Opinion: Fossil Fuel Divestment: Flight From Reality

Institute for Energy Research Founder and CEO Robert Bradley, Jr. penned an op-ed on Forbes.com this past week explaining why the struggling divestment movement is a solution looking for a problem. The text of the piece is below:


Fossil Fuel Divestment: Flight From Reality

By Robert Bradley, Jr.
June 15, 2015

“The effect of [divestment] decisions on the consumption of fossil fuels will be nil; the effect on the growth of institutions’ endowments will be negative.”

– George Will, “‘Sustainability’ Gone Mad on College Campuses,” Washington Post, April 15, 2015.

There is a movement afoot to slow the wheels of modern life. A highly emotional, anti-industrial fringe is urging institutions to “divest” — or sell investments in the oil, gas, and coal industries. Their goal is to keep dense, reliable, affordable energy in the ground and out of our lives.

Divestment is a solution looking for a problem. It is destined to fail for at least three reasons.

First, every American is a prolific fossil-fuel user, and substitutes (ethanol for gasoline, wind/solar for electricity) are limited, expensive unreliable options. Second, many — if not most — Americans are rewardingly invested in the oil, gas, coal, and electricity industries. Third, profit-seeking investors can be expected to buy as fringe emotional investors sell, leaving stock prices unchanged.

The irony is that the decades-old case against fossil fuels has weakened. Instead of social costs, we should think in terms of net social benefits and welcome a consumer-driven, taxpayer-neutral, free-market energy future.

Growing But Futile Movement

The list of emotional sellers is growing. Since 2012, the divestment campaign has expanded to more than 220 colleges, faith organizations, pension funds, and other institutions. Some have already sold; the others have pledged to do so.

Syracuse University is a recent example of a high-profile institution jumping on the divestment bandwagon. Influenced by climate change activist Bill McKibben’s 350.org movement, the university announced its intent to redirect the fossil-fuel portion of its $1.2 billion endowment to “clean energy” investments.

Top-tier research institutions have also joined in. Stanford decided last year to cease all direct investments in companies engaged in coal mining. Oxford University, while rejecting formal divestment, stated that it will not invest in companies that mine coal or heavy oil.

‘Market Failure’ Mirage

The fuss is long on emotion and short on evidence The Big Four issues of fossil-fuel sustainability–depletion, pollution, energy security, and climate change — have all weakened over time.

Depletion? We are not running out of oil, gas, and coal. In fact, the opposite is true. Critics who once said it would not be economical to increasingly produce oil or gas (coal supply has never been an issue) now insist that there is too much to produce and consume. Hence the call for divestment so firms have less capital to extract hydrocarbons.

Air pollution? That’s been going down as more carbon-based energy has been combusted. Since 1970, the aggregate emissions of the six criteria pollutants — including carbon monoxide, lead, and sulfur dioxide — dropped by more than two-thirds. More improvement is coming as newer, cleaner equipment replaces current inventory. By 2017, for example, smog-forming emissions from motor vehicles will have fallen by 99.4 percent since 1970.

Energy Security? The U.S. Energy Information Administration forecasts continued growth in domestic oil and gas production. By 2017, the United States will be a net exporter of natural gas. On the oil side, today’s net imports of 25 percent (way down from the peak of 60 percent in 2005) is forecast to fall to 14 percent by 2020.

Climate Change? “Where the heck is global warming” remains the major question. Global warming has nearly stalled since the late 1990s, and modest increases are well below model forecasts, as I have detailed in a previous Forbes.com post. A recent attempt to reanalyze global temperature to increase warming to predicted levels is controversial and remains the outlier.

The “pause” or “hiatus” in global warming is mainstream — and it continues. And the data on hurricanes and other extreme weather events does not suggest a positive correlation with carbon dioxide (CO2) atmospheric concentrations, which are increasing.

Compare the intellectual case for fossil fuels to the desperate analogies of Bill McKibben for divestment, the most notorious being apartheid. He recently suggested that “divestment will undercut the industry’s political power, just as happened a generation ago when the issue was South Africa.”

Such a comparison to the modern energy industry is morally repugnant — and inane. The institutional racism of apartheid has nothing to do with the fossil-fuel industries reliably and affordably supporting high standards of living for billions.

Social Costs — or Net Benefits?

Instead of exaggerated “social costs” of fossil-fuel reliance, the benefits of oil, gas, and coal over its (inferior) substitutes should be appreciated. Consumers voluntarily support gasoline, diesel, and gas-fired electricity for good reasons — and taxpayers are burdened by renewable energy for bad reasons.

Consider home energy costs. Thanks to the fracking revolution, natural gas is abundant in the United States — so electric bills are plummeting.  According to research firm IHS, households saved $1,200 in disposable income on average in 2012 thanks to lower energy costs and utility bills. By the end of this year, that figure could be closer to $2,000.

The domestic energy boom has also led to savings at the pump, thanks to plummeting oil prices. The Energy Information Administration predicts that the average U.S. household will spend nearly $550 less on gasoline this year than in 2014.

Sonecon Analysis

While the domestic energy boom is helping Americans save money on everyday expenses, investments in the industry also power Americans’ retirement savings. Almost 29 percent of fossil fuel industry shares are held by pension funds, with another 18 percent in IRAs.

These are good investments. A study by Sonecon found, for example, that oil and natural gas stocks comprising 3.9 percent of pension holdings generated 8.6 percent of the returns in those accounts. (The four-state study was from 2005 — 2009.) Another Sonecon study found that $1 invested in these stocks in 2005 grew to $2.30 by 2013. Over the same time period, that $1 would be worth only $1.68 without fossil-fuel investment.

University investments in fossil fuels have helped to grow their endowments considerably. Sonecon found that between 2001 and 2011, investments by college endowments in the oil and gas industry produced the highest returns of any other asset class. And during the 5-year period of 2006 — 2011, oil and gas stocks generated yearly average returns just under 8 percent. That was 172 percent higher than the average returns for all U.S. stocks.

According to the National Association of College and University Business Officers (NACUBO), university endowments hold an estimated $23 billion in energy stocks. Revenues generated from these investments support financial aid packages, professors’ salaries, and new infrastructure.

Fischel Analysis

Daniel Fischel, former head of the University of Chicago’s law and economics program, examined the growth of two hypothetical investment portfolios over the last 50 years. According to his analysis, $100 invested in an optimal portfolio in 1965 would yield $14,600 by 2014. But a fossil-fuel-divested portfolio yielded only $11,200 over that same time period — a shortfall of 23 percent.

In other words, divestment threatens to compromise and shrink university endowments. With aggregate endowments of $456 billion in assets (NACUBO), the Fischel-estimated cost of divestment is $3.2 billion each year. That translates into less financial aid, and thus less opportunity, for needy students.

“I conclude that the costs to investors of fossil fuel divestiture are highly likely and substantial, while the potential benefits — to the extent there are any — are ill-defined and uncertain at best,” Fischel warns.

Fossil-Fueled Future

Fossil fuels are our future. According to the U.S. Energy Information Administration’s 2015 Annual Energy Outlook, the United States will depend on fossil fuels to supply 80 percent of its energy needs in 2040. That’s not far off last year’s 82 percent. Globally, three-fourths of primary energy consumption will come from fossil fuels in 2040, the International Energy Agency predicts.

And these numbers will be higher if governments scale back their massive subsidies to renewable energies in the false hope of achieving parity with the real thing.

Instead of vilifying an industry that has been key to the enhancement of the quality of life, colleges and universities should welcome traditional energy investing. Swarthmore, for example, despite strong objections from green activists, recently decided “not to modify its investment guidelines to allow for use of the endowment to meet social objectives.”

“The divestment impulse recognizes no limiting principle,” George Will wrote several months ago. He fears “shedding investments tainted by involvement with Israel, firearms, tobacco, red meat, irrigation-dependent agriculture, etc.” where “progressivism’s dream of ever-more-minute regulation of life is realized but only in campus cocoons.”

One can only hope the divestment craze ends so that nonprofits will not have to choose between expanding educational opportunity and kowtowing to a futile political crusade.

Robert L. Bradley Jr. is the founder and CEO of the Institute for Energy Research. This post originally appeared on Forbes.


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