The divestment movement: Be careful what you wish for

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Why is it that people with good intentions so often suffer from terrible logic?

A good example is the so-called "divestment" movement, popular these days with academics and environmentalists concerned about global warming. The idea is to urge everyone to sell their shares in petroleum companies as a way to punish them for digging up and selling hydrocarbons. The website for one particular movement, gofossilfree.org, smacks the reader in the face, saying:

"It's wrong to profit from wrecking the climate. It's time to divest from fossil fuels."

As with a lot of well-intended causes, the divestment movement tugs on emotional heartstrings but lacks any intellectual basis. There are two non-financial reasons why investors could be persuaded to sell their stocks in an oil company, neither of which makes any sense if carried to their logical conclusion. Worse, both could exacerbate the environmental problems.

The first reason is the belief that oil extraction is, in itself, unethical. But ethics only enter the debate when it comes to how humans consume hydrocarbons, and certainly there is unethical and wasteful consumption.

But even if you believe that the act of extracting carbon is morally wrong, selling your stocks in a petroleum company wouldn't improve the situation. It would only enable someone else to profit by buying them. Dumping stock might make you feel a bit better ("no blood on my hands") but it wouldn't make the world a more ethical place. It's like believing that pornography is evil, so you sell your stash of nudie magazines to the teenager next door. If you really believe porn is immoral, you wouldn't sell the magazines – you'd burn them.

And if you sold your petroleum stocks on ethical grounds, what other stocks are you going to buy? Metal mines or forestry companies? They consume a lot of fuel. Airlines? Forget it. Hotel chains? They encourage long distance travel. Even pharmaceutical and tech companies require petroleum byproducts in their manufacturing.

The second reason you might be persuaded to ditch your petroleum stock is the notion that it will punish the company and drive it into bankruptcy. That would solve the climate change conundrum, wouldn't it?

By selling shares, the divestment movement believes it can hold a knife to a company's throat. Part of the movement's goal is to keep 80 per cent of existing known carbon reserves underground forever. Divestment advocates figure that dumping their energy stocks would coerce the industry into accepting this 80-per-cent goal.

But economics teaches that this would only make the problem worse. Assuming that there is no substantial reduction in energy demand, sequestering 80 per cent of oil reserves in the ground would curtail supply so severely that prices would double or even triple.

Nothing would please an oil company more than oil at $250 (U.S.) a barrel. Profits would soar and those rascals holding the remaining stocks would be laughing all the way to the carbon hell to which the divestment folks think they're headed.

The law of unintended consequences wouldn't stop there: $250 barrels of oil would push unemployment higher. Inflation on food and transportation would skyrocket. The people punished the most would be those least economically able to cope. Gasoline, diesel, kerosene and propane would become prohibitively costly for more than five billion of the world's poorest, who would have to resort to traditional energy sources – burning tropical hardwoods, grasses, animal feces and garbage.

Isn't all of this economic, social and environmental havoc precisely what we are hoping to avoid in the first place?

Reducing carbon emissions and better stewardship of the planet should be everyone's goal. Gradually and steadily, all countries should work toward a better mix of energy sources, including development of renewable sources.

Perhaps a better way to influence change for the better is to buy more petroleum stock – you'd have a greater influence on the companies' behaviour as a shareholder, especially if you buy stock as a group.

The divestment movement's concerns about the Earth's atmosphere are laudable. But ethics are best measured in how we consume oil. If we demand less, less will be extracted. Simply dumping energy stocks won't achieve anything constructive.

Todd Hirsch is the Calgary-based chief economist of ATB Financial and author of The Boiling Frog Dilemma: Saving Canada from Economic Decline.