Invest in Oil, Help the Environment

The fossil fuel divestment movement, like many other campus causes, mistakes posturing for effective action, giving its proponents a false sense of accomplishment. By divesting from fossil fuels last August, Pitzer College actually weakened its ability to help the environment. Fortunately, Pitzer’s mistake can be corrected. Current market conditions allow for Pitzer to regain and extend its environmental influence (and shore up its endowment) before it is too late.

Pitzer’s move to divest from fossil fuels came at the perfect time for the college’s endowment. Either by luck or clairvoyance, the college sold its oil-related assets right before last year’s major energy sector selloff. On November 27, the Organization of Petroleum Exporting Countries (OPEC) held a conference during which the cartel stated that it was not going to cut production of oil in order to retain its market share. Subsequently, oil and many other fossil fuel-related assets’ prices plummeted. Halliburton’s stock price fell from a high of 74.33 to 37.21, while Exxon’s fell from a high of 104.76 to 82.68. Values of energy sector ETFs and mutual funds fell by 30%.

Thanks to a surge in domestic production due to fracking, coupled with OPEC’s decision to maintain production, analysts estimate that the world is producing 1-1.5 million barrels of oil a day more than demanded. The world is even running out of space to store the excess supply. At $51 a barrel, down from $115 in June, oil is less profitable to drill. Production is slowing. As the price of oil begins to rebound, the energy sector is easing off of its 52-week lows. Halliburton is now trading at around $45, and Exxon around $86. Energy sector mutual funds have also begun to rally.

Now is the time for Pitzer to reinvest in the oil industry.

A shareholder’s say in deciding the direction of a company is directly proportional to the number of shares it owns. Though fossil fuel divestment was a great public relations move by Pitzer, if the college intends to spark change in the oil industry, its best course of action would be, ironically, to increase the number of fossil fuel shares that it holds in its endowment portfolio. It is impossible to sell a stock without a buyer, and whoever bought Pitzer’s shares probably does not care about the environmental impact of fossil fuels. At current prices, shares of companies in the energy sector are at bargain levels. By buying low, Pitzer could buy more influence for less. Pitzer’s endowment would also benefit when fossil fuel prices rise in the future.

In today’s market, investors are increasingly becoming catalysts for change. Just last week, General Electric finally gave into pressure from “activist” investors, selling off much of its GE Capital and real estate assets. Based on a net income of $44.9 billion, Exxon Mobil is the top oil company in the United States. Its market capitalization runs $356.55 billion. In 2013, the National Association of College and University Business Officers calculated the average endowment of 849 four-year institutions in the US and Canada to be $335 million, led by Harvard ($33 Billion), Yale ($20 Billion), Princeton ($18 Billion), and Stanford ($18 Billion). Pitzer was 393rd with $118 million. The total of all college endowments in the US and Canada exceeded $455 billion, enough to buy Exxon Mobil, Valero, and Halliburton. Though colleges have enormous buying power, a complete buy-out of the companies would be unnecessary. A large minority share of ownership in the companies could be disruptive enough get their attention. A few colleges could enact real change through collaborative investment in energy, rather than divestment from it.

If not the energy sector, where to invest? Certainly not in tobacco companies, McDonald’s, Coke, or Wal-Mart. Government debt supports the purchase of intercontinental ballistic missiles. What about consumer staples? Harmless, right? Proctor and Gamble (they make just about everything in your bathroom) profits off the use of fossil fuels. They still require petroleum-based products to manufacture and ship “Zanzibar” scented deodorant to the shelves of your local CVS.

Whether we like it or not, we all demand cheap energy in order to function. At the present moment, there is no cheaper energy source than fossil fuels. Beloved “Big Oil” will continue to drill and will remain the primary producer of transportation fuel whether or not Pitzer owns part of the industry. By divesting, Pitzer is simply ridding itself of one obvious association with fossil fuel companies. In actuality, the institution benefits enormously from fossil fuel consumption. When a professor drives to work, Pitzer benefits, just as it does when garbage is hauled away. How would Pitzer send students to Washington, D.C. to protest the Keystone pipeline, as it did last March, without oil and the 2.3 million miles of domestic energy pipelines that are already in existence?

It is my hope that cheap, efficient, renewable energy is just around the corner, and we may see it become more of a factor in our daily lives within the next few years. Many companies that are leading the charge, including the liquid metal battery company Ambri, are still in developmental stages and are privately held. This means that an institution like Pitzer cannot be a shareholder because the companies have yet to make a public equity offering. Pitzer already invests a small portion of its endowment portfolio in smaller public companies that specialize in renewable energy, limiting its exposure to them because emerging companies tend to be riskier investments. Established companies in the energy sector, including Chevron, also happen to be some of the largest researchers and providers of renewable energy. A group of investors could pressure major energy companies to do even more by allocating more capital towards renewables, causing a significant shift away from fossil fuels within the industry.

Thankfully, Pitzer’s commitment to environmental sustainability extends beyond its bark. Pitzer’s Presidential Task Force on Campus Sustainability has broad goals, including campus carbon neutrality by 2050. If the Task Force reaches just a few of its objectives, the impacts will be positive. The goals as they currently stand, however, are limited to the 34 acres of Pitzer’s campus. If the Task Force proposed a collaborative investment initiative with other like-minded colleges, the consequences could resonate far beyond Pitzer’s campus, adding a new dimension to what it means to be an “activist” investor. Students across the 5Cs with plans for their own divestment campaigns should be mindful of the opportunity cost of spending time on a project with no environmental impact. For their cause to remain credible to non-environmentalists, they should focus on tangible accomplishments that are both symbolic and immediately effective. They should invest more, not less, in the energy sector.
Disclosure: Author uses a re-usable water bottle, picks up trash in national parks, grows his own vegetables during the summer, rides his bike to work, leaves the air conditioning off, and invests in KMI, HAL, and PSX.

One thought on “Invest in Oil, Help the Environment”

  1. The price point for oil continues to decline, which means now may not be the best time to invest, unless you like losing money. Imagine how low the price will go as we transition to renewable energy sources. Already new loans for fracking are on hold. Also remember that activist investors only have leverage if they own significant amounts of a stock, unlike in the energy sector where investment is broadly diverse. That is why there have been no successful investor challenges to energy sector board decisions.

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