The $1 trillion sovereign wealth fund of Norway may sell off all of its shares in oil producers.
The move is a shot across the bow for the oil industry. A $1 trillion fund, built on oil itself, now sees the future of oil as too risky.
Norway’s sovereign wealth fund is not getting out of the oil business entirely. The government has only recommended exiting oil and gas exploration and production companies (i.e., upstream producers). The reason why the fund wants to pursue divestment is that it views the long-term oil market as volatile, unpredictable, and at this point, vulnerable to permanently low prices. “The goal is to make our collective wealth less vulnerable to a lasting fall in oil prices,” Norway’s finance minister, Siv Jensen, said. The fund currently holds about $37 billion in oil and gas stocks.
Based on that logic, the government wants to avoid the exposure to producers, since they will be the companies most impacted by changes in oil prices.
But the divestment is also one of the most powerful symbols yet regarding the potential for peak oil demand. The notion of permanently low oil prices is predicated on a peak and decline in consumption. And if a $1 trillion sovereign wealth fund views oil as inherently risky going forward, other investors could begin to fret. It’s worth noting that oil and gas stocks fell immediately after the announcement.
On the other hand, the selloff could also be viewed in the narrow interests of Norway itself. The sovereign wealth fund was built by oil revenues, so the divestment is a bit ironic. Critics might point out that it is a bit rich for a country that has been, and still is, funded by oil revenues to be taking such a stand on the future of the oil business.
But that misses the point. Precisely because Norway’s government still sources a lot of its revenue from oil is also why it wants to diversify. The Norwegian government is not making a moral claim about climate change, or exiting oil stocks for reasons of symbolism, but simply to spread risk. A future scenario in which oil prices stay low, potentially on a permanent basis, would upend the Norwegian government’s revenue base. To have both the budget and the sovereign wealth fund vulnerable to such a scenario – one that is completely feasible – would be reckless.
“The oil business will be a major and important industry in Norway for many years to come. The government’s income from the [continental] shelf basically follows the profitability of upstream companies. Therefore this is about spreading the risk,” finance minister Siv Jensen said, according to the FT.
The sovereign wealth fund has already exited from coal stocks, which, at this point, is a no-brainer given the crisis in that industry. Oil could be next. The new recommendations say that the fund can still invest in integrated oil companies, and those that have their hands in renewable energy.
In related news, Morgan Stanley says that China’s oil demand could reach a peak as soon as 2025, driven by high-speed rail and a rapid transition to electric vehicles. And as China goes, so goes the oil market. China has accounted for more than a third of the annual growth in oil demand for most of this 21st century. A peak in Chinese oil demand likely signals a coming peak in overall oil demand.
But the forecast is sooner than the market consensus. While there is no shortage of peak demand forecasts – and they run the gamut – many center on or around 2030. Some are sooner and many more are later, but 2030 is kind of the unofficial consensus. The Morgan Stanley prediction, then, has raised some eyebrows.
“China will no longer be the growth driver of global crude demand,” Andy Meng wrote in the report. “We believe the refiners and petroleum stations are the largest potential losers, while the battery companies are likely to become the key winners.”
China is already the world’s largest market for electric vehicles, and it is expected to grow rapidly in the years ahead. EV sales in China have already surpassed 6 percent, and new government incentives could accelerate the transition.
The last few months of data are even more shocking. Overall car sales in China are contracting, while EV sales are rising quickly, on track for around 60 percent growth rate this year. It’s a little early to declare the peak of the internal-combustion engine in China, but if that trend continues, such a reality is not far away. In other words, it’s not hard to imagine peak oil demand in China in the near future.
If China does reach a peak in demand, then many more investors may want to divest their assets from the oil industry.