Colorado's PERA Shouldn't Bank on the Future of Oil and Gas

Tom Sanzillo,Director of finance for the Institute for Energy Economics and Financial Analysis in Cleveland, Ohio shared the following In Response piece in Colorado Politics in Fall, 2018.

By adopting a fossil-free portfolio strategy as has been urged, the Colorado Public Employees’ Retirement Association (PERA) would be doing right by its 560,000 members, ensuring steadier investment returns as the oil and gas industry faces continued uncertainty and decline.

In a paper commissioned by the Independent Petroleum Association of America Daniel Fischel arguesthat divestment would lose money for PERA and harm its beneficiaries He argues that because fossil fuel stocks were investment-return powerhouses for 50 years, they will be again.

To portray past performance in a manner that assumes it will be repeated comes perilously close to misleading advice according to the Security and Exchange Commission rule on forward-looking statements, however. The rule exists to prevent investment advice from relying solely on the past as the sole guarantor of the future. The fiduciary question is: what were the conditions under which the past performance was achieved and will it be repeated? Common sense underlies this rule: If you drive a car and only look in the rearview mirror, you will crash.

Some points to keep in mind when weighing the divestment question:

Further, the future of the industry is likely to be one of cost cutting and of volatile and mostly declining profitability. The stock behavior tells us investors are not buying the oil and gas value proposition for the future.The fossil fuel energy sector, broadly speaking, will continue to be battered by competition from wind and solar on the power-generation side of the equation and from the rise of electric vehicles on the transport side.

Technological breakthroughs within the oil and gas sector have, paradoxically, only driven profits down, particularly in natural gas, and investors are now demanding cash returns from companies rather than promises of future profits. Fossil-fuel holdings, simply put, are no longer the stable investments they were and instead have become largely speculative and high-risk. The past conditions under which the sector produced substantial profits for institutional investors is unlikely to be repeated— new market forces dominant the investment landscape.

Had PERA gone fossil free 10 years ago, its holdings would be worth more than they are today.

*To read the full article, click here.