Strictly Business: Why £50 Divestment of Oil Stocks Makes Sense

September 26, 2014

NOTE: Images in this archived article have been removed.

Image Removed

Various philanthropies and high wealth individuals controlling ~ $50 billion in assets announced that they intend to divest their portfolios of all fossil fuel stocks over the next five years. The most interesting comment to come out of this announcement came from Stephen Heintz, an heir of John D. Rockefeller who, of course, made his fortune in the oil business. Heintz stated:

“We are quite convinced that if he [John D. Rockefeller] were alive today, as an astute businessman looking out to the future, he would be moving out of fossil fuels and investing in clean, renewable energy.”

Strictly from a business perspective, he is almost certainly right.

Firstly, one could examine capital expenditure among the Major oil companies which has exploded in the past eight years while commensurate production has fallen fairly dramatically. In other words, billions of dollars have been spent for less and less actual oil or gas. In fact, new discoveries globally hit an all time low in 2013 and look to be headed for an even more dismal year by the end of 2014. Companies discovered only about half of all production that was consumed.

Secondly, one could compare the stock performance of the Majors against an index like the Dow. There was a time when such energy stocks of the Majors were leaders of the index. Now they are laggards. While the Dow has risen ~ 80% over the past five years, two of the world’s largest oil and gas companies, Exxon Mobil and Shell have only risen about 45%. So it was not the best place to park your money.

There was even a time when GDP was closely aligned with crude prices. That, too, has fallen by the wayside with a significant decoupling. In fact, oil intensity of GDP in both OECD and non-OECD countries has halved since 1980 according to Citibank.

So the announced divestments are certainly understandable purely from a business perspective. Although many supporters of oil and gas will no doubt try to shift the focus claiming such divestments could only be driven by an ethical stance, their case appears weak. In fact, one could rightfully argue that such divestment truly is an astute business decision.


Photo credit: Wikipedia/Jürgen/CC BY 2.0

Deborah Lawrence

Deborah Lawrence (formerly Deborah Rogers) worked as a financial consultant for several major Wall Street firms, including Merrill Lynch and Smith Barney. Ms. Rogers was appointed as a primary member to the U.S. Extractive Industries Transparency Initiative (USEITI), an advisory committee within the Department of Interior, in 2013 for a three-year term. She also served on the Advisory Council for the Federal Reserve Bank of Dallas from 2008-2011. She is a Member of the Board of Earthworks/OGAP (Oil and Gas Accountability Project). She is also the founder of Energy Policy Forum, a consultancy and educational forum dedicated to policy and financial issues regarding shale gas and renewable energy. 

Tags: fossil fuel divestment