The Saudis, and Desmond Tutu
Saudi Aramco just filed notice of its Initial Public Offering. On the same day, Archbishop Desmond Tutu, the remaining lion of the fight against Apartheid, called for an international boycott against fossil fuels, akin to that which, long ago, weakened and hastened the end of Apartheid. It would be hard to imagine a more surreal juxtaposition — the amoral against the moral, the forces of finance against the interests of a healthy, sustainable earth.
Where to start?
I offer this: that while the fossil fuel industry will collapse to a fraction of its current size, and a tinier fraction of its current valuations, we’re not near a tipping point. Until that point, boycotts and divestitures won’t be helpful, or successful. Let me explain my thinking.
I was in Riyadh nearly two years ago, when the Aramco IPO was already in the works, and when it seemed that a more moderate, regional-leader Saudi stance would emerge. I remember being told in quite strident terms that my being from California, and thus automatically thinking in favor of winding down use of fossil fuels would be out of place. Oh no, a senior official explained: we KNOW that fossil fuels are ending, you just talk about it. We’re committing to it and to a post-oil Saudi economy.
It’s hard to square that with the apparent push to a high valuation for Aramco. Unless, that is, the Kingdom is rather more calculating in its thinking: that, perhaps, this is the last possible time to extract capital value from the Saudi oil fields.
Because it is, or nearly is.
Soon, it will be broadly understood that valuing oil deposits on the assumption of a 40-year extraction life is meaningless, because nobody’s going to be using oil as the first line fuel in 40 years. So, asset value calculations that make that assumption are flat wrong, to be polite about it.
What, then, of boycotts and divestitures?
The Saudi calculation that it can still extract billions of dollars in hard currency via a public offering also speaks to the tremendous challenges facing boycotts and divestitures. One reason that they worked in weakening Apartheid-era South Africa was that the South African economy was always quite a small part of the global economy. Any large fund could quite easily move moneys elsewhere, with no expected loss of return on investment. That’s not the case for fossil fuels. They, in total, account for as much as 8% of the global economy — and a much larger fraction of the economy available to large investors.
It’s not that bankers are heartless people who don’t care about the fate of the earth (although some might want to stipulate that as a truth), it’s that until there are non-fossil-fuel energy assets equivalent in scope and scale and value and return to those of fossil fuel assets, big funds can’t migrate big assets.
Even worse. The pension funds and sovereign wealth funds and endowments and family funds that might be the best places to apply pressure for boycotts and divestitures … would suffer in two ways. They’d be forced to sell, perhaps at sub-optimal prices, to less scrupulous buyers. The new asset owners would, perforce, be less susceptible to social and political pressure. Best to keep the funds we can pressure in place, and push through them.
And then, slowly at first, and swiftly at the end: alternative, vast, clean energy asset classes will emerge, and fossil fuel investment assets will be revealed as increasingly worthless. As we near that time, boycotts and divestitures will, indeed, hasten oil’s burning death. Not ’til then.
(Other notes on the finances of a fossil-fuel-free future at THIS LINK)
