The “Hindenburg Trap”: Dump Oil, Coal & Gas Stocks if you Want to Retire

By Juan Cole | (Informed Comment) –

What is the actual value of the oil, gas and coal fields owned by big energy corporations, which gives them their stock price and allows them to be counted as assets for borrowing purposes?

The real value of those hydrocarbon resources is zero.

Or actually it is much less than zero, since there are likely to be a lot of liability lawsuits and insurance claims for severe environmental and property damage. Coal, oil and gas are now where the cigarette companies were in 1990, on the verge of getting hit with massive penalties. Big Coal and Big Oil are dead men walking.

The only thing that stops the entire world economy, including that of the United States, from collapsing is that investors continue to pretend that what I just said is not true. Because of this pretense, some people will go on making a lot of money with hydrocarbon investments in the short and perhaps even the medium term. Much investment and assignment of value is a matter of confidence.

But the confidence is misplaced. If you are still fairly young and you or your pension fund bought a lot of petroleum or gas or coal stocks in hopes of retiring on them, think again. You will lose your shirt.

Worse, because so many loans and other investments are anchored by the supposed value of coal, oil and gas, the world is walking an economic tightrope and the gentlest of breezes could knock it off into a crisis that would make 2008-2009 look like a minor hiccup.

In particular, if a sizable ice shelf breaks off in the Antarctic, you could see a sudden sea level rise that would panic the public and possibly lead some countries to outlaw things like coal and gas.

The Bank of England is doing a big study of this problem, which economists call that of “stranded assets.” That is a fancy phrase for when you invest in something that suddenly loses its value.

For instance, say you invested in Blockbuster Video Entertainment, Inc., when people used to rent DVD’s of movies from brick and mortar stores. In 2006 it seemed a good stock to buy– it had 9000 stores and 60,000 employees (almost as many as there are coal miners). And then streaming video came along. Stranded asset. Blockbuster went bankrupt in 2010 and survives only as a streaming service of Dish satellite television, which bought it and was gradually forced to liquidate all the stores.

The same thing will happen to coal, oil and natural gas, for two big, inexorable reasons. First, burning hydrocarbons is fatal to the health of our planet– in terms of the energy it releases, it is like setting off atomic bombs constantly. After a while that would take a toll. Second, other far less destructive ways of generating electricity are every day becoming cheaper and more efficient, especially wind and solar.

That coal as an industry is a bad investment should be obvious. The Obama Environmental Protection Agency has decided finally to start actually enforcing the Clean Air and Water Act, and has also claimed the right to regulate states’ carbon dioxide emissions (in which it has been upheld by the Supreme Court). Most coal plants will likely close over the next five years. Can you say, Blockbuster Video? I’d dump those coal stocks, like yesterday, or call my pension fund and make them drop them.

Of course, there was already a social conscience argument against investing in coal, which is dirty– burning it emits mercury (a nerve poison) and other dangerous pollutants and makes people sick. It also causes acid rain. And it is a major emitter of carbon dioxide, the deadliest poison of all. It is a horrible thing.

Let’s consider what has happened in Iowa just since 2005.

energy-source-comparison

In 2005, wind generated 4% of Iowa’s electricity. Coal was responsible for a whopping 79%, about 4/5s.

In 2013, wind generated 28% of Iowa’s electricity. Coal had fallen to only 59%.

Given those trend lines, in such a short period of time, does coal look like a good investment to you? Or does wind? Especially since we know what the EPA is planning for coal.

Coal isn’t just competing with wind. The conservative Deutsche Bank has just concluded that in 14 states of the US, solar power is now as inexpensive as that from coal and natural gas. Right now. That is, it would be crazy to build a new coal plant today when you could generate electricity just as cheaply with solar.

And get this: by 2016– next year! — Deutsche Bank concludes that solar will be competitive with coal and natural gas in all but three or four states. And that is not an argument based on subsidies for solar. It will be as inexpensive as coal-generated electricity just purely on a market basis (in fact, it will be even cheaper, since there are massive government subsidies for coal, gas and oil).

Critics say that the wind dies down sometimes and the sun doesn’t shine on half the earth at night. This problem is referred to as that of “intermittency.” But it isn’t an insoluble problem. For one thing, the wind often blows more at night, so turbines can take up the slack from solar plants. For another, there are now molten salt solar installations that go on generating electricity for six hours after sunset. As batteries improve in efficiency and fall in price (both things are happening already, big time), the problem of intermittency will fade into insignificance, likely within a decade.

Another drag is that the electricity grid in many states needs to be redone. Wires need to be laid from the Thumb in Michigan where the wind is to the Detroit metropolitan area where most of the electricity is used. But it really is a relatively minor expense, and since the fuel for wind turbines is free, it would pay for itself fairly quickly. That is just a matter of having a state government that is on the ball and sees where the future profits are to be made. Cheap wind- and solar- generated electricity will allow factories to save money on energy and make their products more inexpensively, allowing them to compete on the world market. A solar facility is helping power the Volkswagon plant in Chattanooga. They’re not paying for coal or gas to produce that portion of their power, because the sunlight is free, and that will make their cars more competitive in price. Some buyers may throw their business to Volkswagen because they are greener. All factory owners will quickly move in this direction over the next few years.

So there isn’t any doubt about it. Buying stocks in coal, gas and oil companies is like buying stocks in zeppelins. They are outmoded and prone to crashing and burning, a Hindenburg waiting to happen. (Zeppelins were good investments once, too; they carried tens of thousands of people across the Atlantic and the top of the Empire State Building was designed to anchor them; but they became a stranded asset.)

It is therefore absolutely amazing that institutions of higher education like Harvard often refuse to divest from oil, gas and coal companies. The science and the economics are clear as day– burning hydrocarbons is disastrous for a city like Boston over time, and holding stranded assets is a one way ticket to bankruptcy court. I couldn’t tell you whether this decision is made out of short-sightedness or out of ethical and moral corruption (universities live nowadays on donors’ donations and don’t want to anger generous alumni who make their living purveying coal, gas and oil).

But those hydrocarbon stocks, and loans made on the basis of those worthless assets, are endangering the economic health of us all. Buying and holding them is the equivalent of refusing to vaccinate your children against measles. It is an individual decision that imperils the rest of the public. You and I may not be able to do much about the Koch brothers’ hold on state legislatures, or about the mysterious insidiousness of the Harvard regents. But most of us have some say in what stocks are in our pension funds or 401ks. There shouldn’t be any coal, gas or oil securities in there. Unless you like the idea of working backbreaking minimum wage jobs into your 80s.

13 Responses

  1. Thanksso much for this excellent article. Too bad you can’t get this type of information on the “news”

    The Koch’s and their minions are in for a rude awakening. Love the idea of a (tragic) ice shelf waking up the world. Finally.

  2. BP should have gone out of business in the wake of the Deepwater Horizon catastrophe. Yet the US government essentially colluded with them to shield them from the full financial impact. As long as governments can be co-opted like this oil will remain a killer business (literally).

  3. Scott Thill

    Brilliant. I’ve been divesting everyone I know for years. Journalism has become my second job because of it!

  4. 1) Fertilizer is made of natural gas.
    2) Asphalt is made of crude oil.
    3) Many other things are made from crude oil

    link to en.wikipedia.org

    A better argument for non petroleum energy sources is it will free up resources for agriculture, road surfaces, and chemicals.

    Surprisingly even coal has non energy uses, but not many.
    link to en.wikipedia.org

  5. Since the next Prexy will be a Repuglan, it is likely that all Obama’s executive initiatives which impinge upon fossil carbon profits will be reversed. (Of course all the Obama decisions which profit the Merchants of Fossil will be kept in place . . . things like throwing upen the Atlantic coastal shelf to oil exploration and opening the Beaufort/Chukchi Sea shelves to oil exploration and all the pipelines that were greenlight-redballed to provide a whole cats cradle of pipeline workaround routes for Alberta dilbitar if Obama should cancel Keystone North for symbolic diversionary reasons.)

    So every reader’s best investment would be in the means of survival in the teeth of a CPPM 600-700 world.

  6. I grew up in the early ’70’s, studying oil markets and world history. (My honors degree was a major in History, minor in economic History). My graduation coincided with the world in shock because American gasoline was at $1.50-2.00 and Gerald Ford was saying “whip inflation now.”

    So I did feel I had some insight into the oil industry when some decades later, my father, who started out as a young chemical engineer for what is now Chevron before making his money helping the cement industry be more productive, passed on an inheritance in the low 6 figures. Part of it was in an American pipeline stock, 90% distribution of oil with a bit of production. Polluting? Sure! Am I willing to be a plaintiff for radical lawyers who want to sue them for pollution? Yes to that as well. In the meantime, over about 11 years the sucker has gained about 160% in value, while paying 6 to 8% dividend. A little bit better than a savings account or Treasury bonds, and has covered my losses in tech and health stocks.

    And since my inheritance coincided with an oil market low, I did put 20 – 30% into buying low and selling high with producers and drilling servicers, over the next years into the great crash of ’08-9, and helped myself significantly through that.

    I’m almost all out of production and drilling, except for about 3% in a European oil major, privatized successor to the national oil Co. of a “European power.” It’s been up and down over ten years and is now just about exactly where I bought it, while paying about 4% and some foreign taxes every year. So 4% is OK, that’s all I ask of any investment, yet I do would wish that I could sell out with WTI closer to 150 than to 50.

    However Juan is very persuasive, this is a very good argument for why that last oil panic may never come through.

    I was old enough when I got my inheritance to understand that my economic desires and my political desires would always be opposed, I do understand why oil and coal need to be utterly banned, by the power of a global citizens movement. I give monthly to 350-dot-org.

    Yet still, a part of me grew up with those predictable ups and downs of the oil market, it’s hard to stop hoping for one more up. But how much of an up am I gonna get from 3% of my retirement fund anyway? The argument gets more convincing.

  7. The collapse of petroleum bubble will change everything as we know. It will be delayed with even more risky investing and cost cuttings. But eventually it will burst and bring down with it many players.

  8. Liability, I suspect, is why the rich must pour money into the climate change denial movement in the USA. If trillions of dollars of damage occurs around the world, they will be the ones facing lawsuits. But by chaining our citizens to their financial fate, they force us to militarize the dispute – to demand reparations is an act of war against our country.

    Which means, either the foreign oligarchs will stand with Wall Street and suppress environmental politics in their countries, including objectively profitable clean energy, or they will abstain and capitalism will be split into hostile blocs embracing radically different energy models. Too bad none of the blocs appear to have any democratic or egalitarian trends.

  9. There are many collapsable things about the world economy that are in mortal danger of collapse. Many efforts are underway to try and prevent these collapses. However, the worst collapse of all, the climate, is fully denied by nearly all of the powers that be…

  10. The Republican leaders of the House and Senate are promising to remove the present weak restrictions on Coal, Gas and Oil production and Obama and the Democrats are irrelevant because they depend on Oil Money as much as the Republicans. Now with Secret Money we won’t even know who is getting Oil Money.
    The Courts?
    Obama’s Justice Department will not prosecute any more Oil Men than it did Bankers. And who can afford to go against the Oil Men in court.
    If everything worked as it should, it would be a good time to get out of Oil. But our government has become corrupt so Oil will be a very good investment for a long time.
    Renewables & solar will be axed by the Republicans so Oil will continue to own our Government until people form a new party without quislings like the Clintons and Obama.
    With out big change we are doomed.

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