Oil GDP and Divestment

Good evening all, I hope your toes are warm and you are excited for Christmas (probably not as much as I am). I am here today to unwind after being smooshed by final exam week, connect some things that I have been noticing, and address some things my readers have inquired about. I’m going to […]

Good evening all, I hope your toes are warm and you are excited for Christmas (probably not as much as I am). I am here today to unwind after being smooshed by final exam week, connect some things that I have been noticing, and address some things my readers have inquired about. I’m going to cover what has been going on with oil, connect it to the Divestment from fossil fuels, and bring GDP and its validity into question. This is going to be a good one!

Oil GDP and Divestment

Throughout this piece, I will take a step back and look at the big picture. Let’s start with Oil. The prices to fill up your hybrid or (in my case) gas guzzling SUVs have declined dramatically. For those people who think (and have been blaming) that Presidents can control oil prices; well Obama hasn’t done anything to contribute to the sudden drop. Or has he?…. (Insert epic dum dum dum)

Capture oil p

This is a chart for the price per barrel of oil, which is usually around $90 – $100. Until the last few months.

As a recap: OPEC met to discuss the falling prices. Simply put, the prices have declined because there has been an increase in oil supply. OPEC was going to decide if they would cut back on oil production to bring the prices back up. Well for OPEC members who’s countries depend on oil sales basically flipped the bird to the world, and announced they will not cut back production. But are there other reasons?

I’ve seen many articles on OPEC taking a stand against Fracking, like this great article from The New Yorker.  It makes sense, but I’m still skeptical that there are no other major factors at play.

Remember that whole Russian sanction deal that’s been going on? Russia’s main export is Oil, and their economy depends on it big time. The price decrease is killing them, and Putin is not happy. At all. See?

Capture Russia

I’m not a conspiracy theorist. All I’m saying that the timing of the decline in oil prices, is pretty convenient as the Western World attempts to squeeze Russia via economics.

The price of oil impacts so many areas of the world economy. The article from the New Yorker I linked above talks how the decline in prices in a way redistributes wealth from exporters to importers. That’s the broad picture, which affects you individually since you aren’t spending as much $$$ at the gas station, and instead can buy MORE CHRISTMAS PRESENTS!

Alright you understand. Oil plays a huge impact in the world. From politics and entire countries’ economic growth, to your wallet. We’re already viewing oil from a big picture perspective. But as Matthew McConaughey discovers in Interstellar, you can’t discount time.

Fossil Fuel Divestment

As we shift gears, let’s all agree to not waste time arguing about Oil and all fossil fuels’ negative impact on the environment. Fossil fuels harm the environment in the long run. What can we do about it? How would we curb fossil fuels’ world dominance?

One of my friends inquired about my views on the Divestment movement. Several schools, including Virginia Tech are calling for their school’s endowment funds to divest from fossil fuel-related investments. Rolling Stone has a great article outlining the current state of divestment across college campuses.

I’ve already briefly described fossil fuels majorly driving a plethora of economic things… so why wouldn’t universities or hedge funds divest from fossil fuels?

The bottom line: Dependence drives Profitability

Capture Fossil Fuels From IER

This chart does not paint the entire picture, but you can generalize since 95.1% of US transportation depends on fossil fuels. From an investor’s standpoint: would bet on making money in the dark blue or light blue section of the pie graph? PowerMag has a good article (even though it’s from 2012) that shows the considerable growth in the energy sector’s profitability from renewable sources. But Fossil Fuel’s revenue was still $80 Billion compared to $10 Billion from renewable sources. Fossil fuels are a more developed market, and the broad dependency on oil are just more attractive investment opportunities. Why do you think that after 72% of Harvard’s student population voted for divestment; Harvard basically said they think it’s cool that the students believe in something….. but No?

The world’s dependence on oil simply is too widespread and is driving returns. Regardless of long term environmental impacts, people want to make money.

I find Divestment to be a good cause with a long term perspective in mind. We can run out of Oil, but we can’t run out of Earth. Keep at it environmentalists, and continue spreading awareness – it will happen.

21st Century GDP

My regular readers know I like to say “let’s take a step back” a lot. Well now let’s take a few hundred meter dashes backwards.

A country’s measurement of economic growth: Gross Domestic Product. Calculated by summing consumer spending, investments, governmental spending, and net exports.

GDP was created by a fellow named Simon Kuznets in 1934, when the New Deal was getting Americans pumped up. The purpose of GDP was to gauge economic growth through measuring total economic activity. Kuznets cautioned that this should not be the “go-to” way to gauge economic growth. In 1934…..

This article shows the contradiction simply of the GDP formula, where the governmental spending piece is based on cost, while the consumer/private investment portion is based on price. The Harvard link below outlines 3 gaps in GDP: Excludes social and environmental factors, ignores future growth potential,  and gaps related to total economic welfare.

So we see that GDP is not perfect, but nobody has really came up with a better way to measure economic output.

WHY NOT?

A couple Harvard fellows (Ben Beachy, Justin Zorn) wrote an excellent paper that illustrates the issues with GDP, and poses that with our technology and improved means for data collection, creating and measuring new means of growth is attainable. The piece says the following can be measured and included:

  • capital investment
  • household labor
  • educational attainment
  • crime
  • consumer debt
  • resource depletion
  • volunteer labor
  • entrepreneurship

See that bolded bullet point right there? “resource depletion”. We can include that in economic measures that gauge overall economic growth? Is the concept of broader economic welfare too mind-blowingly out of right field for anyone to realize or even talk about? Note: there is an alternative (and seemingly more accurate) measure called GPI, but it is rarely used.

Here’s the funny part. The publication talks about some of the ironies of current GDP. For example, if there is more Crime occurring in your (neighbor)hood then the police get more money to combat said Crime. Technically meaning as crime goes up, so does GDP. What?

Oh So Epic Conclusion

Let’s put everything together shall we? Oil runs the world. My fellow environmentalists are all for taking a stand against fossil fuel dependency, but have yet to see immediate results. Creating measures of GDP  to incorporate other social well-being factors could be a huge first step to curbing Oil’s influence. Why isn’t anyone talking about this? Why has this not be done yet?

Here is my “Circle of Frustration”. Let’s do the GDP + Well-being thing and experience a major social shift in viewing economics and money. Congress would have to pass legislation for this to occur…. oh wait. Who funds politician’s campaigns? Many fossil fuel dependent companies…

So to decrease Oil’s span of influence: Oil-dependent companies would need to support candidates who pass legislation creating wide-spread GDP measures which increase awareness of fossil fuels’ negative environmental & economic impacts. (Exhale). Do you see that happening? It may not have a direct impact on bottom lines, but why would Oil companies shoot themselves in the foot?

They wouldn’t shoot themselves, but the other side can argue Oil companies are shooting the feet of (environmental issues aside) economic and social progress. Just something to think about.

End Acerbic Rant.

Only 16 days until Christmas. I’m asking Santa for good grades and my sanity through finals week.

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