What is the value of an oil company?

The Neue Zuercher Zeitung (www.nzz.ch), a conservative and usually very business friendly Swiss newspaper, recently published an interesting article on the valuation of oil companies from an investor’s perspective. Currently, the value of an oil company is determined by the amount of reserves still left in the ground. It is also based on the assumption that the companies will be allowed to extract this oil and sell it. On the other hand, climate models tell us that this would lead to a complete disaster for the planet: the known reserves of oil, coal, and gas contain enough carbon to modify the climate into something hitherto unknown to mankind. Therefore, there is a significant risk (from the point of view of an investor), that governments will at some point pull the emergency brake, leading to a sharp drop in the value of oil companies.

Will humanity be prepared to commit suicide in order to save the value of oil companies? Unless you are perfectly convinced about this, you probably should not invest in companies dealing with fossil fuel.

This example illustrates that climate change has long ceased to be an issue only for environmentalists? The future of the fossil fuel industry is currently very uncertain. By continuing to invest in fossil fuel, we are essentially creating an investment bubble which will make the US subprime mortgage crisis in 2008 look trivial by comparison. More information on this topic is available from the Carbon Tracker Initiative.

There are good reasons for oil, coal, and gas companies to support the GISEco approach; a global and slowly increasing fee on CO2 would represent a soft landing and make it easier for them to plan the future. What is the point in looking of oil in the arctic, if you are not going to be able to sell the oil?

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