Trump, Paris, and the Future of Oil

So, last Thursday, President Trump announced that he was pulling the U.S. out of the Paris Climate Agreement. He says the agreement to cut carbon emissions will cost the U.S. “2.7 million lost jobs by 2025” and “close to $3 trillion in lost GDP” by 2040.  

Critics of Trump’s decision are flipping out. One environmental activist said it amounts to a “traitorous act of war against the American people.”

Now, the purpose of the Paris Climate Agreement is to get the 194 countries that signed on to cut the carbon emissions that scientists say are causing our climate to get hotter. That means fossil fuels: oil, natural gas, and coal.

Obviously, the U.S. economy is heavily involved in fossil fuels. (So is the whole world, really.) I suppose on an anecdotal level, when people hear that the U.S. has to burn less fossil fuels, there’s some fear that our way of life is being threatened. It’s fear of change. 

But here’s the thing: American use of fossil fuels is already changing. And it has nothing to do with Trump, or Obama, or the Paris Climate Agreement. It has to do with basic economics. And as an investor, you should be very aware of the changing significance of fossil fuels in the global economy.

Quite simply, if you don’t have an idea of what’s happening, you could lose a lot of money. But if you do have some ideas about where fossil fuel use is headed, you’ll be ready to make some very profitable decisions.

Real News and Fake News

While President Trump was taking the headlines last Thursday, he overshadowed a much more newsworthy item from the day before: 60% of ExxonMobil shareholders voted in favor of a resolution demanding that Exxon “disclose how technological advances and action on climate change could affect its portfolio of assets.”

In other words, Exxon shareholders want to know what Exxon really thinks about the future of oil. And these aren’t just any shareholders. The Washington Post says that Fidelity, State Street, Vanguard, and BlackRock all supported the resolution. These four companies alone wield about $14 trillion in investment dollars. Together these four powerhouse asset management firms own something like $70 billion worth of Exxon stock. That’s about 20% of Exxon’s value. 

This should go without saying, but I’m going to say it anyway: If the biggest and most powerful investors in the world are concerned about the future of Exxon and oil, you should be, too. 

Now, let’s delve into exactly what they are worried about. We’ll start with a chart from BP: 

Global oil demand is driven(!) by transportation — cars, trucks, trains, and planes account for just over half of oil demand. Cars alone account for 20%. 

BP also tells us, “Oil consumption within the developed world has been falling for much of the past 10 years and that trend is likely to continue.” There are reasons for this, like better fuel efficiency, better public transportation, these pesky millennials refusing to get their driver’s licenses…

Still, BP sees oil demand going from around 95 million barrels a day (mbd) today to 115 mbd over the next two decades. And pretty much all of that growth comes from emerging economies like China, India, and the countries of Africa.

So, emerging economies are the big wild card here. And I think it’s dangerous to make too many hard assumptions about how these countries will progress. Because the fact is, change can happen much faster than we expect. And changes to stock prices can happen even faster, when the big threat is still just a ripple on the horizon.

Climate Change, or Pollution?

President Trump says the Paris Climate Agreement puts immediate caps on the U.S. but allows China, for instance, to continue as it is before it has to make big changes to its carbon output. We are supposed to conclude that China will indeed continue basically as it has. Take coal, for instance…

Just this January, China cancelled plans for 104 coal power plants, nearly half of which were already under construction. And on May 12, 2017, Reuters reported that China has suspended permits for new coal power plants in 29 of 32 provinces. Now, this isn’t to say that coal consumption is declining in China. It’s not. But the rate of growth is far less than what we estimated just a couple years ago.

It’s the same story in India, where coal plants are being cancelled. And it’s not really because of climate change; it’s because pollution in both countries is bad. It’s not a coincidence that India is the world’s biggest solar market. 

Still, the point of this article is oil. And the biggest source of oil demand is transportation. This means the biggest threat to oil demand is coming from electric vehicles (EVs). 

In 2016, U.S. sales of electric cars rose 32% to 159,139. But in China, sales grew 53% to 507,000 EVs. In Europe, sales grew 15% to 222,200. Sure, those numbers are a drop in the bucket of the 95 million cars that were sold around the world. But if total EV sales grow just 20% this year, that will mean over 1 million EVs sold in 2017. 

So, while BP sees oil demand growing to 115 mbd over the next 20 years, analysts at Bernstein project that 30% of the global fleet of autos will be electric vehicles in 20 years. Both of these things won’t happen. And if Bernstein is correct, you can bet oil demand will be a good deal less than 115 mbd 20 years from now. (Don’t miss India’s stated goal to sell nothing but EVs by the end of the next decade.) 

The thing is, none of these projections take into account the changes that autonomous cars might have. Some think tanks foresee a world where individual car ownership is replaced by fleets of autonomous vehicles that take you where you want to go at a fraction of the cost of today’s cars. Imagine transportation costs falling from ~$0.65 a mile for a car owner today to $0.05 a mile for using a sort of autonomous taxi service. The ReThinkX analysts say this would put $1 trillion into American consumers’ pockets. 

You want to know why Google, Apple, Tesla, Amazon, Ford, and GM are spending billions on all this new technology? 

It’s because big changes are coming fast. I haven’t zeroed in on exactly who the big winners will be just yet. But it’s becoming increasingly obvious who the big losers will be. President Trump can’t change that. And neither can Exxon. 

Now, I know 20 years sounds like a long way off. But remember: the investment that makes all this a reality is happening right now. And the big boys like Vanguard and BlackRock are making decisions about their oil investments right now. 

I recently wrote two pieces for Wealth Daily, outlining the bearish and bullish cases for oil. Given that OPEC and Saudi Arabia failed to implement new production cuts, I believe the bearish scenario for oil is more likely. 

Until next time,

Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.