Let’s Act Before the Oil Bubble Bursts


BILL RITTER: There is at least one issue that had been overlooked until recently and that deserves discussion between advocates for climate action and the leaders of the world’s big oil companies. It is the finding that the world has a “carbon budget” and we have already spent most of it.

The Intergovernmental Panel on Climate Change and the International Energy Agency are among the expert organizations that say 60% to 80% of the world’s proven reserves of fossil energy must remain in the ground if we want to stop short of dramatic, perhaps even catastrophic changes in climate.

The possibility that trillions of dollars in fossil energy assets could become stranded has raised concerns among the industry’s investors. It also concerns former Treasury Secretary Henry Paulson Jr., who argues that in light of the carbon budget we are overvaluing the worth of oil, coal and natural-gas reserves. The result, Mr. Paulson says, is a carbon bubble much larger in its potential economic impact than the real-estate bubble. “This is a crisis we can’t afford to ignore,” he wrote in the New York Times.

Exxon Mobil, Shell and BP PLC reportedly have assessed this risk at minimal to zero. They base this conclusion on a variety of assumptions, among them that governments will not institute aggressive policies on carbon emissions anytime soon, that a world hungry for energy will not tolerate leaving so much of it underground, and that whatever comes, the oil industry will have time to adjust because the global energy system moves like an oil tanker: very slowly.

Some of these assumptions should be questioned. In regard to the world’s energy appetite, for example, the response to the carbon budget is not to deprive developing nations of modern power. It is to help them obtain their energy from lower-carbon resources.

Another topic worth discussion is whether it is in the interest of oil companies and their shareholders to hedge the risk presented by the carbon budget by substantially increasing their investments in nuclear, solar, wind, biofuels and other carbon-constrained resources.

Oil-industry executives say the value of their assets is based on tried and true economic principles, thorough analysis, and consultations with energy experts around the world. They have concluded that fossil fuels will continue providing a large majority of the world’s energy for many decades to come. But the impacts of climate change—physical, financial and human—are dynamic. The atmosphere is filled with black swans. Do tried and true assumptions still apply?

In short, there is an important conversation that needs to happen between the industry’s thought leaders, its investors, climate action advocates, the Obama administration and congressional leaders. The urgency of this issue, as Henry Paulson notes, is the risk of the global economy feeling the shock waves when the oil bubble bursts.

Bill Ritter served as Colorado’s 41st governor. He is currently the director of the Center for the New Energy Economy at Colorado State University.



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