Divestment of Energy Stocks
Still Does Not Address Climate Change
By
Brad Cornell and Branko Terzic
A while ago there were frequent announcements by university boards and some investment funds that they would divest of ownership of energy company stocks. That struck us as symbolic at best and hypocritical at worst. The same student and faculty campaigners calling for divestment, say at Harvard, arrived on campus via flights to Logan airport, by Amtrak train to Boston or by car or bus to the Cambridge campus all fueled by products produced by oil companies. Did the investment fund managers calling for divestment stop to consider that they were able to write their letters of protest, under electric lights and on laptops, powered by electricity courtesy of the oil company produced natural gas fueling the power plants operating in New England’s electric grid? Did they suggest selling all airline stocks and perhaps going so far as advocating regulations to limit air travel? Probably not.
It did not take much financial market knowledge to expect that reducing the demand for oil and gas stocks will merely make the same stocks more attractive to the remaining buyers. Lowering demand while keeping the supply constant has that effect in a market. Could reducing demand for energy stocks have made it impossible for them to raise capital thus curtailing future expansion of production? Not likely, in our opinion, as the availability of capital was and is widespread globally and includes the wealth of many oil producing nations. At this point it may be useful to remind the readers that state owned enterprises in Saudi Arabia, Russia, Iran, UAR, Kuwait, China and national oil companies (i.e. OPEC + Russia) control 90% of the world’s oil reserves and 75% of global oil production.[i]
The reality is that reducing the demand for energy stocks in the financial markets does not reduce the demand for the energy products produced by these vital companies. Consumers, global citizens, travel to work, school or embark on vacations every morning. They do so predominately in cars, buses, trains, and airplanes fueled by the refined petroleum products of gasoline, diesel, and aviation fuel. When they get to their final destinations they are warmed or cooled by natural gas or electricity produced by predominately by coal, natural gas an oil. All of these normal and daily activities result in greenhouse gas emissions.
The reduction of greenhouse gas emissions should the goal of those concerned with climate change. This means reducing the demand for carbon dioxide producing fuels by 1) conservation and reduction in activities which require such fuels, 2) replacement with renewable resources and 3) increased energy efficiency reducing future demand for fossil fuels through improved end use technologies.
It does not mean penalizing the companies that produce the fossil fuel products that we continue to require. Any reduction in their production would be met by increases by the state-owned firms. It is our demand that is the problem not the fact that some companies work hard to meet our demand. Divestment does not begin to address the real problem. That ship has sailed.
[i] https://www.wsj.com/articles/SB10001424052748704852004575258541875590852
Dr. Bradford Cornell is a Professor of Financial Economics at the Anderson Graduate School of Management, University of California, Los Angeles. Professor Cornell received his Masters degree in Statistics and his PhD in Financial Economics from Stanford University.
The Honorable Branko Terzic is a former Commissioner on the FERC and state of Wisconsin Public Service Commission and former utility CEO. He has a B.S. in Engineering and Doctor of Sciences in Engineering “honorus causa” from the University of Wisconsin-Milwaukee.
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