Common Cents & Fossil Fuels on January 24, 2019

January 24, 2020, by John Norris

“One of the things that we have to realize is we cannot get off gas, we cannot get off oil, fossil fuels tomorrow – it’s going to take a few decades. maybe we can shorten it, but there’s going to have to be a transition time.”

Justin Trudeau

 

This week, Geneva-based World Economic Forum held its annual meeting in Davos, Switzerland. The official invite list included close to 3,000 of the world’s wealthiest, most powerful, and anointed, including an estimated 119 billionaires. The theme for this year was: “Stakeholders for a Cohesive and Sustainable World.” Individual meetings and presentations included: Greta Thunberg’s usual admonitions, a warning from Prince Charles over the ‘approaching catastrophe’ of climate change, an agreement to plant 100 trillion trees, a exhortation from Venezuela’s Juan Guaido to help him become President of Venezuela, tips on how to tax the digital economy, ideas on getting to 50-50 gender parity, updates on the Wuhan Coronavirus, a ‘conversation’ with will.i.am, and so-called ‘special addresses’ from the heads of Pakistan, Germany, the European Commission, and Spain.

It is all terribly important, or so one would think. Interesting? To be certain it is. Intellectually stimulating? I would imagine it is. Well-intentioned? I should say so. Idealistic? Without a doubt. Actually Impactful? I am not so sure. Try as I might and try as I may, I can’t remember a single time this annual meeting of the world’s elite changed my outlook on the economy, our asset allocation targets, or how we conduct business. Perhaps I should change the word we to I. Increasingly, it seems I am not alone.

For long years, the coverage and commentary on Davos was mostly flattering. This has changed over the last couple of years, as it seems, for all the money spent and attention given, this meeting doesn’t amount to as much as those in attendance would care or like to believe. After all, sophisticated conversations on a host of complicated matters don’t mean a whole lot to people who are struggling to provide, as my father was prone to say: “a roof over their heads, clothes on their backs, and food in their stomach.” Admittedly, meeting topics like climate change could very easily impact those things; however, when your time horizon and worldview is the next paycheck in, say, Tupelo, Mississippi, panel discussions on Europe’s ‘Green New Deal’ are irrelevant, to put it nicely.

Walter Russell Mead touched on this in an opinion piece in the Wall Street Journal on January 20, 2020. He wrote the following:

“There is something inescapably ridiculous about a gathering this self-important; certainly Marie Antoinette and her friends dressing up as shepherdesses to celebrate the simple life has nothing on the more than 100 billionaires descending, often by private jet, on an exclusive Swiss ski resort for four days of ostentatious hand-wringing about the problems of the poor and the dangers of climate change. This year an earnest young aide at registration told me that, to reduce the event’s carbon footprint, no paper maps of the town were being distributed; one could almost feel the waves of relief from the nearby Alpine glaciers at this sign of green progress.

For the Davoisie the rise of populism is a huge problem. A world increasingly separating into rival blocs as supply chains begin to decouple isn’t a hospitable environment for global governance, Third Way capitalist reform and their many other hopes and projects.

This is particularly true of the cause that dominates the agenda here: climate change. The conventional Davoisie wisdom says that climate change can be handled only by international agreements and global institutions like those envisioned in the Paris Agreement. The goal is to get the nations of the Earth to limit their use of fossil fuels and make the enormous changes required to reach “net zero” emissions in time to avoid the most devastating consequences. The solution requires a massive shift of power from national governments to global institutions.

As the millionaires, billionaires and Greta Thunberg assemble in Davos this week to debate the future of the world, they face a crisis of relevance. What if, with all of their competence, experience, cosmopolitan vision and, yes, goodwill, the Davoisie are merely passengers, comfortably ensconced in first-class seats, on a train whose route they do not know and cannot control?”

That is a great question, that last line. After all, how is an individual who can afford a Porsche Taycan, BMW i8 Roadster, Aston Martin Rapide E, or Tesla Model S and who can purchase things like ‘carbon offsets’ truly impacted if the world’s governments decided to: ‘limit their use of fossil fuels and make the enormous changes required to reach “net zero” emissions in time to avoid the most devastating consequences?’ Perhaps a bit on the margins, perhaps?

Now, what of everyone else? US Treasury Secretary touched on this with a little exchange he had with a reporter at the conference. According to cnn.com, this is how it went:

“Greta Thunberg has called for a public and private sector divestment from fossil fuel companies. Does that pose a threat to US economic growth?” a reporter asked Mnuchin.

“Is she the chief economist, or who is she? I’m confused,” the secretary replied. “It’s a joke. After she goes and studies economics in college she can come back and explain that to us.”

Not surprisingly, certain media outlets have heaped scorn on Mnuchin for daring to refute Thunberg, with some questioning his knowledge of economics…if not outright lambasting it. However, the Secretary has a point, and a quote from Hamlet comes to mind: “There are more things in heaven and earth, Horatio / Than are dreamt of in your philosophy.” You could call this a clever way of saying, at least in this instance, for every action there are numerous reactions.

While combating climate change is perhaps desirable and even admirable, the shape of the global environment in, say, 100 years is speculation. To be certain, experts can devise complicated models and concoct any number of scenarios, however, as with any prediction of the future, there is no certainty they will be accurate. However, we can measure and/or observe the economic impact on a region/population when the business, shall we say, dries up. It moves away. It vanishes. It is no more.

Consider the economic fortunes of places like Flint Michigan, Detroit, and Gary, Indiana. Heck, much of western Jefferson County in Alabama still haven’t recovered from the shock of US Steel shuttering most of its capacity there in the early 1980s. Then there is the pitiable situation in the Eastern Kentucky Coalfield and much of West Virginia. Places like McDowell County, WV, where the population has fallen from 98,887 in the 1950 Census to the 2018 estimate of 18,223. 35.4% of the people in that country live under the official poverty thresholds, and only 28.3% participate in the official labor force. It is surprising the poverty levels aren’t actually higher. The reason for this decay? The sharp decline in the coal industry…period. If you want to see what the government can or has or will do about it, take a spin through Welch one day.

To be sure, it is easy enough for folks to say “let them move to where the jobs are” or “we should create public/private partnerships to create thus & so.” Unfortunately, that time has come and gone for many of these areas, as those with get and go have mostly gotten up and left. Those that stay are the fistful of people who own whatever is left and those that don’t own a damn thing. There is almost nothing in between, and there are no equivalents in the 94111, 10577, and 94301 zip codes…let alone a posh resort like Davos, Switzerland.

In the Deep South, you don’t have to travel terribly far to find pockets of economic misery. You have seen the towns which withered away when the mill or gin shuts down. Those which couldn’t find a way to make it when the well-intentioned Interstate by-passed them by only 20 miles or so. The counties and communities which don’t have enough of a tax-base to pull themselves up by their proverbial ‘boot straps’ and don’t have enough people/voters for politicians to care. Those places where there isn’t enough wealth to attract a loan shark, let alone investors with capital.

Speaking of capital, what happens to the value of all those investments in fossil fuels? The loans banks have made? The commercial real estate these companies own? What happens when bank losses accelerate, causing liquidity and credit to dry up? What happens to those jobs in places like the Chevron oil refinery in Pascagoula? To the, literally, millions of people who are directly employed in the production, marketing, and distribution of fossil fuels in the US? The jobs which depend on those jobs? The communities and cities which depend on those jobs? The value of the real estate and collateral, and therefore the health of the local real estate market? The number of foreclosures and requisite write offs at banks? 2008 could look like a picnic, that is how much capital is tied up directly and indirectly in the energy sector.

So, you’re going to find replacement work for all of these people? Doing what and where and with whose money, because a lot of money just went poof and there is/will be a lot of stress on the financial system? Seriously. There is a lot more to divesting from fossil fuels than meets the eye. These are real people with real families and real finances. They aren’t just a statistic and they don’t exist in the ether

If we, as a society, decide, as the elite did in Davos, we should eliminate fossil fuel usage in the US in order to combat climate change, then so be it…maybe that will be a good thing. However, we need to be realistic about what that will mean for a huge swath of our economy and our population in the near and medium-terms, and I can’t stress the word realistic enough. There will be a LOT of economic dislocation and misfortune despite assurances to the contrary. If you don’t think so, I would invite you to visit places, again, like Welch, WV, Gary, IN, and Flint, MI.

That is what IT looks like when the business leaves town, it isn’t speculation…and it doesn’t matter what Prince Charles has to say about it.

 

Have a great weekend!

John Norris

All opinions expressed in this piece are mine and mine alone, and do not necessarily reflect the views of Oakworth Capital Bank