No one is looking for oil anymore. The world is awash in it and exploration budgets have been slashed or simply stopped.
All bets are now on invention over discovery. The market is certainly moving in that direction, as illustrated by the fact that wind and solar generator NextEra Energy crested Exxon Mobil Corp’s value last month. That would support a vision of a future in renewables-linked power generation.
The price of oil as a commodity has always been cyclical, with down cycles weighing on share prices. That said, Exxon’s descent is no surprise. Although by the numbers, the world continues to run on oil, alternative fuels boast advantages in cleanliness and sustainability – and in the era of climate change and pandemic, that’s a strong case for re-orienting towards alternative fuels.
The latest oil downturn came at the start of this year, as a Chinese economic slowdown left extra supply on the market. Crude prices fell to their lowest in decades as producers battled for customers.
Then the pandemic hit and global lockdowns halted transport and economic output. Oil flows, which can’t be turned off quickly, suddenly had nowhere to go. Storages overflowed while prices hit zero and even negative territory. The two issues delivered compounded pain.
Since February, the major industry players have tried to mitigate the crisis. Exporters OPEC and Russia have set aside their differences to cut output and manage the glut. OPEC has loads of flex capacity now. Meanwhile, shale’s meteoric rise in the U.S. has quailed and settled into a mild decline. Yet the sector appears more than ready to resume.
Down cycles in exploration during low oil demand are nothing new. What is new this time, however, is that some of the world’s largest energy companies have signaled that they have no plans to bank on oil again. In one prominent example, BP plans to halt exploration in new regions and decrease its oil output as part of a new strategy that focuses on renewable energy.
This is a pivotal moment, because at some point the pandemic will end. Global economies will seek to recover, and cheap energy will be a key part of that.
OPEC and Russia appear to have the ability to provide that affordable energy immediately, with ample spare capacity. And, in fairness, BP has a big passive stake in Russian production via a shareholding in the country’s main oil producer, Rosneft. U.S. shale is right behind OPEC on affordability and has the advantage of being located in its major sales market. Exxon and Chevron appear poised to return to business here as well.
Yet some – mainly European – oil companies, including BP, Total and Eni, are tapping out of the oil future and essentially transforming into green energy producers. All three have recently made major investments in wind and solar energy and cleaner-burning natural gas, all of which are used to generate power.
This strategy shift aligns with the goals of the European Union, which has pledged to become carbon-neutral by 2050. The result is a win-win for both sides, as the EU has supported renewables generation and welcomes industry growth that creates new domestic jobs, from wind turbine manufacturing to the production of electrolysers for hydrogen.
The industry’s increasing popular, political and economic support may be a large incentive for investors to place their bet on renewables. A victory by U.S. President-elect Joe Biden, who has signaled a reverse to Donald Trump’s climate change policies, was accompanied with a tide of investment into green energy companies.
The world appears ready to buy cleaner energy, and governments are not only supporting but in some cases leading this trend. At the same time, the global shift towards clean energy has had a major impact on oil exploration. There is simply less money and less will to travel to the edges of the globe in the hopes of discovering some mythical El Dorado – the lost city of gold. And that’s okay for now. Innovation within the industry has made vast swathes of previously trapped resources viable.
Yet this abundance in oil also creates a cardinal difference for the future investment in renewables. Record energy prices and wealth over past the several decades served as the perfect incubator for innovation in wind and solar, as both consumers and governments were willing and able to accept higher costs.
Those conditions have changed. The pandemic has hit consumer pocketbooks hard and strained government coffers. While technological gains can happen independent of that, the pricing goal posts for renewables seem to have moved further away. As post-pandemic economies tighten their belts, cheaper oil may once again become the more attractive option.
With that, investors need to keep in mind that oft-repeated buzzwords like “scale” or “innovation” in cost reduction are not equivalent to alchemy – the ancient and ill-fated search for a chemical agent that turns plain metals to gold. Even with the rise in popularity and investments into alternative energy, there is no technological trick that will suddenly make it more cost-effective than traditional sources – for now.
In any case, market bets for the moment are on intelligence and innovation, and massive reorganization in what has been a very conservative industry. This is happening. Traditional methods of approaching the future are on hold or being re-examined like never before.
The planning, effort, money and political capital already put into renewables mean that this sector will experience large scale growth. It is the future of the industry. Europe has little alternative and much to gain from the opportunity. The U.S. appears poised for an invigorated approach as well.
However, the transition timeline – which is key to investment decisions – seems too ambitious given the bleak post-pandemic economic outlook, which will drive demand towards the cheapest and most reliable sources. There may even be another super cycle in oil prices first. There is a stalling point out there somewhere for all this momentum.
For the investor, that means never mind tickets to El Dorado, but watch out for the alchemists.