Mar 8th 2015

The “Hindenburg Trap”:  Dump Oil, Coal & Gas Stocks if you Want to Retire

by Juan Cole

Juan Cole is the Richard P. Mitchell Professor of History and the director of the Center for South Asian Studies at the University of Michigan. His latest book, Engaging the Muslim World, is just out in a revised paperback edition from Palgrave Macmillan. He runs the Informed Commentwebsite.

What is the actual value of the oil, gas and coal fields owned by big energy corporations, which gives them their stock price and allows them to be counted as assets for borrowing purposes?

The real value of those hydrocarbon resources is zero.

Or actually it is much less than zero, since there are likely to be a lot of liability lawsuits and insurance claims for severe environmental and property damage. Coal, oil and gas are now where the cigarette companies were in 1990, on the verge of getting hit with massive penalties. Big Coal and Big Oil are dead men walking.

The only thing that stops the entire world economy, including that of the United States, from collapsing is that investors continue to pretend that what I just said is not true. Because of this pretense, some people will go on making a lot of money with hydrocarbon investments in the short and perhaps even the medium term. Much investment and assignment of value is a matter of confidence.

But the confidence is misplaced. If you are still fairly young and you or your pension fund bought a lot of petroleum or gas or coal stocks in hopes of retiring on them, think again. You will lose your shirt.

Worse, because so many loans and other investments are anchored by the supposed value of coal, oil and gas, the world is walking an economic tightrope and the gentlest of breezes could knock it off into a crisis that would make 2008-2009 look like a minor hiccup.

In particular, if a sizable ice shelf breaks off in the Antarctic, you could see a sudden sea level rise that would panic the public and possibly lead some countries to outlaw things like coal and gas.

The Bank of England is doing a big study of this problem, which economists call that of “stranded assets.” That is a fancy phrase for when you invest in something that suddenly loses its value.

For instance, say you invested in Blockbuster Video Entertainment, Inc., when people used to rent DVD’s of movies from brick and mortar stores. In 2006 it seemed a good stock to buy– it had 9000 stores and 60,000 employees (almost as many as there are coal miners). And then streaming video came along. Stranded asset. Blockbuster went bankrupt in 2010 and survives only as a streaming service of Dish satellite television, which bought it and was gradually forced to liquidate all the stores.

The same thing will happen to coal, oil and natural gas, for two big, inexorable reasons. First, burning hydrocarbons is fatal to the health of our planet– in terms of the energy it releases, it is like setting off atomic bombs constantly. After a while that would take a toll. Second, other far less destructive ways of generating electricity are every day becoming cheaper and more efficient, especially wind and solar.

That coal as an industry is a bad investment should be obvious. The Obama Environmental Protection Agency has decided finally to start actually enforcing the Clean Air and Water Act, and has also claimed the right to regulate states’ carbon dioxide emissions (in which it has been upheld by the Supreme Court). Most coal plants will likely close over the next five years. Can you say, Blockbuster Video? I’d dump those coal stocks, like yesterday, or call my pension fund and make them drop them.

Of course, there was already a social conscience argument against investing in coal, which is dirty– burning it emits mercury (a nerve poison) and other dangerous pollutants and makes people sick. It also causes acid rain. And it is a major emitter of carbon dioxide, the deadliest poison of all. It is a horrible thing.

Let’s consider what has happened in Iowa just since 2005.

energy-source-comparison

In 2005, wind generated 4% of Iowa’s electricity. Coal was responsible for a whopping 79%, about 4/5s.

In 2013, wind generated 28% of Iowa’s electricity. Coal had fallen to only 59%.

Given those trend lines, in such a short period of time, does coal look like a good investment to you? Or does wind? Especially since we know what the EPA is planning for coal.

Coal isn’t just competing with wind. The conservative Deutsche Bank has just concluded that in 14 states of the US, solar power is now as inexpensive as that from coal and natural gas. Right now. That is, it would be crazy to build a new coal plant today when you could generate electricity just as cheaply with solar.

And get this: by 2016– next year! — Deutsche Bank concludes that solar will be competitive with coal and natural gas in all but three or four states. And that is not an argument based on subsidies for solar. It will be as inexpensive as coal-generated electricity just purely on a market basis (in fact, it will be even cheaper, since there are massive government subsidies for coal, gas and oil).

Critics say that the wind dies down sometimes and the sun doesn’t shine on half the earth at night. This problem is referred to as that of “intermittency.” But it isn’t an insoluble problem. For one thing, the wind often blows more at night, so turbines can take up the slack from solar plants. For another, there are now molten salt solar installations that go on generating electricity for six hours after sunset. As batteries improve in efficiency and fall in price (both things are happening already, big time), the problem of intermittency will fade into insignificance, likely within a decade.

Another drag is that the electricity grid in many states needs to be redone. Wires need to be laid from the Thumb in Michigan where the wind is to the Detroit metropolitan area where most of the electricity is used. But it really is a relatively minor expense, and since the fuel for wind turbines is free, it would pay for itself fairly quickly. That is just a matter of having a state government that is on the ball and sees where the future profits are to be made. Cheap wind- and solar- generated electricity will allow factories to save money on energy and make their products more inexpensively, allowing them to compete on the world market. A solar facility is helping power the Volkswagon plant in Chattanooga. They’re not paying for coal or gas to produce that portion of their power, because the sunlight is free, and that will make their cars more competitive in price. Some buyers may throw their business to Volkswagen because they are greener. All factory owners will quickly move in this direction over the next few years.

So there isn’t any doubt about it. Buying stocks in coal, gas and oil companies is like buying stocks in zeppelins. They are outmoded and prone to crashing and burning, a Hindenburg waiting to happen. (Zeppelins were good investments once, too; they carried tens of thousands of people across the Atlantic and the top of the Empire State Building was designed to anchor them; but they became a stranded asset.)

It is therefore absolutely amazing that institutions of higher education like Harvard often refuse to divest from oil, gas and coal companies. The science and the economics are clear as day– burning hydrocarbons is disastrous for a city like Boston over time, and holding stranded assets is a one way ticket to bankruptcy court. I couldn’t tell you whether this decision is made out of short-sightedness or out of ethical and moral corruption (universities live nowadays on donors’ donations and don’t want to anger generous alumni who make their living purveying coal, gas and oil).

But those hydrocarbon stocks, and loans made on the basis of those worthless assets, are endangering the economic health of us all. Buying and holding them is the equivalent of refusing to vaccinate your children against measles. It is an individual decision that imperils the rest of the public. You and I may not be able to do much about the Koch brothers’ hold on state legislatures, or about the mysterious insidiousness of the Harvard regents. But most of us have some say in what stocks are in our pension funds or 401ks. There shouldn’t be any coal, gas or oil securities in there. Unless you like the idea of working backbreaking minimum wage jobs into your 80s.




For Juan Cole's own web site, please click here.

To follow what's new on Facts & Arts please click here.

Browse articles by author

More Current Affairs

Nov 24th 2024
Extracts: "We all think, speak, and write within certain intellectual frameworks that we largely take for granted. But, eventually, the passage of time renders familiar categories and ideas obsolete. For example, who still talks about the “Soviet Union” today, apart from historians?" ------- "Trump won decisively despite his contempt for democratic institutions, his efforts to overturn the 2020 election, and his subsequent 34-count felony conviction. Though voters know about his chaotic approach to governance, his habitual mendacity, and his sinister immigration policies, he won every swing state. Even with full knowledge of who Trump is, more Americans voted for him than for Kamala Harris. We must not mince words: liberal democracy in the US has suffered a lethal blow. It will be under increasing pressure on both sides of the Atlantic, and there is no guarantee that it will survive. After all, can there be any future for the liberal West without the US as its leader? I believe the answer is no." ----- "If Europe fails to come together at this moment of tumultuous change, it will not get a second chance. Its only option is to become a military power capable of protecting its interests and securing peace and order on the world stage. The alternative is fragmentation, impotence, and irrelevance."
Nov 24th 2024
EXTRACTS: "When the US presidential election was called for Donald Trump, the yield on ten-year US government bonds increased from 4.3% to 4.4%, and the 30-year-bond yield rose from 4.5% to 4.6%, with both remaining at those levels ten days later." ----- " Clearly, investors expect the next Trump administration to produce higher government budget deficits and more debt. It is not difficult to see why. During Trump’s first term in office, he added $8 trillion to the national debt – all previous presidents combined had accumulated $20 trillion – despite having promised to run budget surpluses so large that they would eliminate the national debt within two terms." ----- "Supporters often say that a businessman like Trump or Musk will know how to put America’s fiscal house in order. But the smart money says they have no idea what they are doing."
Nov 13th 2024
EXTRACT: "For 2,300 years, at least since Plato’s Republic, philosophers have known how demagogues and aspiring tyrants win democratic elections. The process is straightforward, and we have now just watched it play out." ........ "As Jean-Jacques Rousseau argued, democracy is at its most vulnerable when inequality in a society has become entrenched and grown too glaring." ..... "From everything Trump has said and done during this campaign and in his first term, we can expect Plato to be vindicated once again. The Republican Party’s domination of all branches of government would render the US a one-party state. The future may offer occasional opportunities for others to vie for power, but whatever political contests lie ahead most likely will not qualify as free and fair elections."
Nov 3rd 2024
EXTRACT: "The likelihood of escalation in the coming weeks and months means that there will be economic and financial risks to manage. A large-enough Israeli strike on Iran could severely disrupt energy production and exports from the Gulf. If Iran gets desperate, it could try to mine the Gulf and block the Strait of Hormuz, while also striking Saudi oil facilities. In this scenario, the world would experience stagflationary shocks similar to those that followed the 1973 Yom Kippur War and the 1979 Iranian revolution."
Oct 9th 2024
EXTRACT: "The continuing cycles of violence can easily spiral out of control, precipitating a wider war involving nuclear powers. Moreover, Netanyahu’s goal of 'total victory' against an ideological movement cannot be achieved by military means alone." ..... "So long as both sides seek to inflict maximum damage on the other to right past wrongs, the violence will not end. Netanyahu may think that total victory is in sight, now that Hezbollah is badly damaged and Gaza reduced to rubble, but that is an illusion. All he has done is create more enemies who will want to restore their honor by killing in a war without end."
Oct 9th 2024
EXTRACTS: "Nasrallah was on a mission to destroy Israel. It was a mantle he had taken up from countless other Arab leaders, from Haj Amin al-Husseini, the grand mufti of Jerusalem who met with Adolf Hitler in 1941 to discuss the destruction of the Jews, to Azzam Pasha, the secretary-general of the Arab League who described the Arab invasion of the then-nascent Israel in 1948 as a 'war of annihilation'. Egyptian President Gamal Abdel Nasser – an icon of pan-Arabism in the 1950s and 1960s – pledged more than once to 'destroy Israel'. Iraqi dictator Saddam Hussein and the Palestinian leader Yasser Arafat, who founded Fatah, nurtured their own dreams of liquidating the Jewish state." ...... "Alas, Israelis have built their own dangerous dream palace of 'total victory', erected on a foundation of nationalist fervor, religious messianism, and political intransigence. There is a scenario in which Israel’s military exploits change the region for the better. Unfortunately, far from being the standard-bearer for some enlightened political vision, Israel’s current government is committed to fighting a war on all fronts, with no view toward any political future that Israel’s neighbors could possibly accept."
Oct 8th 2024
EXTRACT: "But in the real world, slain leaders are replaced. Those who bury their dead do not forget or forgive, and those who have felt the punishment of arms do not forego weapons but embrace them. So it seems unlikely that’s how the story will end. Sadly, it’s far more likely it will never end."
Oct 3rd 2024
EXTRACT: ".....,Russia will probably spend about $190 billion, or 10% of GDP, on the war this year, and that figure presumably represents the peak, given the constraints imposed by Western financial sanctions. Whenever Russia can no longer finance a budget deficit, it will have to cut public expenditures, and its non-military outlays have already been pared to the bone."
Sep 12th 2024
EXTRACT: "Throughout recorded history, crises and tragedies have inevitably spurred apocalyptic interpretations that seek to imbue temporal catastrophes with some divine or redemptive meaning. One can see this in the doctrines of the major monotheistic religions, and even in modern totalitarian ideologies, such as communism and Nazism. One way or another, humans appear inclined to believe that, without Satan, there is no redeemer. To understand just how dangerous this logic can be, look no further than Gaza, where a tragedy of Biblical proportions is fueling the messianic hallucinations of Israel, Hamas, and American Christian evangelicals alike."
Aug 7th 2024
EXTRACT: "China knows that the war has had catastrophic consequences for both Russia and Ukraine. Estimates indicate that Putin’s conflict in Ukraine could cost Russia US$1.3 trillion (£1.0 trillion) and at least 315,000 in troop casualties. So, win or lose, the post-war damage to Russia would be immense. This is bad news for China. Not only will it have a weakened ally, but the west could then have a free hand to consolidate its resources in dealing with the 'Chinese threat'."
Jul 27th 2024
EXTRACT: "......, regardless of the folly of political violence, the attempt on Trump’s life was futile inasmuch as ridding America, and the world, of Trump, would by no means rid us of Trumpism, which was and remains a symptom, and not the root cause, of this country’s moral and epistemic decline. How else could so many millions of Americans support this man? No one can claim that they do not know what he stands for (insofar as he stands for anything other than himself) or what his intentions are: he has made it very clear that his second administration will be not only authoritarian, but fascist in rhetoric and deed.
Jul 17th 2024
EXTRACTS: "Iran unveiled a digital clock counting down the days to the destruction of Israel in 2040. The display, located in Tehran’s Palestine Square, embodies the Islamic Republic’s long-held commitment to annihilating the Jewish state. Some view this promise as a mere rhetorical exercise...." ----- "From Adolf Hitler to Vladimir Putin and even Osama bin Laden, history has taught us to take threats of ideologically inspired attacks at face value. " ---- "......., the key enabler of Iran’s war of attrition is, in fact, Israel’s own government. Netanyahu’s unrealistic goal of achieving 'a complete victory' in Gaza serves Iran’s strategy of miring Israel in an inconclusive conflict while orchestrating a long-term plan to destroy the Jewish state." ----- "It turns out that the only truly irrational, trigger-happy fanatics in this lethal equation are Netanyahu and his theo-fascist allies, who are determined to engage in an apocalyptic war in Gaza and Lebanon." ---- "These messianic hallucinators have a willing collaborator in Netanyahu. Together, they are doing more to annihilate the Jewish national project than Iran could ever hope to achieve on its own."
Jul 16th 2024
EXTRACTS: "In her dissenting opinion in Trump v. United States, Supreme Court Justice Sonia Sotomayor declared that with the majority’s ruling, 'the President is now a king above the law'. In this, she is wrong: the majority opinion has given the US president far more power than English kings had at the time of the American Revolution." ---- "In June 1686, 11 of the 12 hand-picked justices ruled in favor of the king. Echoing the king’s own solicitor, Sir Thomas Powys, the Lord Chief Justice George Jeffreys contended that if the king did not have leeway above the law, 'the preservation of the government' might be in jeopardy." ---- "In 1689, the English people roundly rejected such reasoning and asserted that their kings would thereafter be subject to the law. They set a precedent by removing James II from office. The Supreme Court’s decision goes beyond threatening more than two centuries of American jurisprudence; it overturns four centuries of Anglo-American jurisprudence. The Roberts majority did not give the president the power of an English king; it gave the president power that an English king could only covet."
Jul 4th 2024
EXTRACT: "Most American voters who believe that Trump is the best defender of democracy are not fascists, much less communists. The very thought would horrify them. But they almost surely have a strong opinion on who constitutes the true American people: God-fearing, hard-working, and most probably white. And they worry that these ordinary Americans are being displaced by illegal immigrants, and that their way of life is being threatened by new ideas about gender, race, and sexuality emerging from elite universities. Trump is stoking these fears and exaggerating these threats. His line that the US courts are attacking not only him, but every right-thinking American is horribly effective. Since he is heard as the true voice of the people, he is the purest democrat. As a result, liberal democracy might not withstand another four years of his rule."
Jul 3rd 2024
EXTRACT: "....the debate showed all too clearly that he is suffering cognitive decline and cannot possibly serve as a competent president for another four years. If Biden is true to his word, and stopping Trump from regaining the presidency is his overriding goal, he needs to announce that at the Democratic Convention in August, he will release his delegates from their obligation to vote for him, and instead ask them to vote for the candidate with the best chance of defeating Trump."
Jul 3rd 2024
EXTRACTS: "Both Chief Justice John Roberts and Justice Sonia Sotomayor of the United States Supreme Court have just announced grand opinions trying to resolve the fundamental constitutional issues raised by former President Donald Trump’s claim to absolute immunity" ---- "According to Sotomayor, who wrote for the three dissenting justices, Roberts’ sweeping grant of immunity has 'no firm grounding in constitutional text, history, or precedent.' ” ----- "For what it’s worth, I think that Sotomayor is right and Roberts is wrong." ----"But for now, it is much more important to consider the objection raised by Justice Amy Coney Barrett to both Roberts’ constitutional glorification of the presidency and Sotomayor’s devastating critique of Roberts’ majority opinion." ---- "Barrett is right to ask why Roberts and Sotomayor did not join her in adopting the problem-solving approach that they have repeatedly endorsed in many other contexts." ---- "Roberts took the path that not only betrayed Founding principles, as Sotomayor argued, but also betrayed the very principles to which he has dedicated his entire career. "
Jul 1st 2024
EXTRACTS: "Netanyahu’s disdainful criticism of Biden. Netanyahu knows how indispensable the US is to Israel, as no country has provided Israel with more financial, military, and political support than the US. And no American president has ever been more supportive and committed to Israel's security than President Biden. But then, leave it to the most loathsome Netanyahu, who dares to criticize the president for suspending the shipment specifically of 2,000-pound bombs to continue with his devastating bombardment of Rafah that could indiscriminately kill thousands of innocent civilians." ---- "All Israelis who care about their country’s future must rise and demand the immediate resignation of this corrupt and brazen creature who inflicted untold damage on the only Jewish state, making it a pariah state."
Jun 12th 2024
EXTRACTS: "One of the more amusing exercises on the economic calendar is the International Monetary Fund’s annual review of the United States. Yet while everyone knows that the US government pays absolutely no heed to what the IMF has to say about its affairs, the Fund’s most recent Article IV review of the US economy is striking for one unexpected finding. Readers will be startled to learn that, in the IMF’s estimation, US government debt is on a sustainable path." ---- "What then could go wrong? Well, US institutions could turn out not to be so strong. Donald Trump has a personal history of defaulting on his debts. As William Silber has observed, Trump in a second presidential term could instruct his Treasury secretary to suspend payments on the debt, and neither Congress nor the courts might be willing to do anything about it. The gambit would be appealing to Trump insofar as a third of US government debt is held by foreigners. The damage to the dollar’s safe-asset status would be severe, even if Congress, the courts, or a subsequent president reversed Trump’s suspension of debt payments. Investors in US Treasuries would demand a hefty risk premium, potentially causing the government’s interest payments to explode."
Jun 9th 2024
EXTRACT: "An all-too-familiar specter is haunting Europe, one that reliably appears every five years. As citizens head to the polls to elect a new European Parliament, observers are once again asking whether far-right anti-European parties will gain ground and unite to destroy the European Union from within. To be sure, skeptics of this doomsday scenario have always argued that the far right will remain divided, because nationalist internationalism is a contradiction in terms. But it is more likely that specific policy disagreements – mainly over the Ukraine war – and drastically diverging political strategies will prevent Europe’s various far-right parties from forming a 'supergroup.' ”
Jun 9th 2024
EXTRACT: "While the dreadful legacy of his Conservative predecessors – the morally vacuous Johnson and the reckless Liz Truss – would make it extremely difficult for Sunak to offer a credible vision of a better future, many of his current problems are self-inflicted. For example, he supported Johnson’s bid for the Conservative leadership, a decision that reflects poorly on his judgment. Sunak has also been a Euroskeptic since he was a schoolboy and was an early supporter of Brexit."