So if Fossil Fuels are sub-prime, what SHOULD the FTSE look like?

Last week, a statement by Mervin King caught some interest in the media about Fossil Fuels Being Subprime - I finally got a chance over the weekend to read it properly, and digest what it meant.

So in short, if 5 of the top ten companies in the FTSE are very carbon intensive, and are valued on the basis of being able to exploit resources that they will not be able to exploit, then there's a gaping chasm in the listed value, and actual value of both these companies, and the pensions invested in them.

Cue quote from insurance giant Aviva:

Valuations of the oil and gas sector still assume that they will be able to take all proven and probable reserves out of the ground and burn them. "Based on credible data we cannot be allowed to do that,"

Another from HSBC (you may have heard of them):

at least one-half of fossil fuel assets will have to be left in the ground,”.... “We’re still pricing [companies in the extractives sector] as if they are all going to be exploited.”

So this begs the question - if everything is totally mispriced, what SHOULD they be priced at?

And if I have a pension of 100k saved up ( I don't), how much would it really be worth?

In the space of a weekend, would it be possible to create a prototype FTSE 100 listing, where the valuations are adjusted for these factors, or a calculator build to show you what a pension of say, 100k would really be worth?

I'm going to be at the London Green Hackathon this weekend.

Let me know if you'd be interested in looking at this, as I think it would make for a fascinating hack.

5 thoughts on “So if Fossil Fuels are sub-prime, what SHOULD the FTSE look like?”

  1. To get an accurate assessment of what these extraction oriented companies will be worth in the future there are many variables to be taken into consideration; from the ease of extraction to pricing and not to forget the other uses of petroleum in the manufacturing industry. As well as the effect of scarcity on pricing i.e. peak oil (point in time when the global production of oil will reach its maximum rate, after which production will gradually decline). It has already been said that there will be no more refineries built in Europe or North America as there won’t be enough time left for them to make a profit. This adds interesting connotations to the refining capacity of the oil majors- basically allowing them to use their lack of capacity as a choke on supply to push up pump prices.

    Then there is also the issue of what effect major oil cartels such as OPEC will do in the future to ensure the maximum value of their assets. The quality of information on oil reserves is also a matter of some concern. What if these blocks are under/over estimating their reserves in order to manipulate prices.

    In fact when you think about it the financial crisis was predicated by consistent records in oil prices- making it expensive for companies to manufacture goods, leading many businesses to slow and then came (rather conveniently) the ‘credit crunch’ (which I’m reliably informed is not just a breakfast cereal). Last year has seen the first time that average oil prices have remained consistently above $100 a barrel.

    Ultimately the longevity of large companies in general depends on adding a moral impetus to the primary objective of making a profit whilst keeping an eye on sustainability. Its difficult to see how any large hydrocarbon focused business would do that except through diversification into more sustainable energy resources.

    There is no transparency in this industry and further lack there of in the financial/ pensions sector. I think that you would have to make a lot of assumptions to have a hack at this- but I’m sure its possible and I would love to help.

    1. Thanks for the comments Thomas!

      So, rather unexpectedly, I got a chance to speak to an executive in the oil industry at the Real Time Club a few days back.

      I put the question to him, and the response was interesting – in short he said he’s not worried, and his response was based around two points:

      1) that governments tend to overestimate their ability to set targets around carbon reduction, and not have them overturned when the bond markets tell them how high to jump

      2) that burning fossil fuels needn’t always mean releasing CO2, with technology like carbon capture and storage. Truth be told, I take this last claim with a pinch of salt until I see an actual CCS coal plant working somewhere, and a cheap way to retrofit all the new plants being created – I don’t know of any successful pilot project of this kind yet (I’d love to hear if there were though).

      I’ll catch you in the weekend – you seem to have thought about this more than me, so I may have further questions :)

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