In the wake of last week’s UN-backed report that greenhouse gas emissions were behind global warming and that governments of the world ought to do something about it, the CIBC’s Jeff Rubin is telling his clients to reduce their exposure to energy stocks.
“Governments are waging a war on carbon,” said Rubin, Chief Strategist and Chief Economist at CIBC World Markets. “The decline in crude consumption in the OECD last year seems further evidence of policy-mandated demand-destruction aimed at reducing oil consumption in an effort to abate GHG emissions.”
Mr. Rubin cites the mandating of greater ethanol content in gasoline and the raising of minimum fuel mileage standards to address public concerns about global warming as key policy initiatives that have resulted in a reduction in consumption. He expects the next step in Canada and the United States will be regulations of GHG emissions along the lines of what was recently introduced in California. This would see provinces and other states implement a carbon dioxide emissions cap while at the same time establishing an emissions trading system that allows larger polluters to buy emissions credits from other firms whose emissions are less than what is allowed under the cap.
The report states that the cap and trade system would most adversely impact utilities and oil sand producers. As a result of this and faltering demand growth for crude oil in OECD countries, CIBC World Markets is pruning back its overweight in energy stocks from 4.5 percentage points to 3 percentage points. However, the firm still expects that oil sands opportunities will continue to be aggressively pursued by global energy giants.
“We are realigning our equity portfolio toward a more balanced sectoral weighting in keeping with the recent breadth of market gains,” notes Mr. Rubin. “Investor disappointment at fading near-term prospects for rate cuts has been more than offset by growing confidence in the North American economy.”