailed in an expansive report by the Geological Survey of Finland, a part of the country’s Ministry of Economic Affairs, growing global oil demand since the Great Recession has been met largely by expensive-to-extract supplies in North America, from Canada’s tar sands to shale to offshore drilling. More than a decade on, with the companies responsible for that looking increasingly overleveraged—and losing friends in finance—one of the biggest houses of cards in the global economy may be on course for a reckoning. “The era of cheap and abundant energy is long gone,” the report’s authors write. “Money supply and debt have grown faster than the real economy. Debt saturation and paralysis is now a very real risk, requiring a global scale reset.”

Moving toward a carbon-neutral economy—as climate campaigners have long recommended—could blunt both the climate crisis and the blowback of a potential oil shock, albeit with Herculean effort. As the report notes, to get off fossil fuels, the “entire global industrial ecosystem will need to be reengineered, retooled and fundamentally rebuilt. This will be perhaps the greatest industrial challenge the world has ever faced historically.”

In a follow-up piece after his CNBC appearance, Cramer was keen to clarify that he’s not some anti-fossil fuels zealot—just a guy looking out for his bottom line. “I have been the most vocal proponent of the industry of anyone on air. Bar none. I also am a huge believer in being energy independent. I have favored the exploration and production of natural gas as a bridge fuel,” he urged. “But the bounty has overwhelmed itself.”