For many years, those interested in global warming or, as it is more broadly labeled, “climate change” have been meeting periodically to discuss scientific studies about the issue or measures that individuals or governments can take to “deal with it.” They’ve chosen the somewhat weird and maybe presumptuous French-based label for these conferences as a “conference of the parties” (as though there were no other conferences being held for any other reason, so naturally we’d know this was the climate crowd).
The Wiki tells us that they’ve been meeting since the early 1990’s but things really got underway with the Kyoto Protocol in 1997, that purported to create a “treaty” among countries that was really going to do something about the previously wonky, academic or tree-hugger topic. Serious observers of these things say that Kyoto, and those conferences and treaties that happen every year (Rio, Paris, etc.) “established legally binding obligations under international law.” Maybe so, but maybe actually more like laws against shoplifting in San Francisco. So, what happened at this year’s conference in Glasgow, Scotland?
The usual academics, policy wonks, socialites and politicians arrived at COP26 intent on doing what everyone does at a big public conference – see and be seen by those you want to impress. Hundreds of private jets ferried in the big shots, though most arrived by less glamorous means. Doubtless many are sincere folks who regard global warming as an important topic. There is important scientific research being done in some quarters, by serious scientists that don’t have a political agenda. Along with copious amounts of nonsense being written by the popular scientific and non-science media, as well as serious and determined declarations from politicians who believe this will help their public standing. (President Biden showed up in Glasgow, but politicians who don’t have accountability to the public – Putin from Russia, Xi from China and maybe Newsom from California – didn’t bother to jet in for the photo op.)
At the end of the gig, a statement of some kind was agreed to by some group of countries and maybe some of them signed some papers. Many inside and outside the conference denounced COP 26 as not doing much of anything that will matter.
First and foremost, the COPs have become a center stage for the hoped-for war on fossil fuels. Why? Because burning coal, natural gas and oil generates carbon dioxide. Carbon dioxide has been labeled as a major source of warming in the atmosphere in recent years. There is little debate that we have, until recently, been in a long-term warming trend. The activists assert that most of this is caused by man’s activity since the beginning of the industrial era. They further argue that warming will be bad for life, and for humans in particular. The goal of the COP participants is to find some way to keep the temperature from rising more than 1.5 degrees Celsius since pre-industrial times. Since hydrocarbon burning causes warming, they say we must stop burning hydrocarbons.
Accordingly, rich countries are, sorta, taking steps to punish fossil fuels and reward “green” energy generation. Poor countries, as you might expect, don’t really care much about any of this – they just don’t want to be poor any longer than necessary. There were some delicious political ironies during and around the time of COP 26: President Biden, who is doing just about everything in his power to punish oil companies and Americans that use oil, was in the odd position of having his administration begging OPEC to increase oil production so that the recent price increases in US gasoline would stop and prices would come down to the levels of the Trump administration. As you can imagine, Republican pundits had a field day. And in China, in an effort to show their solidarity with the COP 26 folks, the government ordered coal mines to shut-down and so they did (you can do that in a communist country). But then, the factories and power generating stations that burn coal also shut-down and street lights went out in some cities. The Party quickly ordered that nonsense to stop – get the coal mines open again immediately and start burning that stuff ASAP!
But, more seriously, governments are taking the position that they will either eliminate hydrocarbon use, or at least achieve “net zero” carbon emissions by some target date in the future. Will that happen? Will all those oil companies that sell us oil and gas go out of business?
Some people think its all over for oil & gas. A typical story in the media is this one, claiming that $3.3 trillion worth of oil & gas reserves will be “stranded” – that is, not sold and used – because the entire world will soon abandon the use of oil & gas.
I think stories like this are just to fill space in a publications. The scenario described in these stories seems quite unlikely to me – there’s a huge disconnect between the narrative and the real world:
- Half of the world’s oil reserves are controlled by national oil companies. They are extremely unlikely to stop what they’re doing because their governments need the money. (It’s not even happening in Norway, the best case for a country abandoning its production and revenues – they’re still actively granting licenses, exploring and developing.)
- the politics @ COP26 again show that rich countries are not even willing to make empty, inadequate promises that everyone knows will not be fulfilled. Poor countries are happy to beg, grandstand and get whatever they can, but will surely not stop getting and using energy any way they can.
- any number of surveys confirm that citizens are unwilling to spend much money to be green. And it will take a lot of money every year to achieve President Biden’s pipe dream of net-zero carbon. Almost all government measures to punish oil and gas are indirect and disguised so as to avoid accountability for driving up the prices and reducing energy availability. There is a lot of “boiling the frog” going on to implement policies that would be politically unpopular if done in a straightforward manner.
- China & India alone – halfway to being developed countries – can’t stop burning coal and building coal plants, much less stopping use of oil. Nothing the rest of the world does, or doesn’t do, makes any difference, because China and India are such large users of fossil fuels.
- the major oil producers that are public companies will see pressure from the markets and from governments to reduce carbon impact, and they will do that. (Recall, in the last wave of green-ness, BP became “Beyond Petroleum” and wasted a lot of shareholder money on wind, etc.). But mostly the big oil companies will become green by selling those high-carbon, oil assets to non-public buyers who can ignore their image while producing the oil and rewarding their owners. The buyers of big coal projects the past couple of years have done quite well recently as coal prices have risen. The major oil companies are not very efficient and often make poor decisions. They do little innovating, but are good at scaling up. I’d be surprised if the money the majors invest to make themselves green will be wisely used.
- oil is the largest and most liquid market in the world. It is very efficient. Right now, supply and demand are roughly balanced at 100 million bbls of oil per day. Capital will be allocated properly, after accounting for government penalties and incentives that distort market signals. (The largest energy subsidies in the world are those given in poor countries to poor citizens in the form of artificially low fuel prices.) Winners will be rewarded, and losers punished. When non-oil alternative energy become economic, it will be widely and quickly adopted. The best role for government is promoting research and development.
- private capital will backfill any shortfall caused by government pressure on banks to stop funding oil and gas companies. That market will decide which companies and projects get funded. There will surely be some stranded assets, just as there are today. Commodity prices and development costs will rise and fall as they always have, and some investors will win while others lose.
- finally, when we reach a time when hydrocarbons are not widely used for transportation or electricity generation, there will still be large demand for O&G in manufacturing. The production of O&G will continue, even though it’s not being burned for energy use.
I don’t think these doom & gloom stories about the demise of oil will stop, because the media and intellectual class are too invested in the narrative. But I also don’t see the oil and gas sector disappearing. The energy sector will evolve as it always has. Regardless of whether you care about what they said at COP26, there are indeed punitive measures being taken by governments against traditional sources of energy – oil, gas, coal and nuclear. If energy is made more expensive to obtain, then economies and people will suffer. The rich countries can afford to take half-hearted measures to discourage hydrocarbons, but poor countries won’t. The only thing we have to worry about from COP26 is that someone will take the platitudes seriously and then destroy our economies and standard of living in pursuit of an idea that cannot be achieved.
What Are We To Make of This? 