about 1 year ago • 3 mins
The future of energy might be clean and bright, but not everyone’s ready to let go of their fossil fuel ways.
✍️ Connecting The Dots
The laws of supply and demand are locked in a tug of war when it comes to oil, and right now, demand – that’s falling demand – appears to be winning. See, even the combined effects of a Russian embargo and OPEC’s spigot tightening haven’t been enough to stop the price of oil from falling. And now, weakening Chinese demand and looming recessions in the West are making matters tougher. So, the benchmark Brent crude has dropped 45% from its high earlier this year.
Looking longer term, Big Oil’s standing at a junction with both roads appearing to end at a brighter, more renewable future. But the journeys to get there are very different. Down one road, oil firms would react to the surely but steadily declining need for gasoline by trimming supply. That should keep oil prices propped up and allow companies to funnel their mountains of cash into share buybacks. Down the other road, oil majors would press the renewables accelerator and plough today’s profits into building their own alternative offerings. This means less cash left over today, but better chances of survival down the line.
Until now, it’s been the European firms pressing the renewables pedal to the metal, while their US counterparts have been traveling the slow-and-steady-decline route. So it’s a little surprising, then, that ExxonMobil’s pumping its spending plans not on renewables, but on extracting more oil at a time when the price is falling. Maybe the US giant’s found a third route to nirvana, or maybe it’s just the price highs from earlier this year tempting Exxon into producing more.
1. Money makes the world go round.
When war broke out in Ukraine, and the oil price roofed it, investors driven by environmental, social, and governance (ESG) virtues seemed to drop their priorities and go scrambling for shares in Big Oil, leaving the stock prices of planet-savers like First Solar languishing. There’s an irony to that: higher oil prices make alternative power sources like solar cheaper by comparison, which should be good for renewable firms’ stock prices. At least, that’s been the playbook in the past. But an interesting divergence has emerged more recently: First Solar’s stock price has skyrocketed at a time when oil’s been falling. Through optimists’ eyes, it could suggest demand for renewables is now unstoppable, regardless of the price of fossil fuels.
2. Let’s get real.
The drumbeat of ESG investing softened earlier this year, but it might be about to crescendo again. And if themes like ESG are about to come back on the menu, investors need to be reading their choices closely. There are a plethora of exchange-traded funds (ETFs) on offer, but some of them look like a deconstructed and then reconstructed S&P 500, with non-planet-killing – but certainly not problem-solving – firms like Apple, Microsoft, and Coca-Cola making the cut. Your best bet is to download a factsheet and have a good poke around before deciding who gets your bacon.
🎯 Also On Our Radar
Conventionally, volatility watchers tend to sell stocks when the VIX index – the market’s “fear gauge” – spikes. That’s because when it’s on the rise, investors are more anxious. And those watchers do the opposite when all’s calm, buying stocks when the VIX is low. But this year, it’s worked the other way around: and buying when everyone’s fearful has paid off. So maybe it’s true, then, there really is nothing to fear but fear itself.
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