I never had a transaction or an account with Lehman Brothers. I’m not even sure what business Lehman Brothers was in. Yet when the company collapsed in 2008 my financial health was negatively affected for years. A precipitous downfall of Exxon or Chevron could set off a global economic crisis, affecting everyone – whether divested from oil and gas companies or not.
The financial tentacles of oil companies are extensive, involving lenders, insurers, service companies, investors, employees, and others. In addition to these more ordinary business financial entanglements is perhaps the greatest risk from oil company collapse—the risk of stranded assets.
Part of the valuation of oil companies comes from the reserves they own but have not yet developed. Reserves also provide collateral for lenders, and may figure into CEO compensation formulas. If those reserves can never be developed, either because the energy transition renders them not profitable or because climate policies limit their use, then those reserves become stranded assets.
Academics, Gregor Semieniuk and Philip Holden, set out to uncover who exactly is at risk from stranded assets.(who-really-owns-the-oil-industrys-future-stranded-assets) They asked: “Who owns oil companies?” Their conclusion:
“Who really owns the oil industry’s future stranded assets? If you own investment funds or expect a pension, it might be you.”
Since my answer to both these queries is “yes”, I do own investment funds and I do receive a pension, it seems that oil companies are us —-- or at least me.
I understand the consternation among climate activists at the appointment of an oil company executive, Sultan al-Jaber, CEO of the Abu Dhabi National Oil Company, to head the next COP28 climate conference in the United Arab Emirates. But don’t we need them at the table? – if not that table, then some table? It is in all our interests to have an orderly transition from fossil fuels to renewables.
Where does this leave us? What is the exit ramp for Big Oil? How might stranded assets be unwound without crashing the world economy?
An experiment is underway in Columbia, S.A. The newly elected President, Gustave Petro, has announced his energy policy: no new oil exploration, shutting down fracking operations, and ending fossil fuel economic activity in 15 years. Critics say that losing oil’s one-third of the economy will impoverish the country. I will be watching.