That's nice.

College Students Can't Defeat Big Oil

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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The idea of divestment from fossil fuels is gaining traction on U.S. college campuses. Last year, student activists famously disrupted a Swarthmore College open meeting where the issue was being discussed, which I filed away under "people with too much time on their hands and an insufficient grounding in enlightenment values." But according to the Wall Street Journal, the movement is having some effect: Several major endowments, including Stanford's, have divested from fossil fuels.

I find this sort of riveting. I think the odds of this movement having any impact at all on the consumption of fossil fuels are statistically indistinguishable from zero. So why are endowments giving in, and thereby sacrificing potential returns? Why, for that matter, has this so fixated the students?

In case any student activists are reading this, let me explain. University endowments may seem very large in comparison with your living expenses or income. But in comparison with the overall supply of financial assets in the U.S. economy, the roughly $400 billion they have to invest is not enough to move markets by any substantial amount, especially not in the stock of a massive, widely traded company such as a big oil corporation. For purposes of comparison, the total outstanding value of the stock of U.S. companies was $18 trillion in 2012 and has increased substantially since then. And, of course, many fossil-fuel companies are foreign-owned. And many others are large, state-owned firms that don't really care what the student body of Swarthmore thinks.

Forcing endowments to divest from fossil-fuel investments may possibly be enough to cost those endowments some significant money, but it is not going to be enough to cause much consternation at the headquarters of Big Oil or Big Natural Gas or Big Coal.

The hope seems to be that such gestures will lead to a broad trend. The divestment movement also seems to be targeting big pension funds such as California's. That might move the stock price more than getting Harvard to go Fossil-Free. But big public pension funds tend to have major underfunding problems, which is going to make it a hard sell to get them to voluntarily lower their potential returns, even in a liberal bastion such as California. Private pension funds have similar issues with underfunding, plus they often belong to unions that expect to benefit from activities such as pipeline construction.

And even if such a campaign did manage to knock back a stock price, what do the activists think will happen next? They'll spend more money on public relations, perhaps. But here's what's not going to happen: The president of Peabody Energy Corp., the world's largest private-sector coal company, is not going to have a conversation where someone notes that its stock price has dropped a couple of bucks and suggests that the company therefore give up this whole coal mining thing and start making wind turbines instead. Peabody is good at mining coal; it has a lot of human and financial capital invested in doing so; and if it tried to abandon all that and turn itself into a green-energy company, its remaining shareholders would kick management out.

Nor can you even hope to choke off the supply of capital for opening new drilling and mining projects. Item No. 1: Money invested in stocks (where most of the divestment action will take place) doesn't go to the company, which long since received whatever cash they sought from selling shares. Item No. 2: Fossil-fuel companies have alternative sources of capital, such as banks, corporate bonds and their own retained earnings. Try seeing if you can get a Citigroup Inc. shareholder meeting to sit still for the sort of antics that went down at Swarthmore.

This reveals one problem with the divestment campaign: What they're doing works best at a very small institution with a lot of money and such a deep emotional attachment to left-wing activism that it will tolerate this sort of disruptive behavior. The only place that really describes is a U.S. college. If you're trying to spark some sort of wider revolution, what happened at Swarthmore is absolutely counterproductive. Very few adults outside of academia look at that video and think, "Those are passionate people who are clearly fighting or an important cause"; they think, "Those are affluent teenagers having a temper tantrum." And don't try to argue with me about whether this is, in fact, true; the point is that this is the impression it leaves. It may work on a liberal-arts faculty, but as far as activism goes, that's not really playing against the varsity. If you want to have an impact in the wider world, you need to convince people with at best a passing interest in, or tolerance for, the passionate opinions of college students.

Which brings me to my second, and more important, point. Anti-fossil-fuel activists face not just a PR problem, but also a fundamental economic problem: Money, like oil, is fungible. A dollar invested in Chevron from a big hedge fund does it exactly as much good as a dollar invested from the Swarthmore endowments.

Fungible goods make terrible targets for boycotts, because all that happens is some minor swapping of who gets exactly what. Since the items are, for all intents and purposes, exactly identical, your target doesn't much care. That's why the Arab oil embargo failed in the 1970s; maybe Israel didn't get barrels of oil from Saudi Arabia, but it still got oil, and whoever used to buy that oil took the Saudi stuff instead. Net effect: zero. Which is the same effect that divestment activists could expect to have even if they succeed beyond their wildest dreams.

As long as people are willing to pay a high price for fossil fuels, other people will be willing to invest money in that business. Why aren't activists agitating more strongly on the demand side: for their universities to forbid work travel by car or airplane, require that students certify (with receipts) that they have arrived at school by train, lower the thermostat in the winter by 10 degrees in all university buildings, cancel study-abroad programs unless the students agree to travel by boat, shut down the electricity-sucking usage of computers, the Internet and stereo equipment, demolish the campus parking lots, and institute clotheslines in place of dryers?

For all I know, they are advocating for these things, though I'd be surprised to find them staging protests for many of the items on that list. And to be fair to the activists, it wouldn't do that much good, because these things would still be a drop in the bucket of global demand, and besides, a lot of the fossil fuels they saved would simply be shipped to China and burned there.

But however little they'd accomplish by targeting university demand or radical government action, it's more than they'll accomplish with this quixotic campaign. Why on earth have they settled on the one thing that is certifiably, definitely not going to work?

  1. The supply restrictions had a lot of effect on the price. But those effects were worldwide, not targeted at the objects of their ire.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Megan McArdle at mmcardle3@bloomberg.net

To contact the editor on this story:
James Gibney at jgibney5@bloomberg.net