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Saturday, October 17, 2015

The Fossil Fuel Stock Market Bubble

Despite the massive loss in value of fossil fuel companies like Chevron and Exxon Mobil over the last 14 months, these stocks are still in bubble valuation territory. Many are headed for eventual bankruptcy. Thus there is a fossil fuel stock market bubble.

This is because true costs of carbon dioxide in intensifying global warming are not taken into account in a company's stock market valuation. Currently the price of fossil fuels companies shares is calculated under the assumption that all fossil fuel reserves will be consumed. An estimate made by Citi puts the loss in value of the fossil fuel companies due to the impact of the growing renewables industry at $100 trillion. According to the UK's Committee on Climate Change, overvaluing companies that produce fossil fuels and greenhouse gases poses a serious threat to the economy. The committee warned the British government and Bank of England of the risks of the carbon bubble in 2014.

The stranding of carbon assets will come about because of the free market. Of course, many fossil fuel companies will lobby government to avoid this outcome, but that's a rear guard action which will ultimate fail to prevent fossil fuels from being phased out. Already, many renewable sources of energy, such as wind and solar, are more economical than fossil fuels. In 2014, for the first time, wind and solar were cheaper than coal and gas in the USA, Australia and China. Switching to electricity based transportation like electrical vehicles from fossil fuel based transportation will reduce and eliminate the demand for fossil fuels, particularly petroleum.

Once the investment world realizes that fossil fuels are becoming obselete, the value of those companies will trend toward zero. Thus, those who are buying those stocks with the expectation that fossil fuels will rebound as they have in the past are subjecting themselves to severe financial risk.