Coronavirus Stimulus Money Will Be Wasted on Fossil Fuels

April 21, 2020

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by David Roberts (Vox) Oil and gas companies were already facing structural problems before Covid-19 and are in long-term decline. -- ... I wrote about how shortsighted it is for Republicans (enabled by learned Democratic passivity) to reject aid for the struggling clean energy industry.

In this post, I want to take a look at why it is equally shortsighted for President Trump and congressional Republicans to remain so devoted to the fossil fuel industry.

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Even among those eager to address climate change by moving past fossil fuels to clean energy — a class that includes a majority of Americans — there is a lingering mythology that US fossil fuels are, to use the familiar phrase, too big to fail.

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But the position of fossil fuels in the US economy is less secure than it might appear. In fact, the fossil fuel industry is facing substantial structural challenges that will be exacerbated by, but will not end with, the Covid-19 crisis. For years, the industry has been shedding value, taking on debt, losing favor among financial institutions and investors, and turning more and more to lobbying governments to survive.

It is, in short, a turkey. CNBC financial analyst Jim Cramer put it best, back in late January, before Covid-19 had even become a crisis in the US: “I’m done with fossil fuels. They’re done. They’re just done.”

“We’re in the death knell phase,” he said “The world has turned on [fossil fuels].”

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Fossil fuels are furiously lobbying for, and receiving, largesse from the US government

The UK-based think tank InfluenceMap recently did an analysis that tracks corporate lobbying in the face of the Covid-19 crisis. It found that, across the globe, the oil and gas sector has been the most active in lobbying for interventions, seeking, as CIEL summarizes, “direct and indirect support, including bailouts, buyouts, regulatory rollbacks, exemption from measures designed to protect the health of workers and the public, non-enforcement of environmental laws, and criminalization of protest, among others.” In Canada, Australia, and the UK, the industry is arguing that it must be subsidized and deregulated in order to survive.

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The virus has not slowed down the Trump administration’s attempts to assist the industry. It is gutting fuel economy standards, which, by its own estimation, will increase pollution and eliminate 13,500 jobs a year. The EPA has dramatically eased the enforcement of pollution regulations and moved forward with its “secret science” rule, which will make it more difficult to understand and address the health impacts of air pollution — and more difficult to study the coronavirus.

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The administration seems determined to bail out struggling shale gas companies, despite that overleveraged, debt-ridden sector being long overdue for a shakeout.

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A group of GOP senators is lobbying for fossil fuel companies, including coal companies, to be eligible for the small-business recovery fund.

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First, fracking was a financial wreck long before Covid-19 hit. US fracking operations have been losing money for a decade, to the tune of around $280 billion. Overproduction has produced a supply glut, low prices, and an accumulating surplus in storage.

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Even as its prospects grow dimmer, the enormous debt the industry has taken on over the years is coming back to bite it. Some $40 billion will come due this year alone, and around $200 billion in the next four years. In the hours after this article was first published on April 20, oil futures for May fell to negative prices. Mind-boggling.

Second, both oil and gas prices were persistently low leading into 2019. Due to oversupply and mild winters in the US and Europe, there is a glut of both natural gas and oil, such that the entire world’s spare oil storage is in danger of being filled. Many big oil deals in “frontier countries” with as-yet-unexploited reserves, like Guyana, Argentina, and Mozambique, are falling through as low prices drag on.

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Fourth, oil and gas majors are revealing their own weakness by writing down assets — effectively conceding that certain reserves cannot be profitably exploited. In 2019, Chevron wrote down $11 billion worth; Spanish oil company Repsol recently wrote down $5 billion worth. Exxon Mobil, after adding Canadian tar sands assets to its books in 2017, reversed course and wrote down 3.2 billion barrels last year.

Fifth, financial institutions — “institutional and retail investors, banks, insurers, and credit rating agencies” — are catching wind of fossil fuels’ weakness and beginning to back away. Many, like Wells Fargo, BlackRock, the European Investment Bank, and the World Bank Group, are restricting investments in carbon-intensive projects. As of March 2020, asset investors worth $12 trillion had declared that they would divest from fossil fuels.

As financial institutions divest, the ones still invested in carbon-intensive projects face increasing vulnerability to lawsuits charging them with ignoring material risks. “As the risks of investing in the oil and gas sector become ever more apparent,” CIEL writes, “more and more investors subject to fiduciary duties will likely choose to steer clear of these companies.”

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All these doubts are converging as Moody’s recently revised the company’s outlook to negative. It fell out of the S&P’s top 10 for the first time, its stock hit its lowest price in a decade, the rapid rise of renewables and electric vehicles rendered billions (and perhaps soon trillions) of dollars of its assets worthless, and it is keeping shareholders happy with debt-financed dividends.

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It’s entirely possible that auto and air travel won’t reach their pre-virus levels in the US for years, if ever.

Travel by ship is also taking a hit. Cruise ships, beset by a series of viral horror stories, have suspended operations and many analysts doubt they will ever fully recover.

Meanwhile, oversupply, exacerbated by the drop in demand, is taxing the nation’s storage capacity — the International Energy Agency says global capacity is about 85 percent full.

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Fossil fuels and petrochemicals could struggle for years. And even if they eventually manage to achieve something like their pre-virus trajectory, that trajectory was sloping downward.

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Wasting stimulus money on fossil fuels makes no sense, so Trump will probably do it

Slowly but surely, the world is beginning to take global warming seriously, shifting attention and investment to materials and sources of energy that do not produce greenhouse gas emissions. As more and more jurisdictions, institutions, and investors turn away from fossil fuels, explicitly citing climate change, those left holding carbon-intensive assets will become targets of increasingly intense legal and civic activism holding them responsible for the damages.

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If Democrats do not muster the courage to stop them — and it does not seem they will — the GOP is likely to continue showering the fossil fuel industry with favors while dismissing aid to the clean energy industry as frivolous.

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Adding stimulus money to fossil fuels’ already subsidy-rich diet will allow a little more pollution and a little more damage to public health for a little longer, but it’s only a delay. Meanwhile, other countries will be establishing a commanding position in some of the biggest growth industries of the 21st century.

It would be a shame to emerge from this crisis still clinging to the past rather than facing, and preparing for, the future. READ MORE

Oil Plunges Below Zero for First Time in Unprecedented Wipeout (Bloomberg)

Excerpt from Bloomberg: There are signs of weakness everywhere. Even before Monday’s plunge, buyers in Texas were offering as little as $2 a barrel last week for some oil streams. In Asia, bankers are increasingly reluctant to give commodity traders the credit to survive as lenders grow ever more fearful about the risk of a catastrophic default.

In New York, West Texas Intermediate for May delivery dropped as low as negative $40.32 a barrel. It’s far below the lowest level previous seen in continuation monthly data charts since 1946, just after World War II, according to data from the Federal Reserve Bank of St. Louis. Brent declined 8.9% to $25.57 a barrel.

Crude stockpiles at Cushing -- America’s key storage hub and delivery point of the West Texas Intermediate contract -- have jumped 48% to almost 55 million barrels since the end of February. The hub had working storage capacity of 76 million as of Sept. 30, according to the Energy Information Administration.

Fund Inflow

Despite the weakness in headline prices, retail investors are continuing to plow money back into oil futures. The U.S. Oil Fund ETF saw a record $552 million come in on Friday, taking total inflows last week to $1.6 billion.

The price collapse is reverberating across the oil industry. Crude explorers shut down 13% of the American drilling fleet last week. While production cuts in the country are gaining pace, it isn’t happening quickly enough to avoid storage filling to maximum levels, said Paul Horsnell, head of commodities at Standard Chartered.

”The background psychology right now is just massively bearish,” Michael Lynch, president of Strategic Energy & Economic Research Inc said in a phone interview. “People are concerned that we are going to see so much build up of inventory that it’s going to be very difficult to fix in the near term and there is going to be a lot distressed cargoes on the market. People are trying to get rid of the oil and there are no buyers.” READ MORE