Barry Norris, manager of the VT Argonaut Absolute Return fund, says not only is there a strong moral case for investing in fossil fuels but that they will also be the “trade of the decade”.
With the West heading into a period of economic stagflation, unstable power grids and deindustrialisation, Norris said this has resulted in interest rate rises, structural inflation and negative real returns on asset classes apart from commodities.
Norris argued that institutional investors – like governments – have not thought through what he calls the negative and social consequences of the rush to decarbonise and that the bull market for renewable energy is “dead”.
“The West thought it could move energy and commodity supply off balance sheet, focusing instead exclusively on technological innovation which, like most bull markets, culminated in a speculative bubble, with fund managers handing out capital like lollipops at a school fete to anyone with wacky ideas for flying taxis, solar powered tanks, or carbon free hot dogs,” he said.
He added that by “jumping abroad the ESG gravy train”, institutional investors have instructed the management of major oil companies not to invest for future production.
“Capital expenditure amongst the 12 non-OPEC+ major oil companies have fallen from $330bn in 2013 to just $140bn today,” he said. “Unsurprisingly the amount of new oil and gas discovered has also plummeted from 30m/barrels of oil/day equivalent in 2012 to just 5m in 2021, with a record low reserve replacement ratio of new volumes found to current production forecast of just 12%.”
Even if the West continues its rush to zero-carbon, Norris said that demand for oil and gas in the rest of the world will still grow whilst supply plummets.
“Given that renewable energy can never replace the reliability or unsubsidised cost of fossil fuels in a free market, the result can only be a new bull market in the cost of energy,” he argued.
Morality
With families in the UK being hit by rising electricity and gas bills, in addition to rising mortgage costs owing to interest rate rises, Norris said there is also a strong moral case for investing in fossil fuels.
“Climate change activists claiming to be ‘saving future generations’ from ‘climate change apocalypse’ often seem to have profoundly anti-human, Malthusian agendas that negatively impact the world’s poorest,” he said.
“Even the bosses of major oil companies have been so cowed by the climate change apocalypticism that – like pre-Thatcherite post-war politicians in the UK – they meekly accept managed decline.”
Countering Norris’ argument, Nigel Green, chief executive of deVere Group, warned that not only will addiction to fossil fuels drive the world’s “mutually assured destruction,” it could also hit investor’s investment portfolios.
“It’s critical that countries around the world continue to work on their reduction of emissions in order that we have any chance of meeting the target of a 45% cut in global emissions by 2030,” said Green.
“Hitting the brakes on decarbonisation is not only a serious issue for our planet, but it could also hit investors’ portfolios if they move away from sustainable investments,” he added.
‘Legitimate portfolio diversification tool’
Green noted that impactful investments have been making up an increasingly large proportion of portfolios in recent years, going from ‘nice to have’ to a “legitimate portfolio diversification tool that delivers profits with purpose”.
“This trend should not change in the wake of the current geopolitical issues,” he said. “We are in extraordinary times, but these do not last forever – as financial history teaches us – and investments should remain future-focused.”
“Investors need to think carefully before rushing to reposition portfolios away from future-focused alternatives in the wake of the Russia-Ukraine situation,” he added. “Climate change remains the greatest risk to economies and communities around the world – and there are major opportunities and high rewards for those who invest in a more sustainable future.”
