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When Goldman Sachs published a landmark study this summer on clean energy, the greenies cheered. The Wall Street giant didn’t really say anything new, but its conclusions reinforced the notion that the oil era is winding down and that renewable energy would soak up the bulk of the entire energy industry’s investment dollars.

Specifically, the report, “Carbonomics: The green engine of economic recovery,” said that renewable power will emerge as the No. 1 area of energy spending in 2021, usurping oil and gas spending for the first time, and that the green transition will drive US$1-trillion to US$2-trillion per year – per year! – in infrastructure investments, while generating as many as 20 million new jobs worldwide.

Renewable energy will reach about 25%

of global energy supply investments by 2021

As a percentage of total

25%

20

15

Estimate

10

2010

2012

2014

2016

2018

2020

2022

JOHN SOPINSKI/THE GLOBE AND MAIl

SOURCE: goldman sachs

Renewable energy will reach about 25%

of global energy supply investments by 2021

As a percentage of total

25%

20

15

Estimate

10

2010

2012

2014

2016

2018

2020

2022

JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE: goldman sachs

All encouraging news, if true, and even better news for the planet. The United Nations has predicted all sorts of life-threatening calamities if carbon emissions push average global temperatures beyond 1.5 degrees Celsius above pre-industrial levels.

Story continues below advertisement

When I read the Goldman Sachs report, and similar ones in recent weeks, my first thought was that we are on the verge of an investment bonanza that might make the spectacular returns seen by Big Tech (Facebook, Amazon, Tesla and others) in recent years look like a minor upward deviation in the wealth-creation norm. My second thought: Here we go – Wall Street and its glorified bucket shops, as they always do, have found another class of investments to ram down our throats. For sure we will get the good, but we will also get the bad and the ugly.

Royal Dutch Shell, one of the world’s biggest oil and gas companies, is a case in point. On Thursday the company’s London-listed shares hit a 25-year low. They fell again Friday, for a one-year plunge of 60 per cent.

investments in new oil fields

have reached a new low

Capital expenditures in oil by year

Traditional

(incl. exploitation)

Heavy oil

Deep water

$250

Estimate

200

Total capex in $US billions

150

100

50

0

‘00

‘02

‘04

‘06

‘08

‘10

‘12

‘14

‘16

‘18

‘20

‘22

JOHN SOPINSKI/THE GLOBE AND MAIL

SOURCE: goldman sachs

investments in new oil fields

have reached a new low

Capital expenditures in oil by year

Traditional (incl. exploitation)

Heavy oil

Deep water

$250

Estimate

200

Total capex in $US billions

150

100

50

0

‘00

‘02

‘04

‘06

‘08

‘10

‘12

‘14

‘16

‘18

‘20

‘22

JOHN SOPINSKI/THE GLOBE AND MAIL

SOURCE: goldman sachs

investments in new oil fields have reached a new low

Capital expenditures in oil by year

Traditional (incl. exploitation)

Heavy oil

Deep water

$250

Estimate

200

Total capex in $US billions

150

100

50

0

‘00

‘02

‘04

‘06

‘08

‘10

‘12

‘14

‘16

‘18

‘20

‘22

JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE: goldman sachs

Yes, oil companies are dying beasts, according to believers in the green revolution, but Shell recently made it clear that it had no intention of tripping headfirst into a grubby grave. It would downgrade its oil ambitions, cut costs big time, launch an ambitious decarbonization effort and dive deep into renewable and low-carbon fuels, such as hydrogen. BP, the former British Petroleum, did the same – it too would evolve into a groovy and politically correct “energy” company – yet its shares also kept sinking, hitting a 52-week low Friday.

The share plunge was investors' way of saying that the transformation of Big Oil into Big Energy is either unwarranted or will not succeed. Oil companies have made fortunes for a century by pumping hydrocarbons from the ground and may not be able to repeat that success by producing clean, or cleaner, forms of energy – wind, solar, hydro, biomass, hydrogen, nuclear, geothermal and technologies yet to be invented. The highly successful overhaul of Orsted, the Danish oil, gas and coal company that traded hydrocarbons for wind power, becoming the world’s largest offshore wind developer remarkably fast, may not be easily cloned.

There are a lot of reasons to believe the green revolution is finally coming – and to believe that it may be less glorious and bankable for investors than advertised.

In green energy’s favour is its relatively low cost of capital – the blended cost of the equity and debt required to build a new project. For a company to avoid a slow-motion suicide, project returns must exceed those costs.

The Goldman Sachs report noted that green infrastructure is far more capital- and job-intensive than traditional energy projects, but its cost of capital has plummeted as investors shy away from hydrocarbon plays and throw their money at projects that are morally safe and come with less-volatile long-term returns – the kind pension funds love. Goldman Sachs said the cost of capital for oil and gas projects is 10 per cent to 20 per cent; for green projects, it’s only 3 per cent to 5 per cent. There is no contest – green wins. The point being, waning demand for oil might not kill the hydrocarbon industry, but rising costs of capital could.

Story continues below advertisement

That’s the good news for green investments The bad news is that renewable energy projects have thrived not so much because they make business and environmental sense but because governments have been sucking fortunes out of the pockets of taxpayers to subsidize them. This is generally done through generous “feed-in” tariffs, in which utilities pay producers of renewable energy artificially high prices – for years.

While some of these subsidies are coming down, they are still largely in place. What happens when they disappear? Governments around the world are paying horrendous costs to fight the pandemic. At some point they will be looking for savings, and the feed-in tariffs might get the chop. Were that to happen, investors' returns might take a dive.

Even Tesla, the ultimate poster company for the green economy, is in effect subsidized through government regulations. Tesla’s core electric-car manufacturing doesn’t make a profit; what does is the sale of environmental credits to companies, such as Fiat Chrysler Automobiles, that can’t meet the new carbon-emission rules because their fleets lack hybrid and battery-only vehicles.

Another issue is carbon pricing. If the price of carbon spewed into the atmosphere were US$50 to US$100 a ton, hydrocarbons would be effectively taxed out of existence. Goldman Sachs says the average global carbon price is only US$3 a ton, barely enough to move the needle.

Goldman Sachs and the other investment firms that are touting the green revolution are directionally right. Renewable energy momentum is building. But don’t forget that Wall Street, the City of London and Bay Street exist to flog investment products to the smart and the gullible alike. In the vast, emerging green portfolio of investments, some of these products will be winners, but most won’t.

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