TSX does better without oil

Canadians contemplating fossil fuel divestment often assume they will not make the same returns on their investments if they exclude fossil fuels – oil, coal and natural gas. But data compiled by analysts at Greenchip Financial show this assumption is false (graph below). In 7 of the last 10 years, returns on the TSX without oil and gas companies were higher than returns with oil and gas companies included. And this is true for every year since 2009, except 2011 when returns were the same for the TSX and the fossil-free TSX.

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One reason that the fossil-free TSX is out-performing the TSX is the increasing costs of fossil fuel extraction (e.g. tar sands, deep-sea drilling), which are reducing the profit margin of the industry.

Add to that the increased oil production in 2014 by Middle Eastern producers, especially Saudi Arabia. While there are no doubt political reasons for this, it is also partly aimed at ensuring that Saudi Arabian oil does not become a ‘stranded asset’ if and when the world’s leaders take real action on climate change. At the Copenhagen summit in 2009, all nations agreed that global temperature increase must not exceed 2°C if we are to avoid catastrophic climate change. Staying within this limit means we need to leave 80% of proven fossil fuel reserves in the ground, never to be developed. Since the stock values of oil and gas companies are based largely on their proven reserves, current oil and gas stocks are inflated. As Saudi Arabian oil is much cheaper to produce than other oil such as oil sands or deep sea oil, increased production in Saudi Arabia pushes other producers out of the market and ensures that Saudi Arabia will get to produce the 20% remaining ‘burnable carbon.’

Some financial analysts may point out that, averaged over the past 30 years, returns on the TSX are higher than returns on the fossil-free TSX. But the world is changing fast. The next 30 years will be nothing like the last 30 years. Looking forward, investment in fossil fuels is not a good bet.

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