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Oil/Gas and the FTSE All share

Index tracking funds and ETFs
colin
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Oil/Gas and the FTSE All share

#138593

Postby colin » May 12th, 2018, 6:35 pm

About 12% by value of all share index trackers are invested in carbon producing energy companies. I assume that the value of these companies will fall over the coming years as the world moves to renewable energy sources. But does this mean the value of the all share index will take a hit, or will the companies which are destined to supply our need for cleaner energy take the place of the traditional energy companies in the index meaning no overall loss of value to all-share investors?
As a matter of interest a sector breakdown of the all-share from 2011 gave the proportion of oil/gas companies as 17%.
Just a discussion point.

Alaric
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Re: Oil/Gas and the FTSE All share

#138600

Postby Alaric » May 12th, 2018, 7:12 pm

colin wrote: But does this mean the value of the all share index will take a hit


Indexation delivers market returns, so if components of the index take a hit, so do the investors in indexed funds.

If oil companies such as BP, Shell etc. convert themselves into energy supply companies, their share values probably don't suffer from a switch to renewable energy.

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Re: Oil/Gas and the FTSE All share

#138605

Postby GeoffF100 » May 12th, 2018, 7:16 pm

Carbon emissions will continue to rise:

https://www.c2es.org/content/international-emissions/

They will not be replaced by green technology to any significant extent.

colin
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Re: Oil/Gas and the FTSE All share

#138624

Postby colin » May 12th, 2018, 8:33 pm

If oil companies such as BP, Shell etc. convert themselves into energy supply companies, their share values probably don't suffer from a switch to renewable energy.
Top


I am wondering how much of the value of the big oil companies lies in the reserves held in their oil fields, maybe if its only a decade or so worth of oil the move to other sources of energy should not have a great impact on the index , as you say they have the technology and capital to turn to other activities, but if their value is derived from decades worth of oil which has to be left in the ground, what they are calling 'stranded assets' that would be wealth destroyed, or more correctly wealth abandoned.

GeoffF100
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Re: Oil/Gas and the FTSE All share

#138636

Postby GeoffF100 » May 12th, 2018, 9:25 pm

All the oil that is in the ground will be extracted and burned. There are very few things that are more certain than that. There will, of course, be disastrous consequences, which will destroy wealth, but that is probably many decades away.
Last edited by GeoffF100 on May 12th, 2018, 9:28 pm, edited 1 time in total.

tjh290633
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Re: Oil/Gas and the FTSE All share

#138638

Postby tjh290633 » May 12th, 2018, 9:26 pm

GeoffF100 wrote:All the oil that is in the ground will be extracted and burned. There are very few things that are more certain than that.

Technology does not exist for 100% of the oil and gas to be extracted.

TJH

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Re: Oil/Gas and the FTSE All share

#138641

Postby GeoffF100 » May 12th, 2018, 9:30 pm

Yes, that is true, I meant that all the oil that can be extracted will be extracted and burned.

colin
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Re: Oil/Gas and the FTSE All share

#138715

Postby colin » May 13th, 2018, 9:09 am

Ok so no one thinks we will do anything except burn all the oil till it's all gone.
But just for the sake of argument lets say we do actually cut down quite radically on the amount of fossil fuels burn't , then how might that affect the value of the FTSE All share? and why?

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Re: Oil/Gas and the FTSE All share

#138725

Postby swill453 » May 13th, 2018, 9:34 am

I'd say the value of the index reflects the (perceived) prosperity or otherwise of the economy. Any change in the mix of the industries that make it up is just churn, and won't affect the overall value.

Scott.

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Re: Oil/Gas and the FTSE All share

#138733

Postby tjh290633 » May 13th, 2018, 9:53 am

colin wrote:Ok so no one thinks we will do anything except burn all the oil till it's all gone.
But just for the sake of argument lets say we do actually cut down quite radically on the amount of fossil fuels burn't , then how might that affect the value of the FTSE All share? and why?

Nature abhors a vacuum. Invention will find a substitute for most things which become impossible over time. Remember that oil is not just a fuel, it is a feedstock for many plastic materials. Many processes require the use of thermal energy, not always replaceable by electricity. That is where the use of alternative fuels comes in, be they derived from coal, wood, vegetation or waste incineration.

TJH

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Re: Oil/Gas and the FTSE All share

#138772

Postby hiriskpaul » May 13th, 2018, 12:20 pm

colin wrote:About 12% by value of all share index trackers are invested in carbon producing energy companies. I assume that the value of these companies will fall over the coming years as the world moves to renewable energy sources. But does this mean the value of the all share index will take a hit, or will the companies which are destined to supply our need for cleaner energy take the place of the traditional energy companies in the index meaning no overall loss of value to all-share investors?
As a matter of interest a sector breakdown of the all-share from 2011 gave the proportion of oil/gas companies as 17%.
Just a discussion point.

Oil and gas production will certainly decline in importance, perhaps in 50 years time it may be down to 1% of the FTSE or less. Some O&G companies will adapt and reinvent themselves, some will be taken over, some go out of business. Not sure it is possible to make a better prediction than that and highly unlikely IMHO to offer a trading proposition.

Composition of the UK stock market has changed dramatically over time and will in the future. I am sure I read somewhere that at one point over half the market by value consisted of rail companies.

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Re: Oil/Gas and the FTSE All share

#138795

Postby dspp » May 13th, 2018, 1:40 pm

I've just posted a simples answer to some of you on much the same topic here:
viewtopic.php?f=76&t=7367

I won't combine the threads quite yet as they are on a different point, but I think Colin (as OP) is asking a very valid question.

In most technology transitions the incumbents fail. There is a technology transition underway. Big Oil has survived the quasi-transition from oil to gas, and is well aware of the risk posed by the underway transition. Ditto for the big utilities as consumers. They are all jockeying to make it through the evolutionary bottleneck. I am doing my best to make sure that I don't have too much value exposed more than (say) 10-years in O&G out as I think that the failure to adapt risk is quite high. As to what would replace them in the capital markets the answer could well be the newcomers, including any of us personally with our own generation capacity. It could indeed be very different.

regards,
dspp

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Re: Oil/Gas and the FTSE All share

#138804

Postby dspp » May 13th, 2018, 2:06 pm

Thank you FB. I am somewhat aware of the technology changes (but downstream isn't really my area, so please keep talking), and definitely aware of the regionalisation trends.

The capex splurge hitting O&G is consistent with peak oil theory, and normal O&G cycles. The question is which cycle will be the highest wave washing up the beach as the tide starts to recede. I think we are there, now. My guess is that the output from this cycle will be less than the output from preceding cycles, even if the input is greater. That would be consistent with the EROEI data.

I have no idea how the ME countries are going to get their hordes to do any work, let alone keep them at work, in the RE-driven world. I think they are in deep pooh and they know it. This decade is their last chance to solve that. And in many respects I add all of the Indian sub-continent into that last chance saloon. It could get very ugly: the current strife is just the warm up act. Likewise Venezuela - what price heavy oils & tars when RE is cheaper.

regards, dspp

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Re: Oil/Gas and the FTSE All share

#138812

Postby hiriskpaul » May 13th, 2018, 2:36 pm

My daughter is doing research into algae as a source for food and chemicals. Whether that becomes technically and financially viable as a replacement for fossil O&G will not be known for decades, but some new technology will come along to replace it and I suspect that many of the multi-nationals will adapt, just as FredBloggs describes is happening now with the companies moving into downstream businesses.

IBM comes to mind as an example of a large company that has consistently evolved, embraced change and exited non-profitable lines of business.

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Re: Oil/Gas and the FTSE All share

#138819

Postby dspp » May 13th, 2018, 3:07 pm

Oman is not typical imho. 25-years ago I was working alongside the first generation of Omani O&G engineers, including females who even then were technical HoDs on merit alone.

I would not want to generalise, but there are some societies / nations that are heading down deeply unhelpful pathways that it will be nigh-on impossible for them to reverse out of before trundling off the cliff-edge. Witnesss Yemen or Venezuela or Syria as for-examples. Even if they were to switch course overnight it would take decades to rebuild. Do they have decades ?

As the energy transition proceeds, then increasingly O&G will be restricted to petrochemical use. That is not a lot to feed KSA in say 40-years time. Long before then things could get very uncomfortable in the MRH countries (inc Russia) and affect our stock market investments. That is why I am constantly posing myself the question in O&G (and E) as to what is my investment time horizon. At present I do not invest unless I can see value being released within about 10-years.

regards, dspp

colin
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Re: Oil/Gas and the FTSE All share

#138869

Postby colin » May 13th, 2018, 6:22 pm

https://www.ft.com/content/622de3da-66e6-11e5-97d0-1456a776a4f5

Mark Carney is worried but oil and gas companies say the concept of stranded assets ignores rising demand from developing countries ( but then they would wouldn't they?)
As someone who mostly invests in trackers my reaction has been to dilute the FTSE 100 which holds such a high percentage of oil and gas .
Yes technology evolves and index sector weightings change, the state of California has just mandated that nearly all new houses built will have to come with solar panels installed by 2020 . People will still spend money on energy generation materials even when the energy itself is free and any money they save will be spent elsewhere so no overall value should be lost. But a nagging thought is the awareness that the value of house price falls in the USA which precipitated the financial crash of 2008 was much less than the value which ultimately evaporated into thin air due to the amount of leverage used, credit default swaps on credit default swaps sort of thing.
So I wonder if in a context which is not so obvious to us today the wider economy might in some way be leveraged to the presumed value of fossil fuel reserves?

Hariseldon58
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Re: Oil/Gas and the FTSE All share

#138909

Postby Hariseldon58 » May 13th, 2018, 11:19 pm

The question asked is what is the effect of a major sector of the All Share suffering a terminal decline. A look at the past suggests that the stock markets of today in the U.K. or elsewhere have seen enormous change in the past. The US market at one time was dominated by railroads, not so now.

The indes reflects companies growing and declining all the time and if the changes take time then the transition will also take time and Your investment in a U.K. tracker will probably be just fine, the problems that could cause a catastrophic decline are likely to be unpredictable ‘Black Swans’ , I’d suggest diversity of geographic regions and asset types to provide a spread of investments. There comes a point where you cannot predict or control what happens but can you formulate a diverse portfolio to cover most eventualities then just sit back and relax and let the capital markets work for you.

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Re: Oil/Gas and the FTSE All share

#138927

Postby OhNoNotimAgain » May 14th, 2018, 8:46 am

Two things to bear in mind.

The UN predicts the the global population will grow from 7 billion to 11 billion by 2100 but the number of children wil remain at 2 billion. In other works the population will age and it will want heat, transport and consumer goods, many made of plastic.

Secondly, if Aramco succeeds in listing on the LSE it will dwarf every other company. Depending on how thw weight is calculated it will almost certainly be the biggest individual company on the exchange and probably the biggest dividend payer.

I would not write off the oil and gas sector just yet.

colin
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Re: Oil/Gas and the FTSE All share

#138946

Postby colin » May 14th, 2018, 10:45 am

Yes wise words Harieseldon58. I guess the essential nature of Black Swans is their unpredictability so as you say diversify and stop worrying.
Cheers

colin
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Re: Oil/Gas and the FTSE All share

#138947

Postby colin » May 14th, 2018, 10:49 am

if Aramco succeeds in listing on the LSE it will dwarf every other company.


If that comes to pass I am definitely going to get rid of my exposure to FTSE 100, if the Saudis don't want their oil any more why should I ?


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