Oil companies have registered this hundreds of billions of dollars of profit. Investment firms have backtracked on their climate commitments. High interest rates hurt clean energy companies.
The financial world doesn’t seem to have been too friendly lately to the global pledge to transition away from fossil fuels. Has the golden age of oil profits returned for investors?
Not really.
If we smooth out the ups and downs of the past few years (and there have been many), fossil fuel companies actually haven’t done that well over the past decade compared to other major companies. a study Published this month by the Institute of Energy Economics and Financial Analysis, an Ohio-based think tank, it found that stock price indexes (or broad baskets of stocks) that exclude the fossil fuel industry performed slightly better than indexes that did not over the past month . past decade.
A 2023 report from Columbia University’s Center on Global Energy Policy also found that oil and gas companies have underperform in the longer term compared to the S&P 500, an index often used as a benchmark by investors.
That’s a turnaround from previous years, the researchers say, when the oil and gas industry largely outperformed these indexes.
Does this mean that the energy transition is slowly eroding high-carbon profits? Maybe, but that’s not the full story. Today I want to walk you through some of the patterns that investors follow, to help you understand what they show.
A bumpy road
Fossil fuel companies face increasing competition from clean energy. But the demand for energy, especially in developing countries, is also growing. How will these two forces stack up in the future?
Nobody knows.
What the numbers show so far, recent record profits but longer-term underperformance of share prices, is subject to interpretation.
Tom Sanzillo, director of financial analysis at IEEFA, told me that what we are seeing is a decline in the fossil fuel industry. “This is a fundamental change,” he said. “And it will continue.”
Gautam Jain, a senior researcher at Columbia who focuses on energy markets, believes it’s a bit more complicated than that. The energy transition appears to have played a role in falling fossil fuel stock prices, he said, as changing energy policies and a greater desire for cleaner alternatives make demand for their product uncertain.
But there were other, more immediate consequences for their profits. In the early 2010s, the shale revolution allowed companies to extract oil and gas much cheaper, causing prices and therefore oil profits to fall sharply. Then, just as the industry was stabilizing, the pandemic struck, shattering oil demand as billions of people around the world locked themselves down for months.
The recent rise in profits, after Russia’s invasion of Ukraine, gave companies a chance to reward their investors after years of poor returns, he said. In 2022, companies announced tens of billions of dollars in stock buybacks, in which a company buys its own shares on the open market. Buybacks, which often occur when a company believes its stock is undervalued, can increase the price of the stock. This obviously benefits investors who already own the shares.
It’s telling, Jain said, that companies chose that path instead of investing a greater share of their profits in producing more oil and gas. “They understand that demand is uncertain going forward,” Jain said.
Uncertainty about the future means companies don’t know how much oil and gas they need to produce to meet the world’s needs. That will most likely result in a bumpy road for prices as they adjust in real time to the changing economy.
Jain’s anyway research at Columbia also shows that, despite all these concerns, financing costs for oil and gas companies have not increased. Financial institutions don’t seem to worry that oil companies won’t be able to pay them back.
Governments show the way
Making smart investment decisions is primarily about understanding what will make money in the future. This has become very difficult in the energy markets as the world transitions to cleaner energy sources.
I wanted to understand what investors who are concerned about the economic risks of climate change think about this. I called Liz Gordon, who oversees corporate governance at the New York State Common Retirement Fund, to ask why the pension fund had decided limit its investments at Exxon and other fossil fuel companies, a move it announced last week. (The fund still owns Exxon stock, but through investments such as index funds, rather than outright purchases of Exxon stock.)
She told me that despite all the uncertainties, the fund sees a clear signal that future policies are very likely to hurt the profits of companies unwilling to transition to a low-carbon economy. “You will see a rising price for carbon or other forms of regulation that will drive change and make greenhouse gas emissions more expensive,” she said.
That is a key message I have heard from several experts. In a world of unknowns, policy has become a guiding principle in the money-making labyrinth of the future.
However, it is clear that oil companies and investors believe that there will be fossil fuels well into the future. Jian’s research shows that oil and gas investments are out of step in a world where countries stop adding carbon dioxide to the atmosphere by 2050, which scientists say is absolutely necessary to avoid the most catastrophic effects of climate change.
But they are in line with countries’ pledges to reduce their carbon emissions, he added. Whatever countries decide to do in the future, private money will likely follow.
“Policies are actually much more powerful than you think,” Jain told me. “No one can predict when actual demand will peak. But they do see the impact of the policy.”
Where Biden’s climate law works or falls short
When President Biden signed the Inflation Reduction Act, his administration’s flagship climate bill, in 2022, analysts predicted it would help reduce U.S. greenhouse gas emissions by roughly 40 percent below 2005 levels by 2030. The measure includes hundreds of billions of dollars in tax breaks and spending on clean energy technologies such as wind turbines, solar panels, batteries, electric vehicles and hydrogen fuels.
Eighteen months later, sales of electric vehicles have increased largely in line with expectations a new analysis by three groups monitoring the impact of the law.
But problems with supply chains, as well as problems overcoming local opposition or obtaining permits for various projects, have bogged down one of the climate law’s other big goals: generating much more electricity from wind, solar and other non-electricity sources. -polluting sources.
Although the United States added record amounts of renewable energy and batteries last year, that growth fell short of the level needed to meet the country’s goals of reducing emissions that warm the planet, the analysis found. “Addressing these non-cost barriers will be critical,” the analysis said, for the law “to realize its full potential for clean energy and emissions reduction.” — Brad Plumer