Shell and Glencore: not good times for the bad guys – or our money

Written by Rebecca O'Connor on 29th September 2015

Shell has laid $7 billion of shareholders’ cash to waste, as it yesterday announced it has given up drilling for oil in the Arctic, leaving shareholders feeling a bit nervy but the rest of mankind, relieved.

Meanwhile Glencore, the mining giant, plunged to a record low, with more than 30 % wiped off its value in a single day and a note from analysts at Investec describing the shares as “worthless”.

Shares in Shell have fallen by 40% in the last 12 months, as a decline in Chinese demand, among other factors, has sent oil prices into yo-yo land (but mostly down).

Glencore has suffered from the same downsizing of Chinese demand, which has affected the market for raw materials.

If you are someone with one foot in camp ‘save the planet’ and the other in camp ‘looking after my money’ (probably most of us), this leaves you in a bit of a double bind.

Because on the one hand, finding out that companies that derive their profits from increasing carbon dioxide emissions and extracting whatever they can out of the earth are faltering is good news – not to be met with gleeful schadenfreude, but some small pleasure that such a value decline just might mark a nudge towards a transition away from making money through harmful energy and plundering commodities to renewable energy and the use of new, sustainable materials.

On the other hand, nice people losing a) their jobs and b) their savings is never a good thing – so anyone exposed to either of these companies through their work, investments or pension funds is in a very unenviable position right now.

But honestly, that is most of us, one way or another.

The Gofossilfree campaign put out findings last week that 6.1% of all local authority pension funds are exposed to oil and gas. That’s £14 billion of a total £241 billion council worker pension pot.

If this is a representative figure of the exposure of most pension funds – indeed most mixed funds – to oil and gas, then how much all of us can look forward to enjoying in retirement from our pensions and ISAs is under threat from the current volatility in prices, which many analysts predict is a long-term trend.

The problem for you, me and our parents is not ACTUALLY a problem until the point we want to realise our pensions savings.

Shares in Shell have lost 40% in the last year. Taken as a guide for what has happened to shares across the sector, this means a pension pot that is 6% invested in oil and gas would have lost roughly 2.4% of its total value through the decline in the last 12 months. So if someone was drawing their pension today, it would be worth around 2.4% less than if they took it out 12 months ago, largely because of the declines in oil and gas prices.

A typical pension pot is around £59,000, according to Just Retirement. With a 2.4% reduction through oil and gas price falls (£1,416), this drops to £57,584 (the pitiful amount we manage to save, on average, for retirement, magnifies the impact of what looks like a small % decline).

It would be fair to suggest that most investment funds and pension funds are over-exposed to oil and gas. The reasons are historical – the sector has historically paid very good, dependable dividends, which is manna if you are a fund manager investing life savings on behalf of workers.

However, reducing that exposure at a time when oil prices have already suffered such a big fall presents the same problem of crystallising losses, but for everyone in the fund, not just those drawing their pension.

But this way, at least those still some way from retirement still have the chance to make up some of the losses over time.

Whichever way you look at it, if there is a shift happening away from old energies to new, some of the value of all of our funds will take a hit. Whether this results in actual loss to you personally will depend on the timing of your pension withdrawals.

If it’s not imminent, then you don’t need to worry unduly, but for anyone, it might be prudent to ask your provider for a breakdown of your allocation and if you are worried (and if you have the option), seek advice on whether to shift some of this out of oil and gas. So that when you read about Shell and Glencore shares slipping off a cliff, you don’t have to worry about any of your own cash going with them.