Vericool Finance

“Repent, for the end of the world is nigh”, was the message of the Stern report on climate change, presenting a compelling case for action to avoid an economic catastrophe comparable to the Great Wars and Depression of the first half of the 20th century.

You might have expected investment markets to make more of a fuss. Stern’s dire warnings sound like an invitation to governments to play God – and idea you’d expect the City to detest – but there was barely a squeak of protest. Shares in coal-fired power generator Drax – Britain’s biggest greenhouse gas producer – actually rose.

Do investors think governments lack the will to deliver measures that will truly change the way we live? Maybe things will be different after Stern, but the City will believe it when it sees it.

Stern’s report was music to the ears of City folk – and not just those who’ve had the foresight to buy green energy shares. London is already an entrepot for alternative energy – both in terms of share listings and carbon credit trading.

There was a predictably negative response from the likes of the Institute of Directors, which managed to damn Stern with faint praise… while inveighing against anything that required business to share the pain.

But far-sighted companies see global warming as an opportunity. The climate change market is worth $500bn and London has first-mover advantage. Saving the planet and serving the interests of shareholders are not mutually exclusive.

But don’t assume the shift will be painless; interventionist measures could seriously hurt growth, and governments can all to easily wreck important new markets: witness the blow to the carbon trade earlier this year when EU states issued more permits than their companies needed, undermining a market predicated on the scarcity of permits.

Markets abhor uncertainty and business needs a policy framework that enables it to plan ahead. But make no mistake Stern marks a watershed. If you’re not already planning your portfolio on the assumption that climate change is right at the top of the business, political and regulatory agenda, you should be.

The unpredictable market in black gold is not for the faint of heart. Not long ago, oil bulls were predicting the price would hit $100 a barrel - but it has gone the opposite way, plunging 23% in the past six weeks to below $60. Even by oil’s versatile standards, this is a significant correction, which has caught many on the hop.

Amaranth, a US-based hedge fund, lost an eye-watering $6bn betting on natural gas prices, which have been dragged lower on oil’s coat tails. Closer to home, Ryanair took a $10m hit having hedged its aviation fuel costs at the equivalent of $73 a barrel.

The rapid fall reflects the end to the conflict in Lebanon, less bellicose noises over Iran’s nuclear programme and BP’s return to production in Alaska. Higher inventories have also countered fears that oil could run short this winter.

Whatever the reasons, cheaper oil has arrived in the nick on time. Falling prices will soften the effect of the weakening housing market on the US economy. One estimate says the sudden change of price direction has reduced the total cost of oil to the US by $40bn a year.

But don’t assume that cheaper oil is an automatic panacea for inflation worries. The correction might be presented as a point for the doves, but it is more a point for the hawks. Cheaper petrol will free consumers to spend more and push up core inflation. And it may not be good for equities, because the FTSE 100 is heavily weighted towards oil and commodity stocks.

Will prices continue to fall? That’s the new consensus. Speculative money is running away from oil - even a major supply threat such as the Russian attempt to muscle in on Shell’s Sakhalin-2 venture has barely caused a ripple.

The talk now is of $50, or even $40 prices next year, but for that to happen, two things are needed: relative international calm and a further cooling of the US economy. The latter may be likely, but political calm is a much less safe assumption.

Iran, Venezuela and other oil exporters have grown fond of sky-high prices and are not going to give them up easily. The soundest reason to think the journey from $80 to $40 won’t be so quick is this: when everybody in the market agrees there’s only one-way to go, a nasty reversal usually follows.