September 18, 2018 Read More →

IEEFA op-ed: Colorado’s pension fund shouldn’t bank on the future of oil and gas

Past performance is no guarantee of future success

By adopting a fossil-free portfolio strategy as has been urged, the Public Employees Retirement Association of Colorado 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, an anti-divestment consultant and college professor named Daniel R. Fischel argues that 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:

  • Fossil fuel companies are far less profitable than they used to be.
  • The sector’s proportional market capitalization has dwindled from 16% of the Standard and Poor’s 500 index as recently as 2008 to 6% today.
  • Standard and Poor’s Global Oil Index has lagged the market for 10 years after having led it for 50, which means economic growth and capital markets have been shaped increasingly by other, faster-growing and more profitable industries, such as information technology, healthcare, manufacturing, real estate, and consumer staples companies.
  • In 2017, a year of economic growth and rising oil prices, energy was the poorest-performing sector of the stock market and the slowest growing sector in the economy.
  • Despite a near tripling of oil prices since 2016, oil and gas stocks this year is struggling to keep pace with the market.
  • The current rising-oil-price environment will not return the industry to its premier position, and the wealth destruction that came out of the oil price collapse of 2014 still haunts the industry.

FURTHER, THE FUTURE OF THE INDUSTRY IS LIKELY TO BE ONE OF THE 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.

An energy sector that will continue to be battered by competition from wind and solar.

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.

PERA is transitioning now from a long period of underfunding into an era of catch-up. More money is available for new investments. Now is the time to readjust capital-allocation formulas to capture long-term market trends that have emerged over the past few years.

Fischel and his colleagues have never managed an investment fund. They have no experience with direct investments or the accountability that comes with it.

Oil and gas stocks aren’t going to regain their former glory. And while the energy sector remains a behemoth, its current and future performance will not resemble the past.

Tom Sanzillo is IEEFA’s director of finance. He can be reached at This column first appeared today on 


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