Anthony Hobley Close to Phaseout Profit

Carbon Tracker CEO Anthony Hobley spoke at the “Cambridge Climate Lecture Series” on Friday. The Youtube video of the event posted below shows his talk.

He starts out explaining a bit about Carbon Tracker and its history.

As he explains, people worried about climate change are somewhat “weird”, since they have a long-term perspective. And Carbon Tracker wants to explain the problem in a language that the financial industry understands. They want to show how ignoring climate change affects profits. Much more people are interested in making money now than in average Earth surface temperatures a couple of centuries from now.

Talk with them in their language.

That’s close to Phaseout Profit theory, because Phaseout Profit wants to show that solving the climate problem is good for the bottom line of fossil fuel companies. They may not be interested in Earth surface temperatures in 2323 either, but they care about oil prices and their bottom line right now.

The vision of Carbon Tracker is to get to a carbon neutral system until 2050. My vision is to get there in a week or two, so that’s a difference in speed, but the goal is the same. And we completely agree that speeding up the transition is important. Eventually all energy will come from renewable, at the very least once all fossil fuel is burnt and gone. The question is if that happens soon enough to avoid catastrophic global meltdown.

I discussed another talk by Hobley last December. At the time, he already made a point he made again in this talk: The oil companies should cancel their most expensive exploration projects. That would make them money. And it would help with climate change. Any new oil resource not explored will stay in the ground.

In this talk, he also explains that the most expensive projects also happen to be the dirtiest. That’s an interesting coincidence I was not aware of before. Obviously, this is a fortunate correlation. It means that the oil companies will make the most money from cancelling the projects that need to be canceled first for climate reasons.

Hobley then explains that Carbon Tracker has looked at the scenarios of fossil fuel demand projections. Those projections have been disconnected to the carbon budget. What happens if the carbon budget gets enforced and those scenarios prove to be wrong? Who loses money, and how much will they lose?

I agree completely that eventually demand for fossil fuel needs to go down because of climate concerns, and it will go down anyway because of the much faster than projected development of renewable energy and electric vehicles. I agree that the fossil fuel industry projections are completely off, as are those of the International Energy Agency.

But there is one point where I disagree with Hobley. He seems to think that the fossil fuel industry is doomed. I think that the fossil fuel industry can reap gigantic extra profits from the necessary transition.

Pop quiz: Which theory would you expect to have more appeal to the fossil fuel industry?

For those not familiar with Phaseout Profit, let’s just add a short explanation. Even if demand goes down, as well it should, if the oil companies follow Hobley’s advice and stop all their expensive exploration projects, supply of oil can go down faster than demand, leading to higher prices.

There should be some policy support for this. Stop enforcing antitrust law against oil companies who act collectively to reduce demand. Allow private companies to do what OPEC does. Of course gasoline will get more expensive, hurting consumers. But the oil companies will probably agree that climate policy makes it impossible to pretend that there is still a public interest in stopping the enabling of limiting pr oduction. The situation changed somewhat since the US Supreme Court decided the Standard Oil case.

Another interesting point Hobley makes: Demand for coal only went down about 10 percent. But that was enough to basically destroy the coal industry. The last decade was not much fun for the owner of coal company stocks. The same is true for oil. Small changes in demand lead to large price swings.

That of course means that the reverse is true as well. Small changes in supply lead to large price swings.

If demand for coal goes down by 10 percent, make sure that supply goes down by 20 percent. That leads to higher prices, which compensate for the loss in volume. And which also lead to higher valuations for reserves.

In other words, Hobley’s recommendation to the oil industry of stopping their most expensive projects will show massive positive effects on oil prices even if the oil companies only cancel a small part of the projects.

There is another point Hobley makes I am not sure I agree with. He explains that renewable energy is cheaper since it doesn’t need a large grid.

Actually, having a grid is important for renewable energy since it helps balance out supply variations. There’s a reason Masayoshi Son wants to build the Asia Super Grid. And the very well developed European grid is a fortunate asset to have in the transition to renewable energy, something Japan has not. There are zero connections to other countries’ grids right now.

Hobley mentions that the oil majors could be worth $100 billion more if they followed  Carbon Tracker’s advice. I think that’s true, and it would become even more obvious if you consider the effect of reducing demand on prices, something I can’t see Hobley doing right now.

At the end he mentions that more and more other financial institutions are issuing reports similar to Carbon Tracker, but the oil industry is still not listening, like a supertanker headed for an iceberg collision.

I’m familiar with that sentiment. I have problems getting my particular message out there as well. I still haven’t heard one reason why Phaseout Profit Theory will not work. And it would be rather somewhat of a big deal if it does.

Update: ExxonMobil is not listening to Hobley. Their new CEO Darren Woods just announced that they are increasing capital expenditure by 16% over last year to $22 billion, reacting to higher prices.

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