The Potential Impact of Investor Fossil Fuel Divestment Behaviour on Oil Prices

Abstract

This paper asses the ESG and green finance trends and initiatives that are shaping investor appetite for oil production assets and considers the implications for oil markets. It reviews studies that have looked at the evidence of historical data to test whether divestment from fossil fuels could have an opportunity cost that might ultimately constrain the divestment trend. It also looks at how it may make sense for divestment to continue, even if its potential limiting effect on production, forces oil prices higher. It also considers arguments that suggest divestment should lead to production increasing, forcing prices lower. The paper goes on to present a framework for assessing the impact of embedding the social cost of carbon (a cost which is derived from modeling the full implications of emitting an additional unit of $CO_{2}$) at all stages in the oil supply chain. The results have implications not only for the level of benchmarks like Brent crude, but also for the spreads between prices of different grades of crude and between crude oil and refined oil products.

Keywords: ESG, green finance, divestment, carbon intensity, energy transition, social cost of carbon, SCC