The fact that environmental activist Bill McKibben is waging a relentless “fossil fuel divestment campaign” may not worry established oil and coal companies too much. But he is joined by an increasing number of mainstream investors and analysts. The latest investor to warn that fossil fuel assets may be overvalued is the famous hedge fund manager Jeremy Grantham, owner of the major US asset-management firm GMO. In a thoughtful piece for the GMO Quarterly Letter (February 2014), Grantham writes that he believes wind, solar and electric cars will advance so rapidly that “new investments in coal and tar sands are highly likely to become stranded assets.”Â
This is what Wikipedia has to say about Jeremy Grantham: “Jeremy Grantham is a British investor and co-founder and chief investment strategist of Grantham Mayo van Otterloo (GMO), a Boston-based asset management firm. GMO is one of the largest managers of such funds in the world, having more than US $97 billion in assets under management as of December 2011. Grantham is regarded as a highly knowledgeable investor in various stock, bond, and commodity markets, and is particularly noted for his prediction of various bubbles. He has been a vocal critic of various governmental responses to the Global Financial Crisis. Grantham started one of the world’s first index funds in the early 1970s.”
According to GMO’s website, in September last year GMO, which employs 550 people, was managing $112 billion in client assets. That’s a $112 billion that presumably will be directed away from fossil fuel industries in the future.
In GMO’s latest quarterly newsletter , Grantham makes it clear that he is “increasingly impressed with  the potential for a revolution in energy, which will make it extremely unlikely that a lack of energy will be the issue that brings us to our knees.” According to Grantham, “the potential for alternative energy sources, mainly solar and wind power, to completely replace coal and gas for utility generation globally is, I think, certain. The question is only whether it takes 30 years or 70 years.”
He adds, “that we will replace oil for land transportation with electricity or fuel cells derived indirectly from electricity is also certain, and there, perhaps, the timing question is whether this will take 20 or 40 years. To my eyes, the progress in these areas is accelerating rapidly and will surprise almost everybody, I hope including me.”
As a result, Grantham says he has “felt for some time that new investments today in coal and tar sands are highly likely to become stranded assets, and everything I have seen, in the last year particularly, increases my confidence.” He writes that he is beginning “to wonder whether this year’s $650 billion spent looking for new oil will ever get a decent return.”
“One can easily see that in 10 years there could be a new world order in cars”
Grantham relates that he “recently took a drive in a GMO colleague’s Tesla from New York to Boston”, which he describes as “my #1 car experience ever. Three years ago I test drove a Tesla in Boston and it was a tinny, rattly, super-expensive toy. Its battery alone cost $50,000! Last month, its chief engineers suggested its cost today is $22,000. In three years they and other experts are confident that the battery will be less than $15,000 and probably its weight will have fallen also.”
Grantham says he was able to reach Boston without having to charge the battery, but he nevertheless stopped at the single charging station between the two cities. It took 25 minutes to recharge the batter. “And for free!” He adds that “at $10,000 to $15,000 per battery in three years plus some economies of scale, there will probably a $40,000 vehicle that even die-hard cheapskates like me will have to buy… One can easily see that in 10 years there could be a new world order in cars.”
In addition, “there is a wholly different attack on the traditional gasoline engine from an entirely new technology, the hydrogen fuel cell, to be introduced by Toyota this year.” In short, Grantham concludes, : with slower global economic growth, more fuel-efficient gasoline and diesel vehicles, more hybrids, cheaper electric cars, more natural gas vehicles, and possibly new technologies using fuel cells and, conceivably, methanol, it is certain that oil demand from developed countries will decline, probably faster than expected.”
 “Oil is perfectly designed for cheap shipping; natural gas, in contrast, is perfectly designed for painfully expensive shipping.”
So what about shale gas and oil then? Doesn’t shale herald a new fossil-fuel future in the US and possibly the rest of the world? Grantham concedes that “fracking in the U.S. has already been a bonanza for economic activity” and has led to a “remarkable 20% increase in output”. Yet that is only “2% of world production”, he notes. “The real oil problem”, says Grantham, “is its cost – that it costs $75 to $85 a barrel from search to delivery to find a decent amount of traditional oil when as recently as 15 years ago it cost $25.”
In other words, in Grantham’s view fracking may extend oil and gas reserves for a long time – but shale gas and oil may not be competitive in the long run. (He does not, however, consider the possibility of the shale revolution spreading to the rest of the world.) He notes that fracking “is not cheap”. It is “both labor- and capital-intensive compared to traditional
oil. Also, we drill the best sites in the best fields first, so do not expect the costs to fall per barrel (although the costs per well drilled certainly will fall with experience, the output per well will also fall).” He concludes that “fracking, like extracting tar sands, yields a relatively costly type of oil that you resort to only when the easy, cheap stuff is finished.”
In addition, “fracking wells also run off fast”, notes Grantham. “We still get 10% of global oil from a single traditional field discovered in 1945 [i.e. Ghawar in Saudi Arabia] that is still chugging along. Fracking wells are basically done for in three years. They are definitely not your grandfather’s oil wells!”
Grantham regards it as a very bad idea for the US to start exporting gas. He views this as a waste of resources. “Oil is perfectly designed for cheap shipping; natural gas, in contrast, is perfectly designed for painfully expensive shipping.” According to Grantham, “rising demand as industry and consumers reorient activities toward this cheaper energy will push the price up steadily anyway. And very probably, long before the huge investment in shipping and port facilities were amortized, the U.S. gas price will have crossed the $6 gap, which, added to shipping costs, would close out the international markets. Surely it is far better to have the U.S. sit back and enjoy a few years of energy cost advantage.”
“If [gas] leaks from well head to stove by more than 3%, it gives back its critical advantage and becomes no better than coal in its climate effect.”
Grantham has more painful nuts to crack: the supposed climate advantage of gas over coal and oil may be much less than gas advocates claim. Natural gas is methane, and “unfortunately is an even more potent greenhouse gas than CO2: at an interval of 100 years it is now estimated to be 32 times as bad, and at 20 years to be 72 times worse! If it leaks from well head to stove by more than 3%, it gives back its critical advantage and becomes no better than coal in its climate effect.” The methane can be prevented from leaking into the atmosphere of course, but is it being adequately prevented? Nobody really knows: “Emissions, for whatever reasons, have not been carefully monitored. It would be nice, though, to know how fast we are roasting our planet.”
A final point made by Grantham is that fracking in the Midwest in the US has almost certainly led to a considerable increase in the number of earthquakes, so far mostly minor ones, but they may get bigger. (Tell this to people in the northern Netherlands, a gas-producing region which is also increasingly being hit by earthquakes.)
Grantham is surely no starry-eyed supporter of renewable energy, or an ideological opponent of fossil fuels. He does not deny that fossil fuels will remain important for our energy supply for a long time – but he notes that when things start to change, they may change faster than many people now anticipate. “Some changes”, he writes, “seem to be always around the corner and then at long last they move faster than you expected and you are caught flat-footed.”
Dr. James H. Rust says
The hypothesis increasing greenhouse gases(today carbon dioxide) is causing catastrophic global warming is going to fall apart one of these days when people wake up and see there is no experimental evidence this is true. Fossil fuels will be back in favor again and the world will improve its economic position. We have wasted trillions the past 20 years on this foolish scheme of abandoning fossil fuels and attempting to replace then with uneconomic and unreliable solar, wind, ethanol from corn, etc.
Most likely fossil fuels will need replacing in the future and research must continue in this area.
James H. Rust, Professor of nuclear engineering
James Rust says
If you go to Wikipedia and look up Jeremy Grantham you will see he is a very big donor to the Sierra Club, Natural Resources Defense Council, etc. You might interpret this to mean he is a highly engaged proponent use of fossil fuels is causing catastrophic global warming. This may cause him to state views that support eliminating the fossil fuel industry.
Tom says
You cannot build a car without oil. Plastic comes from oil so does alot of rubber products. What would you be willing to give up to do away with oil