Oil industry has already peaked
Why not invest in the future instead?
An antique oil facility with gritty old petroleum tanks and a disused dock called Point Wells rusts along the cloudy shore of the Puget Sound on the border of King and Snohomish Counties in Washington state. Recently quit by the shipment enterprise that last operated the facility, the Point is merely one of thousands of leaky, corroded junk sites being left behind by a boom-and-bust industry, not unlike the abandoned oil wells that dot the landscape in North Dakota.
But how many more booms will there be for the fossil fuel companies, which range from massive multi-national corporations to small partnerships? The price of oil was hitting at 5-year highs in early 2022 and the long-stalled prices of oil giants like Exxon Mobile (XOM) and Cheveron (CVX), and BlackRock’s IYE energy ETF, had finally seen some momentum upward, each at over 50% up over the last year. The up-and-down economic recovery has so far increased demand and prices, and this has led to increased profits from oil. But I am cautious about how much further these trends have to go before they collide with other trends, including bans on new internal combustion vehicle sales as soon as 2030 in some countries.
Oil production has just about peaked—due to future decline in demand, and due to derelict infrastructure at many traditional suppliers. Venezuela was once touted as an economic success story, with its oil production fueling a higher standard of living than neighbors. But while many of those neighbors are now quite far along in building stable, democratic societies, Venezuela has fallen victim to the well-known “oil curse” of autocracy and disappointing development.
Mexico’s recent announcement that it will shift away from imports in favor of supplying its domestic markets is not good news for Gulf of Mexico refineries, many of which are designed to handle the heavy oil from the Venezuelan and Mexican wells.
Is Mexico some kind of critical producer that will rock international markets? No, not these days anyway, after over a decade of decline, but this by itself is a small story in a much larger narrative.
Over in the North Sea, the formerly productive deep sea wells that helped enrich Norway are being decommissioned, a process that may have started when the oil price was a bit lower but has still become inexorable.
The shift to green energy was aided in Norway by plentiful hydro-power, and now with the shift to electric vehicles underway the country’s sovereign wealth fund is divesting from companies that they consider to be contributing to climate change.
Now even American institutions are joining. Harvard is an extravagantly wealthy university—and now they say they are divesting from fossil fuels.
As a thought exercise, I wonder what backers of this industry actually think will happen? Do they think people will actually fill their tanks with natural gas as the late T. Boone Pickens advocated? Do they think a new president will move into the White House and remove the solar panels, as Ronald Reagan did in a different era? Do they think that the amount of greenhouse emissions from fossil fuels is sustainable in any way over the long term?
Listening to advocates of this industry inevitably results in hearing a barrage of lies and propaganda and science denial, and it really isn’t worthwhile. Luckily for sensible investors, the run of fossil fuels is not assured to go on indefinitely—policies and the market will work together to determine how much longer they provide the bulk of energy sources. But countries like Denmark are getting almost half their electricity from sustainable sources like wind. With some back and forth along the way, this is the direction that almost every country is likely to go in the near future.
The investments to make in energy are not in the legacy oil producers, but in companies building next-generation power systems and running solar and wind farms. In addition, some ETFs are tracking new sectors such as “green metals” (the metals in demand for these types of technologies) and battery technology. For the last few years, the ethical investment has been the better investment, and I expect that to continue going forward over the long term.
Among the popular green energy ETFs are iShares Global Clean Energy (ICLN) and the Invesco Solar (TAN). For some exposure to the self-driving sector, there is the Global X Autonomous And Electric Vehicles (DRIV) and the iShares Self-Driving EV and Tech (IDRV). More and more electric car companies are listing, and there are ETFs for the underlying technology including VanEck Green Metals (GMET) and Global X Lithium & Battery Tech (LIT).
Disclosure: Through personal holdings that I control and through investment LLCs in which I am a partner, I buy, hold, and sell stocks, bonds, ETFs, options, NFTs, and cryptocurrencies, not limited to but including some of those discussed in this newsletter.