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Sunday, February 03, 2013

If the Truth Comes Out, Big Oil Could Drop in Half

The dirty secret that Big Oil is trying to hide is its culpability for Climate Change. Just like the tobacco companies which denied for decades — even lying to the US Senate under oath — that their product didn't cause cancer, Big Oil is facing the reality that their valuation will be decimated when the truth finally emerges.

Now, one of the largest banks in the world, HSBC, has let the cat out of the bag. They've published a report, Oil and Carbon Revisited: Value At Risk From 'Unburnable' Reserves. The world's air is currently nearing 400 parts per million (ppm) in carbon and most scientists would like to see that concentration limited to 450. In order to keep the concentration low, though, only about 1440 gigatons (Gt) of carbon can be burned. If the world decides that it's important to limit carbon, it would leave massive amounts of carbon in the ground — carbon that investors highly value in terms of stock prices. The bottom line: if the world is prudent, those oil company shares are highly overvalued right now.

If you believe that we will, as a civilization, veer away from the cliff's edge and limit the amount of carbon burned in coming years, then you have a grand opportunity right now to sell oil company shares short and make a fortune when those in-ground assets are revalued.

If you are instead a realist and know that the human race is headed for destruction, don't short those shares. Big Oil is one of the biggest political machines in the history of humanity. It's better to bet on the end of civilization than to bet that Big Oil will be shut down.