This recent Forbes article lays out the compelling case for utility scale renewable energy installs permanently dethroning traditional installs due to declining renewable costs. The article’s takeaway is that “it is now cheaper to save the climate than to destroy it”, and it argues that this opportunity, to move to a more environmental energy mix, while reducing energy costs, is too big to pass up. I couldn’t agree more from an economic perspective or an investment perspective.
This shift in energy sources is going to have major ramifications on investors over the next few decades. While this shift away from fossil fuels won’t happen over night, a long term investor would do well to consider how these energy trends will affect their holdings.
Currently these larger trends are set against the backdrop of a Coronavirus led rout in the energy sector, negative or nearly free oil and declining prices for both coal and natural gas. Though recent declines in oil prices have been shocking, they belie a longer term price downtrend.
Over the past three years each of these commodities, natural gas, oil and coal have seen broad price declines.
In the near term, crashing oil prices could see some less fiscally healthy oil producers go belly, such as smaller US fracking companies focused on regions where lifting costs are comparably high. In the longer term, there could be massive shifts in the companies that comprise our energy sector. Oil majors will be forced to pivot business models towards more diversified energy production and away from their myopic business models.
Investment-wise, from a long term perspective, there is a compelling case to be made that investors should transition away from stocks that derive their earnings from these energy sources, or base their revenue on servicing assisting said companies. The easiest way to go about this is to move from traditional index funds like SPY to more ESG focused index funds like SUSA or CRBN that seek to limit exposure to companies that are have large environmental and carbon footprints (which covers your oil and gas producers).
Eventually, unless Exxon and BP have amazing transformations, we will be looking at an energy landscape quite different from what we see today. None of this is to say that oil companies won’t have a great next five years but investors, both shorter and longer term, would do well to consider how these seismic shifts in the energy markets are going to affect their portfolio and plan accordingly.