First of all, note that this is the entire global resource of fossil fuels, and not the much smaller subset classified as reserves. The difference is that resource covers all the fossil fuels that are known to exist, and reserves are the fraction that can be technically and economically produced.  

The graphic shows that according to computer models, the average global temperature could increase by nearly 19°C if all of the fossil fuel resource was burned and converted into carbon dioxide. But the graphic also shows that about 80 percent of that potential warming is because of the world’s coal resource. Burning the entire resource of conventional and unconventional oil would only contribute about 5 percent of the potential warming, while just the oil sands reserve for instance would only contribute 0.2 percent of the potential warming.  

A common response to this line of reasoning is that every little bit counts. This is true, technically, but not even the staunchest opponents of fossil fuels apply it literally. Every single person that pushed for this resolution uses fossil fuels. How can they justify it? They justify by reasoning that their small contribution isn’t significant, and they push for larger changes. In other words, “every little bit” is relative to the benefit individuals derive from what they are using. Yes, my little bit counts, but give up my car and never fly? For most people this is going to be giving up too much for an impact that would be too small to measure.  

And as my friend Geoffrey Styles points out in his take on the issue, ExxonMobil does model “its projects and acquisitions at proxy costs of up to $80/ton of CO2, compared to current levels of $8-10/ton in the EU’s Emission Trading System.” And even though they believe governments are unlikely to adopt such high carbon prices, even 10 times the current value of carbon dioxide emissions in the EU is unlikely to strand Exxon’s petroleum assets because there just isn’t a good substitute.

Conclusions

In my view, the relative benefit of future oil consumption is far greater than the relative benefit of future coal consumption. Why? Because oil has fewer potential substitutes. There are many different ways of producing electricity at a price that is competitive with coal, but with lower emission of carbon dioxide. In a low carbon emission scenario, it makes far more sense to go after coal than it does oil. Coal is a much larger relative contributor, and there are potential replacements.

Thus, I think ExxonMobil is perfectly justified in saying that it’s looked at the risks, and doesn’t believe any of its reserves are likely to be stranded. There are no alternatives capable of supplanting oil as the main global transportation fuel in the foreseeable future. There will continue to be contributions from biofuels, and electric transportation will continue to make inroads, but crude will continue to do the heavy lifting.

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

Portfolio Update

No Rush to Add to Gastar    

Gastar Exploration (NYSE: GST) seemed like a great idea after a monthlong sell-off in early December. Four months later the Aggressive Portfolio pick is up 16 percent, fair compensation for volatility befitting a speculative, small-cap explorer.

The most recent uplift was stimulated by an analyst meeting last week highlighting the value of the Marcellus acreage responsible for most of the current cash flow, while sticking with plans to shift the focus of Gastar’s aggressive capital spending plan to the oil-rich Hunton limestone play in Oklahoma.

Drilling results in the Hunton have been promising but spotty; Gastar’s upside remains high should further development bear out management’s early optimism. The acreage there is also prospective for other hydrocarbon-bearing geologic plays, just as the company’s fruitful Marcellus patch also overlaps some of the most promising potential in the Utica shale.

Three brokerages have raised their price targets on Gastar to $8 or more in the last week. But this is still a company that will rely on new debt to finance roughly half of this year’s capital spending.

Insist on a decent discount from current levels before adding to your stake. We’re lowering our buy below maximum on GST to $5.25 in an acknowledgement of the big risks the company still faces.      

— Igor Greenwald