Regardless of how much time Exxon wants to spend weighing the risks of climate change, its investors are now demanding it. In what promises to be a landmark disclosure, Exxon, the world’s largest publicly traded oil company, has agreed to provide the market with an assessment of how changing legislation around carbon emissions will affect the value of its oil and gas reserves. Taking a cue from the industry leader, other producers, such as oil sands players Suncor and Canadian Natural Resources, are expected to follow suit.

Exxon, of course, is no stranger to carbon emissions. It’s been a world leader in that area since its inception as Rockefeller’s Standard Oil. Indeed, since the Industrial Revolution a remarkably short list of only 90 companies accounts for two-thirds of all human-made carbon dioxide emissions. Among this exclusive group of top tier carbon-spewers, Exxon (in all its corporate guises) ranks an impressive second among publicly traded ones, accounting for 3 percent of overall emissions. First place is held by another member of the Seven Sisters, Chevron. When the world’s governments finally get serious about putting a price on carbon, it’s safe to say that these carbon-emitting giants, and their shareholders, will feel the squeeze most of all.

Investors won’t have to wait for Exxon’s disclosure to get a sense of how emissions constraints will affect the valuation of the company’s oil and gas reserves. The International Agency in its 2012 World Energy Outlook outlined the magnitude of the shifts in fuel usage that will be needed to hold the level of atmospheric carbon to 450 parts per million. That’s the threshold that scientists warn we must not cross if we’re to hold the increase in average global temperatures to no more than 2 degrees Celsius. If the planet gets hotter than that, they say, we can all brace ourselves for all manner of climate-inspired nastiness.

By 2035, the IEA estimates that world coal consumption needs to fall by 30 percent from current levels, while global oil usage will have to drop by 12 percent. If those projections are even remotely accurate, what do you think that will do to coal and oil prices?

Here’s a hint. During the last recession, world oil demand fell by 3.4 million barrels a day between the first quarter of 2008 and the second quarter of 2009. During that time period, crude prices retreated from nearly $150 a barrel to, briefly, below $40. The plunge was short-lived and certainly there were other recessionary factors at play, but the precipitous drop is still instructive.

The IEA’s projected decline, which would unfold over the next two decades, would involve a drop in global oil demand more than three times as large as the one seen during the Great Recession. It may take longer to get to, but if world oil demand is going to fall by more than 10 percent then oil prices are certain to head lower as well.

Are we going back to a world of $40 oil? If so, it won’t be because oil has suddenly become cheap and plentiful. On the contrary, oil will never have been scarcer. At that price, the vast majority of the world’s oil supply, from the Canadian oil sands to the shale oil of the Bakkens, will no longer be economically viable to produce. The only places that will be pumping barrels at those prices will be low cost producers in the Middle East.

Falling prices for fossil fuels are a death sentence for oil, coal, and natural gas producers. When prices go up it opens the door to new sources of supply that were previously too expensive to extract (Alberta’s oil sands are a case in point). Falling prices, in contrast, cause supply to be shut in and turn what were once considered proven reserves into stranded assets that remain in the ground.

A world in which carbon emissions are constrained because of climate change legislation is a world of much lower prices for coal and oil. Falling prices will also bury the Exxon’s of the world. Much of the value of any oil company is based on the proven reserves it holds in the ground. When prices go lower those assets will become stranded — which is exactly what will happen to shareholders as well.

  • Doug

    Eventually the world will need to cooperate to reduce greenhouse gas emissions, but it doesn’t look like that’s going to happen any time soon. It seems a lot of people just don’t get it, and still don’t believe in human made climate change or see it as any cause for concern so don’t be in a panic to sell your fossil fuel energy stocks yet. As for consequences of climate change, what consequences? Isn’t continuing to burn more fossil fuels to keep the world economy growing far more important?

  • Rick

    Jeff, I don’t quite understand the perspective in labelling Exxon et al “Among this exclusive group of top tier carbon-spewers”, when in fact it is each one of us who is the “top spewer”. When was it that Exxon forced you and I to buy a second car? To take a job in a distant city or town? To buy a bigger house on a larger lot in the suburbs? To heat our homes with natural gas? To drive about town in the fulfilment of your everyday tasks? To drive our kids to the school on the other side of town because it’s a “better school”? To consume fruit, vegetables, and all manner of other foods grown and/or processed in some far-off (often southern) location? To take our child to play a soccer game in the neighbouring city for the sake of competition? To drive to Whistler to ski because it’s a grand mountain experience? To drive into the city to see a professional sporting event? To go on a summer driving vacation to appreciate the beauty of our province or to fly south for a much needed winter sun vacation. I am soooo tired of the finger pointing at the “evil” petro companies as if we were somehow coerced to consume their product.