Beware, Investors, of a Climate Minsky Moment

Consumer behavior and technology shifts could also shape prospects for assets vulnerable to global warming.

Climate change could physically impair, destroy or render economically unviable trillions of dollars' worth of assets. The final report from the Task Force on Climate-Related Financial Disclosures can help us understand those risks -- and how to disclose them to investors. It’s a necessarily weighty report, and it invites investors to consider a very nonlinear outcome: what Bank of England Governor Mark Carney calls “a climate Minsky moment.”

This crisis, should it happen, would lead to indiscriminate pressure on climate-exposed asset classes and a potentially dramatic repricing of oil, gas and coal assets. Carney pointed to two drivers of this potential collapse in a Bloomberg Television interview: technology and more detailed disclosures of the risks that climate change poses to physical and financial assets.

Carney’s assessment is thoughtful and eloquent, if slightly scary. Considering the technology factor requires a bit of context: "Minsky moments" arise because “long stretches of prosperity sow the seeds of the next crisis,” so we should look first at where we are now. 

Let's look at fuel prices. We have no data about the future, and managers of trillions of dollars of assets are necessarily reliant on history to inform their view of the present. Here are rebased long-term price strips for internationally spot-priced oil, natural gas and coal over the past few decades:

A Tale of Three Fossil Fuels

Coal, oil and gas spot prices (rebased)

Source: Bloomberg

Note: Oil is Brent crude spot, rebased 1990=100; gas is Henry Hub spot, rebased 1990=100; coal is Newcastle spot, rebased 2009=100

There is some inflation at play here, of course, but one could easily say that, through 2008, prices fluctuated a lot but trended upward. After that, the upshot seems to be that the global financial crisis popped a huge bubble in oil and gas. A third takeaway is that oil and gas prices were down in more recent years, but growing populations are demanding more and more fuel as they develop. Finally, oil, gas and coal assets all produce for decades, so any events after the financial crisis are simply near-term noise, complicating the longer-term story of increasing consumption, with all fuel prices up in the past year.

Indexes of fossil fuels companies (not surprisingly) track closely to the prices of their products, but they also tell a slightly different story. The S&P Oil & Gas Exploration and Production Select Industry Index is spiky, but it has also been essentially flat for the past decade. Coal is below par.   

Up and Down (and Down and Down)

Coal and Oil & Gas equity indexes (start=1000)

Source: Bloomberg

Neither index suggests a major collapse exactly, and if anything they indicate plenty of short- and medium-term opportunities to invest in appreciating stocks. What they also might indicate, however, is the importance of future demand -- driven by technology and behavior, not just climate policy -- as the driver of any sort of crisis for resources companies.

Bloomberg New Energy Finance's latest 2040 outlook has already highlighted the structural decline in demand for coal. My BNEF colleagues recently published a related long-term outlook for electric vehicles, which are expected to comprise more than half of all new cars sold by 2040. At the same time, per capita vehicle miles traveled are falling, regardless of the vehicle's drivetrain. As a result of these two shifts, transportation fuels demand is expected to fall by 8 million barrels per day by 2040.

As Carney suggests, climate-related policy and regulation will be essential in shaping the prospects for fossil fuels. Technology- and behavior-driven change could be just as significant a driver of these climate-triggered Minsky moments, which do not require that demand for a fuel drops to zero. It only requires that demand be less than consensus expectation. As demand changes, it does affect supply: High-cost assets are either productive and in the money for a given amount of demand, or they aren’t. A linear change in demand has nonlinear impacts on assets, and with it, the potential for rapid repricing. 

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    Nathaniel Bullard at

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