Big if true.
And also more than a little weird. Investors tend to be a self-interested group. If there’s money to be made, they will try to make it. There’s a reason the fictional Gordon “Greed is good” Gekko owned an investment fund and not a chain of Burger Kings. If in normal times the price of a key commodity like oil went up, the Wolves of Wallstreet would be happy to supply the industry with loads of cash.
But that lede sentence may be right. Maybe this time we’ll see a long period of high oil prices — the International Information Agency is forecasting growing demand for fossil fuels until at least 2026 — but no increase in production.
And some of you might be OK with that. Some of you might think global warming is such a big threat that we need to curtail production of fossil fuels any way we can. If that means starving the energy sector for capital, then so be it.
Fine. Let’s not get into a debate about whether climate change poses an existential threat that requires immediate radical action. But let’s do think about whether choking off capital going to energy production is a good way to choke off fossil fuel production.
In finance we talk about “political risk”, the risk that some sorts of government actions will lower the return on an investment. When, as recently happened, the Federal government refuses to allow the completion of an oil pipeline, they create political risk—investors quite naturally think, “if the Feds make us trash a billion-dollar investment in a pipeline, what else will they do?” When three green energy “activists” manage to secure seats on the board of Exxon Mobil, people loaning money to Exxon get nervous.
It is obviously true that risk raises the cost of capital—people with terrible credit scores have a tough time borrowing money. The global warming activists are trying to lower the oil industry’s credit score, raising the cost of capital and making it harder for the industry to develop energy resources.
That might — sort of, kind of — work. But it is clunky inefficient way to discourage oil and gas development. Stopping oil and gas production by creating political risk is like trying to stop your daughter’s marriage by bringing a skunk to the wedding reception. It damages all sorts of innocent bystanders and your targets can often find a work around.
Exxon’s new board of directors may manage to steer Exxon away from fossil fuels but it’s much more likely that they’ll sow confusion and distrust in the way corporations are run. If passive investors like you and me come to think that corporations can be hijacked to serve the political interests of a tiny minority, are we going to want to invest our retirement money in the stock market?
And of course, there’s a very good chance these political stunts won’t have much impact on the amount of fossil fuels produced. The Keystone XL pipeline won’t be built but the Canadian oil it was designed to carry will find a different way to the market. If Exxon decides to cut back on drilling, other firms will exploit those opportunities. At $100 per barrel people will drill for oil no matter the Exxon board’s “preference for green energy.”
This is especially frustrating since there’s a much better way to limit the production of fossil fuels: simply impose a consistent and fair tax on carbon. There are dozens of proposals for a carbon tax, but any decent tax on carbon will lower the amount of money a producer can make from selling fossil fuels and create huge incentives for renewables. We should give up sneaky plans to raise political risk and instead settle on a sensible carbon tax. Instead of bringing a smelly weasel to the reception, we should refuse to pay for the wedding.
Michael L. Davis is an economics professor at SMU Dallas Cox School of Business
Read More: Carbon taxes better than assigning artificial political risk – Pasadena Star News