It is becoming more apparent that governmental policy geared towards fighting climate change is only going to get more restrictive over time. And oil companies are finally taking notice. Oil company BP recently admitted that the international concern regarding climate change and its negative effects is leading to the reality that the world’s natural oil resources are unlikely to ever be fully tapped.
BP’s chief economist, Spencer Dale, said that some oil, gas and coal will have to remain in the ground in order to avoid global warming. Dale stated in a recent speech in London that, “Oil is not likely to be exhausted. What has changed in recent years is the growing recognition [of] concerns about carbon emissions and climate change.”
Scientists have warned for some time that most existing fossil fuels known to exist or yet to be discovered must stay in the ground in order to avoid “catastrophic global warming.” Surprisingly, Dale accepted this reality. “Existing reserves of fossil fuels . . . if used in their entirety would generate somewhere in excess of [tons] of CO2, well in excess of the [amounts that the] scientific community consider is consistent with limiting the rise in global mean temperatures to no more than 2 [degrees Celsius.]”
“And this takes no account of the new discoveries which are being made all the time or of the vast resources of fossil fuels not yet booked as reserves.”
Dale emphasized that what all this means is that a “new economics of oil” is needed. “Importantly, it suggests that there is no longer a strong reason to expect the relative price of oil to increase over time.” He said this referring to the year-long slump in oil prices leading to the cancellation of billions of dollars of investments.
Bank of England governor Mark Carney recently discussed how policy related to global climate change will do much more than hurt oil companies. He described the scenario in which policy changes will leave coal miners and oil drillers with stranded reserves and assets that have little value. This will happen because regulations aimed at fighting climate change will require that these resources are left in the ground rather than be harvested.
Carney emphasized that, “A wholesale reassessment of prospects, especially if it were to occur suddenly, could potentially destabilize markets, spark a pro-cyclical crystallization of losses and a persistent tightening of financial conditions. The speed at which such re-pricing occurs is uncertain and could be decisive for financial stability.”
Anthony Hobley, CEO of CTI, points out that, “As BP now recognizes, there is a substantial risk in the system of ‘peak [oil] demand.’ This arises from a perfect storm of factors including ever cheaper clean energy, ever more efficient use of energy, rising fossil fuel costs and climate policy. These are key factors the industry has repeatedly underestimated.”