In an interview with Aaron Task last week, Al Gore discussed the idea of a "carbon bubble," citing the $7 trillion in carbon assets carried on the books of energy companies and the $14 trillion carried by sovereigns.
According to the former VP, no more than a third of these carbon assets can be consumed without "destroying the future," suggesting that energy companies can no longer be accurately valued based on their reserves. He goes on to call big oil companies overvalued and cautions investors to stay away.
A shaky assumption
What Gore didn't mention, however, is that the warnings about fossil fuel consumption by the Energy Information Administration and others are less about oil, and more about coal.
Per the EIA's World Energy Outlook 2012: "No more than one-third of proven reserves of fossil fuels can be consumed prior to 2050 if the world is to achieve the [2 degrees Celsius] goal, unless carbon capture and storage (CCS) technology is widely deployed. ... Almost two-thirds of these carbon reserves are related to coal, 22% to oil, and 15% to gas." [Emphasis mine.]
So yes, if the world burns all of its coal reserves before 2050, or even half for that matter, we're going to have some problems. There's just one thing Gore is missing, though: We won't.
A natural solution
Let's assume Gore is right, and we need to start writing off reserves that are inconsumable for environmental reasons. Who loses in that scenario? The coal producers are an obvious victim. Who wins? Well, oil and gas producers, for starters.
The reason is that if dirty fossil fuel consumption needs to be replaced, the natural solution is cleaner, yet still relatively low-priced, natural gas. This is already happening in North America, largely thanks to the shale gas revolution, but LNG exports and unconventional plays in other areas of the world could make this a global trend in the not-too-distant future.
Interestingly, the largest producer of natural gas in the U.S. as of the second quarter of 2013 was a representative of big oil: ExxonMobil (XOM 0.57%), at 3,581 million cubic feet per day. ExxonMobil, a company to be avoided according to Gore's investing guidelines, explicitly recognizes the growing need for cleaner energy sources, and its bets on natural gas serve as confirmation.
For a more focused play on natural gas, investors can look to the No. 2 producer as of the second quarter, Chesapeake Energy (CHKA.Q). Whereas ExxonMobil, an integrated major, has a diversified revenue stream, Chesapeake derives almost half of its revenue from natural gas. It is important to note, however, that despite being primarily a gas producer, Chesapeake is increasingly devoting resources to more profitable liquids production.
This illustrates another issue with the carbon bubble theory: Oil is still where the money is. According to the same EIA report that warns against consuming more than a third of fossil fuel reserves, oil prices are expected to rise to $125 a barrel by 2035 -- and that's adjusting for inflation. If there's a bubble forming, it sure doesn't look to be popping anytime soon.
Better, faster, stronger
Given his role in fostering the development of the Internet, you would think that Gore would assign more value to the game-changing abilities of new technology.
Go back to the EIA report and read the warning again: "No more than one-third of proven reserves of fossil fuels can be consumed prior to 2050 ... unless carbon capture and storage (CCS) technology is widely deployed." [Again, emphasis mine.] Guess who's a leader in CCS? Try ExxonMobil, which captured 4.5 million metric tons of CO2 for underground injection in 2012, and has captured more than 25 million metric tons since 1996.
Also mentioned in the report is that road freight accounts for 40% of the projected increase in global oil demand. While oil consumption from passenger cars can be curbed by improved vehicle efficiency and increasing demand for EVs, freight presents a more difficult challenge. Enter natural gas. Breakthroughs in LNG and CNG technology have made it feasible for natural gas to fuel these fleets, and companies such as Clean Energy Fuels are creating the infrastructure to support it.
While widespread adoption of CCS technology or natural gas as a fuel is still not guaranteed, it appears that no matter how the energy landscape changes, the big players in oil and gas will still have a piece of the pie.
Bottom line
My advice to Al Gore, if he is confident that a carbon bubble will bring down big oil, is to put his money where his mouth is and start taking some short positions. My advice to investors, on the other hand, is to look elsewhere for guidance. The global energy mix is without a doubt evolving, but these are gradual changes that will reflect supply, demand, and pricing rather than the arbitrary predictions of politicians.
