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I'm old enough to remember the days when a high percentage of folks smoked cigarettes. We recently took a trip to Eastern Europe (Balkan countries) and tobacco consumption is prominent there, with cigarettes and non-combustible products with the young people. I have small holdings in PM, BTI and MO. I continue to contemplate buying more stock in these companies.

With Vermont and now California beginning the legal process of suing the largest oil companies for environmental damage compensation, could we be seeing the opening gambit for a similar future settlement process akin to what the states did with the tobacco companies? We know how that worked out. The tobacco companies went on to do quite well and so did the states. This is to not get into what the tobacco monies were spent on within the states, rather it is to crowd source on this board what could be the case for the energy companies and their shareholders.

Tobacco from its earliest days has been a revenue boon for federal, state and local governments. We can similarly say petroleum products have likewise been a revenue source for federal and state governments. Supposing there is a multi-state or perhaps all states legal consortium that backs the oil companies into a corner where the only way out is a negotiated multi-year payout to the states, would it take the same form as the tobacco settlement where the costs are passed on to the consumers in the form of higher product costs? Higher product costs would lead to less consumption, the same consequence as was seen for tobacco products. What would this mean for shareholders in these energy companies? Could we expect to see these companies prosper over the long term despite lower consumption? Additionally, would this lead to protections from overseas supply as the government(s) police entry to ensure stiff taxes are being collected on incoming supplies? The protection from competition given to tobacco companies because of the way the settlement was carried out was proven to be a powerful barrier to competition. Could we see something similar with the petroleum energy companies?

Like many of you, I have holdings in energy companies. Our holdings are Marathon Petroleum (refining), Occidental, Canadian National Resources and Suncor. We cannot live in a world without petroleum resources. I take that as a given and it is a major reason why I invested in these companies when they were cheap. What I am trying to get my head around is how the consequences of state governments taking these companies to court will eventually be for these companies, their customers and their shareholders.

What do you think? Will this be a replay of the tobacco settlement?

Uwharrie

Some quick numbers here. Let's look at a worst case scenario for cost attribution. Vermont is leading the way, claiming a recent flood was caused by evil oil companies. Every assumption can be challenged scientifically, but I'll just plow ahead.

Global CO2 emissions are indeed global. The biggest contributor is China coal, with 14.%. ExxonMobil produces products which contribute 2% of the global emissions when burned.

Recent floods in Vermont produced 420 million dollars in damage. Suppose the courts rule that global warming of a degree or two, 100% caused by anthropogenic CO2, made the floods 10% worse. They also rule that it is Exxon's fault for selling the stuff, not the fault of the end users. Exxon's share of the bill would be 2% of 10% of 420 mil or 840K. This would be challenged in the courts every step of the way. A nasty mess, profitable to lawyers and little else.

What I am trying to get my head around is how the consequences of state governments taking these companies to court will eventually be for these companies, their customers and their shareholders.

I see a fundamental difference between O&G and tobacco.

When people buy tobacco, they do it for the pleasure or diversion it brings them. What else?

I don't know anyone who buys O&G for pleasure. They do so because they need the results of the energy and raw materials it brings them - basically in all end uses. Transportation, heat, A/C, food (via energy and fertilizer) , shelter (via steel, cement, brick, logging), clothing,medicines, on and on. They buy it because it permits them to live in a modern civilization in a better manner than before the industrial revolution.

States sue focused only on the negative impacts from emissions. They make no attempt to balance that with the benefits. Doesn't seem logical to me. l know why though. If they did, the benefits would far outweigh the negative impacts. And they couldn't maybe find a new source of money.

Such lawsuits seem idiotic to me.

Like many of you, I have holdings in energy companies. Our holdings are Marathon Petroleum (refining), Occidental, Canadian National Resources and Suncor. We cannot live in a world without petroleum resources. I take that as a given and it is a major reason why I invested in these companies when they were cheap. What I am trying to get my head around is how the consequences of state governments taking these companies to court will eventually be for these companies, their customers and their shareholders.

What do you think? Will this be a replay of the tobacco settlement?


I doubt it.

Oil and gas companies are are selling a product which is now being recognized as harmful to the environment, although this is still controversial. But while it is hard to see any benefits to smoking (apart from the enjoyment it apparently gives people), even the most ardent opponents of oil and gas surely recognize that they provide a myriad of benefits, in electricity generation, heating, manufacturing, making plastic, making fertilize, making cement, etc. So I think that juries will not be nearly as sympathetic to these cases, and they will more often be overturned on appeal.

That said, the commodity called common sense seems to be a little harder to count on, in the last few years, so who knows?

As for the rest of your hypothesis, that societal opposition to oil and gas (and coal) use may actual protect incumbents' competitive position, I think this idea makes a lot of sense. In particular, if there is a lot less capital spent on exploration and production, there will inevitably be less output, and prices could go a lot higher. Tobacco and oil are similar in that demand tends to be fairly stable, but supply of tobacco is fairly stable from year to year, without substantial investments in production - this is not true of oil and gas, where it could take years of renewed investment in development to catch up with a gap between supply and demand. And it may be that oil and gas companies, while they are not allowed to collude to suppress supply, are aware of these dynamics and tacitly going along with it.

The Internation Energy Forum (IEF) says this:

The major constraint on near-term investment levels has shifted from capital availability to capital allocation. Oil and gas E&Ps are experiencing record profits. While companies prioritize returns to shareholders, share buybacks, and debt repayment, they still have ample free cash flow that could jump-start upstream investment. The question is now, will companies re-invest, and if so, where?
https://www.ief.org/focus/ief-reports/upstream-inv...

As a citizen, I hope the industry spends enough capital to forestall a crisis in supply, but as an investor with 10% of my investments in oil and gas, I hope for the opposite.

It's an interesting analogy but I can't see states demanding the kind of revenue they got from tobacco companies because the nature of the "damage" is much more opaque. Smoking cigarettes is a lifestyle choice whereas oil was an industry that grew by collective societal choice. You never had to smoke but you did have to heat your house and fill your car up with gas. States can offer incentives to fossil fuel alternatives but I just can't see them getting the kind of taxes they got from tobacco. Oil companies will also never have to deal with the same kind of civil litigation that tobacco companies did as well (except for isolated accidents).

Full disclosure- I have owned PM for 25 years and own Chevron as well.

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