Yes Jeremy!

Leggett goes all renewables on us again.

The oil giants are recarbonising, wilfully choosing to forget both global warming imperatives and the need for renewables in national security terms. Shell pulled out of the biggest offshore UK windfarm yesterday and BP is losing interest in solar and investing in the tar sands – having once refused to do so on ethical grounds because of the greenhouse gas emitted in processing.

Excellent, they\’re concentrating on what they do best. What Leggettt misunderstands is that an oil company is just that, an oil company. That\’s what all their expertise is, that\’s their comparative advantage. There\’s absolutely no reason to think that skill at drilling in the deep waters off Angola is transferable to building windmills upon Lewis.

Just because they both involve "energy" doesn\’t make them the same thing at all. We wouldn\’t, for example, be terribly thrilled by the announcement that BP was going to start building nuclear plants now, would we?

Others think differently. In New York, members of the Rockefeller clan – descendants of Exxon\’s founder – called yesterday for radical reform of the company because they can no longer stomach its irresponsible attitude towards the climate. They want a board that will invest in renewables.

No, that\’s not the right response either. If you don\’tl ike the oil bit, sell the shares and use the money to invest in renewables. That\’s what stock markets exist to let you do: decide how you would like to allocate your capital amongst the available alternatives.

Meanwhile, North Sea oil and gas are depleting rapidly. BP and Shell know there are no more rich oilfields to be discovered there. They are being forced to invest much further afield in the search for the huge fields they so badly need.

Excellent, they are deploying their capital where they can add the most value to it, as they see it.

There\’s one thing he doesn\’t mention but which is also very important. So, imagine that Peak Oil is right.  Or, if you like, that renewables will overtake oil in the coming decades. Does this mean that Shell and BP should go for renewables in order to maintain the existence of the company? No, it doesn\’t, not at all. And it\’s that stock market thing again.

Individual investors shouldn\’t care about the long term existence of a companny: for they can shift out of it and into another one if that\’s what takes their fancy. Say oil does become a declining sector: fine, run the oil companies without reinvesting the profits in them. Pay out those declining profits as dividends and as the last oil wells stop pumping, scrap the steel and close the company, handing back the last few pennies to shareholders. Over the years that flow of theprofits will have been received by shareholders and they will do as they wish the cash, consume or invest it as they wish.

There is no reason why we should hope for or insist upon the continued existence of any one company: that buggy whip manufacturers did not become auto makers doesn\’t matter: that those who had invested in buggy whip manufacturers were able to take their money out of the declining industry and into the growing one did. The very fact that we have stock markets which allow us to do such things means that we don\’t have to insist that a company has an unlimited time horizon. If oil stops being a business worth investing in then there\’s no reason why we should insist that Shell or BP continue to exist, in or out of the oil business.

And this does now link back to what Leggett is saying about Shell and that wind farm. Shell ain\’t investing in it: so what? Who cares? We want experts in wind farms to be investing in wind farms, not experts in oil.

4 thoughts on “Yes Jeremy!”

  1. Maybe, in his heart of hearts, Jeremy suspects that wind farms are as much as a boondogle as do most realistic people. Hence, who better to take an investment fall than those dastardly oil co’s & their evil, evil shareholders?

  2. “We wouldn’t, for example, be terribly thrilled by the announcement that BP was going to start building nuclear plants now, would we?” Not when Shell’s adventure in nuclear ended in tears all those years ago.

  3. Drax is a good example of what you describe. They run one very big coal-fired power station and any profits are returned to investors. They have no interest in diversifying or buying more power stations, so the company is gradually shrinking, throwing off money to the share-holders as it does so.

  4. So Much For Subtlety

    Just in passing, Kerr McGee, an oil and gas company, did move into nuclear power. And brought us a lovely Meryl Streep film “Silkwood” based on the life of one of their Union Reps Karen Silkwood. The mental outlook of an oil field (“if it doesn’t work, hit it with a hammer” for instance) does not translate well to nuclear power. Apparently an employee gave her son a plutonium pellet to take to show and tell.

    Company Executives often forgot that the company does not exist for them, but for the poor long suffering shareholders. I admire any company that is willing to specialise themselves out of business. Go on Exxon et al. However if I have one small gripe, it is that Renewables are bound to come from the existing energy sector – it is the oil companies that have the skills, the knowledge, the contacts and so on that any new renewable company will need. At least they know what an energy market looks like and who to ring if they want to be part of it. The least painful route to renewables would be for oil companies to diversify but if they choose otherwise that is fine with me.

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