This story originally appeared in Truthout on April 19, 2023. Copyright, Truthout.org. Reprinted with permission.
At a time when the world is close to irreversible climate breakdown, fossil fuel energy is growing, with oil being the biggest contributor to primary energy supply. Globally, approximately 33 percent of our energy comes from oil, followed by coal, gas and hydroelectric power. Indeed, oil companies are bringing in staggering profits, and oil production may even continue to increase through 2050. Why is it so hard to quit oil, and what would it take to defeat Big Oil? Progressive economist Gregor Semieniuk tackles exasperating questions like those in this exclusive interview for Truthout.
On March 29, Semieniuk testified before the U.S. Senate Committee on the Budget during a hearing on “The Cost of Oil Dependence in a Low-Carbon World.” In his testimony, he discussed his 2022 research that found that current oil and gas assets may be overvalued by more than $1 trillion, a figure that exceeds the subprime housing mispricing that triggered the 2007 financial crisis.
Semieniuk is assistant research professor at the Political Economy Research Institute (PERI) and the department of economics at the University of Massachusetts Amherst. His research focuses on the energy and resource requirements of global economic growth and on the political economy of rapid, policy-induced structural change that is required for the transition to a low-carbon economy. He has published on these topics and served as consultant for the United Nations Environmental Program, the European Commission and the U.K. government.
C.J. Polychroniou: Big Oil more than doubled its profits in 2022 and plans to stick to business-as-usual for decades to come. Why is it so hard to stop oil production?
Gregor Semieniuk: There are two aspects keeping up oil production. One is demand: As long as there is no ambitious turn away from fossil-fuel reliant transport, power, heat and industrial processes, it’s easy to blame oil producers. But in some way, they just supply a necessary input into the reproduction of society. In fact, at the moment, we’re seeing investments in supply not keeping up with demand.
The other aspect however is that — unsurprisingly — oil and gas companies are doing everything they can to maintain demand for their product. So, they aren’t just passive suppliers of what is exogenously determined by “markets” is the demand. There is now ample evidence of the substantial efforts by fossil fuel companies to defeat policy proposals and laws that would destroy demand for fossil fuels. Problematically, the high 2022 profits in the sector, which came partly about as a result of voluntarily not producing more and thereby driving up prices, enable the continued funding of precisely this kind of lobbying.
Individuals and financial institutions in rich countries like the U.S. will face huge financial losses if the value of fossil fuel assets experiences huge drops due to strong climate action, according to your own studies. Can you talk a bit about why this is a major issue and what the implications may be as demands for a shift away from fossil fuels to renewable and clean energy sources intensify? Indeed, who are really the owners of oil and gas companies in rich countries?
First, we should acknowledge that capitalist economies on the whole are pretty good at adapting to changing circumstances. So, just because an industry goes down — a so-called sunset industry — doesn’t mean there are big losses at the societal level. Of course, specific communities that are specialized in this industry are hard-hit, and a few companies and their owners lose out. But at the societal or aggregate level, the gains from “sunrise” industries, that replace the industries existing, typically more than cancel out much of the losses. Think of digital computers having swept aside human computers, the typewriter industry, etc.
The worry with fossil fuels is that there is no far superior industry coming to sweep it aside and deliver vastly higher productivity. Instead, it’s deliberate policy trying to mitigate climate change with substitutes, notably renewable energy, that have some advantages (e.g., better energy conversion efficiencies) and some disadvantages (e.g., intermittency). If that’s coupled with surprising technological improvements — e.g., the dramatic fall in the cost of solar photovoltaics — this creates a lot of uncertainty about future demand.
Since the United States is now the biggest oil and gas producer in the world, this uncertainty about the future market matters. If U.S. producers bet on having a strong export market even as the Inflation Reduction Act and the recent EPA guidance diminish domestic gasoline consumption, then they could be disappointed if other countries move away quickly from fossil fuels. In our research we show that, indeed, big importers in Europe, Asia, and the rest of the world have every incentive to quickly jettison fossil fuels. As my co-authors and I calculate in our research, producing energy from domestic renewable sources not only creates energy security, but today and in the future, often a cost advantage. That’s so because the money paid for imported fossil fuels goes abroad and depletes foreign currency reserves.
As you say, behind these fossil fuel producers are their financial owners. That is, shareholders who have a claim to the profits the companies make but are also financially hurt if they invest in what turn out to be stranded assets. We calculate that some $400 billion in potentially stranded assets could be sitting on U.S. financial business balance sheets. That’s 30 percent of the global total, and $100 billion more than the stranded assets at production sites in the U.S., because both U.S. oil companies and their financial investors invest in oil and gas production and oil and gas companies abroad. And they invest on behalf of ultimate owners: holders of retirement plans, often invested via pension funds, and the affluent at the top of the distribution, that have a lot of financial wealth to invest. We don’t know exactly what the consequences of asset stranding could be beyond wealth loss, but as the recent troubles in the banking system show, having this potential loss sit in the investment fund industry is not something one should simply dismiss. That’s why financial regulators are engaging with so-called transition risks: that is, financial risks that could arise from the transition away from fossil fuels.
Divestment has been somewhat successful in reducing new capital flows into the oil and gas sector, but research shows that it doesn’t achieve the goal of decarbonization. Are there other ways to defeat Big Oil?
Big enough of a divestment would destabilize the sector, but it does not seem to happen, certainly not since oil and gas companies made the astonishing profits of 2022. Too many investors are dependent on these shareholder distributions to simply walk away. Of course, that also highlights the risk of stranded assets down the road.
But we must also ask whether massive divestment now would really be what’s needed for decarbonization. Clearly, as mentioned earlier, oil and gas are still needed today, and so are the producers who deliver it. What might be effective is first a very ambitious and enduring government decarbonization policy aimed at reducing demand for fossil fuels with all the positive spillovers it has for business investments and scale economies and learning by doing (in fact, the Inflation Reduction Act is a step in that direction). Second, this could be complemented with financial investors actually pressuring oil and gas companies to lay out proper decarbonization plans. That means not so much divesting as using the shareholding to affect change. There are some activist investors that have installed more transition-oriented directors on major company boards or forced these companies to produce more ambitious decarbonization roadmaps. If such initiatives garner enough support from the big asset managers, pension funds etc., to pass, this could add to the drive away from oil and gas on the supply side.
Climate change seems to be reinforcing inequalities. How does it do that, and shouldn’t this be an extra incentive for policymakers to push harder on policies that reduce reliance on fossil fuels and lead to a green transition?
There are good reasons to believe that climate change increases existing inequalities. Here it is useful to distinguish between inter-country inequality and interpersonal and group inequalities, whether within a country or globally. Just like in the current COVID-19 crisis, rich countries can mount more sophisticated responses, and rich or otherwise privileged people everywhere can protect themselves better and face lower rates of mortality than their poorer counterparts, so climate change tends to hit people already in lower-income countries and on the lower rungs of the wealth and privilege distribution harder. For instance, as mentioned in my previous answer, U.S. responses to flooding are likely to rely much more on protection, while in Bangladesh, more people could lose their livelihoods and be left with no choice but to retreat. And richer people can pay higher prices for food and other amenities or invest in adaptive measures (like insulation and air conditioning), while poorer people may not be able to do so.
Interestingly, climate change mitigation is also sometimes criticized for exacerbating inequality. Between countries, the worry is that if developing countries curtail their expansion of fossil fuel-powered electricity in order to install (more costly or less effective) renewables supply instead, that harms their economic growth and hampers the important task of improving the material conditions of the vast majority of the global population living in these countries. Encouragingly, renewable power from new power plants, like wind farms, is now increasingly cheaper than continuing to operate existing coal power plants so that trade-off looks less painful by the day.
Of course, these renewables have to be integrated into an electricity grid, and appropriate and affordable end-use devices, like electric cars, also have to be available, but overall, the falling costs make this a more and more feasible proposition.
Between people, the biggest worry is that policies penalizing emission-intensive activities disproportionately hurt the poor. The “yellow vest” movement in France is pointed to as an example that interpersonal inequality even in rich countries would be exacerbated and made unbearable by carbon taxes. For instance, if you can’t afford to rent in a city and you move to the lower-rent countryside, you are more reliant on a greenhouse gas emitting car, and so would be harder hit by a tax. That was the case in France for many people. However, it is entirely feasible to design policies that make them less unequal or even progressive. For instance, if affordable electric transport was provided alongside taxes that increase fossil fuel prices, then it would be easier to switch by swapping your old car for a new electric one at a subsidized price + availability of charging infrastructure. And my colleague Jim Boyce has shown that when combined with progressive (i.e., income inequality-reducing) rebates financed by at least part of the money accruing to the government, carbon taxes or auctioned-off emissions permits can contribute to progressive redistribution. Key is that richer people will pay much more for consuming carbon in absolute terms, which is money that can be redistributed, it just amounts to a lower share of their income. Examples, such as the carbon tax in British Columbia, show that it can be done, and that people come to accept the carbon tax.
Overall, it seems to me that it’s much more straightforward to deal with inequality resulting from climate change mitigation, than with inequality that results from climate change itself.
I want to point out one more, perhaps less obvious dimension of inequality between countries. Someone needs to produce all of these new technologies, and there is good evidence that the green technology leaders are concentrated in high-income countries and — increasingly — in China. The economic development discourse emphasizes the need for industrial upgrading and acquiring capabilities. So far, the low-carbon transition does not look to be a leveler of the inequalities, but rather to reinforce them. For instance, among the top wind and solar panel manufacturers, only a few countries are represented. And more advanced technologies such as low-carbon steel making tend to be developed in rich countries. Unless a green transition can be shown to offer good economic opportunities for all world regions, coherent, effective climate change mitigation policy could be complicated also by inequality in this dimension, and risk increasing exposure of people to climate change in the unequal ways discussed above.