Environmental column: Atrogenics and the Folly of Fossil Fuel Divestment
Published: Monday, September 30, 2013
Updated: Monday, September 30, 2013 21:09
Students are fed up with the status quo of big oil companies and their oversized profits. Many students are also alarmed at the rise in CO2 levels and the prediction of a warmer future. These individuals have rallied on college campuses nationwide for a campaign of Fossil Fuel Divestment in order to prevent continued burning of these fuels at today’s hurried pace.
The divestment campaigns target university endowments. As standard practice, universities invest their financial assets in a diverse array of stocks, bonds and other financial instruments to grow the financial resources available to the university. The fossil fuel divestment campaigns demand universities to withdraw their investments from companies participating in the fossil fuel industry. Just last week, students at the university wrote an open letter to President Harker encouraging this very action. I encourage you to read their well-written and well-intentioned letter in the last issue of The Review, available online.
Prepared for the disheartening news? OK, here it goes.
The FFD campaign is entirely misguided. It represents a very bizarre and ineffectual way to achieve its purported goals.
If the aim is to smear one subset of offending parties of fossil fuel gluttony (we, the public being the other subset), this may be effective. However, if the goal is to move away from extracting and burning fossil fuels, this campaign is destined to achieve nothing by its very design.
Though well intentioned, it pursues the wrong actions against the wrong actors for all the wrong reasons. In our haste to dispense punishment to cleanse our own tarnished morality, we have overlooked key economic principles.
After all, Bill McKibben, the founder of the divestment campaign, is a well-respected environmental author but an economic savant he is not.
This maladaptive campaign has thrived due to a confluence of two factors; the Misunderstanding and the Moral Quicksand. The two merge to yield a torrent of unintended consequences that I hope to prevent before we are consumed by the frenzy. The Misunderstanding and the Moral Quicksand are the topics of this column, while iatrogenics and unintended consequences of this campaign will be dealt with next week.
After discussions with FFD supporters, one quickly realizes many supporters harbor a colossal incorrect assumption about the mechanics of divestment. Despite popular belief, divestment from a company does not take money away from that company. Selling shares in a company only reduces a company’s share price, hurting all remaining shareholders, but not the company itself. Neither the company’s balance sheet nor its operations are affected. To be clear, I am not saying that the impact on the company’s balance sheet is too small to perceive — I am saying the impact doesn’t exist.
For immature companies with uncertain business models, reduced share price will negatively affect future attempts at raising capital, but this hardly describes the situation of well-established fossil fuel companies that are the target of this campaign.
Counterintuitively, a reduction in share price (without any underlying change in the business) benefits an established company with hoards of cash to burn. Such companies are able repurchase their own shares at a reduced price. When Halliburton, a large oil and gas service company, last month felt its shares were undervalued, it announced a $3.3 billion share repurchase program.
Guess who else has lots of cash to burn? The five “super” majors: Chevron, BP, ExxonMobil, Shell and Total. They have a combined $80 billion in cash and cash equivalents on hand as of their most recent quarterly statements.
If the information included above was a little foreign to you, here is a useful analogy. Think of a company’s share price as analogous to a medical exam. An exam assesses the overall health of a subject by incorporating a variety of diagnostic information to deliver an overall conclusion of health. The health of the individual (or company) drives the results of the assessment (share price), not the other way around. The process only works in one direction. Attempting to weaken a company by driving down share price is like trying to inflict harm on an individual by delivering a false bad bill of health.
Even disregarding all the above economic reality, this campaign is castigated to near irrelevance because 85 percent of all oil and gas reserves are held by nationalized oil companies. These companies are owned by their respective governments, have no shares to divest from and are thus beyond the scope of this campaign’s specious reach.
The Moral Quicksand:
As a nation, we spend nearly $1.4 trillion on energy every year. About $700 billion is spent on oil-based transportation alone. Collectively, we spend more money on energy than the entire Gross Domestic Product of all but about 12 of the world’s countries. Furthermore, the average U.S. citizen spends more each year on energy than the typical person on earth earns in an entire year. I can continue, but hopefully by now you can see that we are the problem, not public institutions, not their investments, nor even the oil companies that satisfy our insatiable demands. Not even the U.S. military (at 1 percent of US energy and 1.9 percent of US oil consumption) can approach the energy use of the collective citizenry.
So, how can we claim that the fossil fuel companies are immoral when we are the prime users, beneficiaries and financiers of fossil fuel use? I agree that we desperately need to remove a great deal of carbon from our economy, but the first step involves a mirror and not an outstretched finger. Why publicly shame fossil fuel companies (jeopardizing university endowments in the crossfire) while simultaneously showering the same companies with our hard-earned money? No wonder why few officials take us seriously!