Oil and gas have helped propel humanity into the 21st century. Without fossil fuels as a cheap energy source, our world would likely be decades behind on many fronts. Or maybe even more than a century behind. Fossil fuels have helped enable countless innovations in agriculture, food storage, transportation, healthcare, etc.
It’s easy to think of direct benefits such as more cost-effective transportation. Imagine a world without free shipping! Although, the bulk of the benefit is second order. These are the good old compounding effects that aren’t as easy for us to see. We tend to think linearly, not exponentially.
I could probably make the case that using fossil fuels has saved hundreds of millions of lives. Not only that, but they’ve enabled many of those lives to start in the first place.
Even today, with many advances in green technology, the benefits of fossil fuels outweigh the downsides. Elon Musk has even said…
If there was a button I could press to stop all hydrocarbon usage today, I would not press it.
He went on to say it would be irresponsible to press that button. That was back in 2014 at an Oil and Gas Summit in Norway. And I doubt his stance has changed in the years since.
So why is one of the world’s leaders in electrification and renewables ok with continued use of fossil fuels? He’s a pragmatic person. For those of us not living under a rock… fossil fuels are still vital today and won’t be disappearing anytime soon.
But with that said, Elon Musk also sees the compounding downsides of using fossil fuels. As a result, one of his main missions is to accelerate the advent of sustainable transport. He’s helping accelerate the move to renewable energy. And to be honest, I’m looking forward to that future…
I hope to be an owner of a Tesla someday in the near future. I’m considering living out of a Tesla and sharing that experience on my YouTube channel. Bad idea or good idea? Let me know in the comments below. But back on topic…
The big question mark when it comes to investing in oil stocks and fossil fuels is the timeline…
Big Oil Stocks vs. Renewable Energy Trends
In 2020, renewables made up 12% of total primary energy consumption in the U.S…
Of that slice of the pie, wind and hydro were the largest renewables. Solar only made up 11% of the renewables slice or in the larger context, solar accounted for roughly 1.3% of total U.S. energy consumption.
These have been growing but not as much as the renewable headlines might suggest. In this next chart, you can see how the energy mix has changed since the 1950s…
In 1950, renewables made up 8.6% of the total. By 2010, it was at 8.5%. And in the past 10 years, it’s bumped up to the 12%, as seen in the first chart.
I have no doubt that renewables will continue to take up a larger piece of the U.S. energy mix. It’s going to pick up speed as well. Although, it could easily be over a decade before renewables even hit the 50% mark in the U.S. And the U.S. isn’t the largest energy consumer. That spot goes to China and its emerging middle class.
Energy demand in China, India and other nations continues to grow. For investors in some of the largest oil stocks, they gain exposure to these markets as well.
Investing in Oil Stocks as a Contrarian Play
When I bought shares of Exxon Mobil last year, it all came down to price relative to value. Oil prices dropped and in the short-term, it wasn’t looking good for big oil companies. The famous Warren Buffett quote comes to mind…
Be fearful when others are greedy, and greedy when others are fearful
Or another Wall Street proverb…
Buy when there’s blood in the streets.
As a result, I thought many of the big oil stocks were trading at a steep discount and I jumped in.
Of course, contrarian investing doesn’t always work. The coal industry comes to mind and I didn’t invest in the concentrated coal companies. But oil and gas aren’t being phased out nearly as fast. Nonetheless, people and governments continue to shift attention toward renewables and away from fossil fuels.
For example, university students continue to protest their school funds investing in oil stocks. They’re demanding divestitures. Although, it’s ironic… those same exact students are benefiting from those oil companies. The electricity to power their lecture halls, smartphones, heat their apartments, etc. On top of that, it just goes to show… it’s easy to tell others to change when it isn’t your money on the line. And now that the energy bills are climbing, I’m guessing some of those same students aren’t happy about paying more.
I do admit though that there’s some benefit to this dissent from students. There are a lot of layers to this cake but that’s food for thought for another time. And once again, I’m looking forward to a renewable energy future… but as an investor, it’s vital to take a realistic look at the timeline.
With so much pushback and short-term price pressure on oil companies, they plummeted. Many companies in the industry didn’t survive and more will follow into bankruptcy. Although, part of my original thesis was the big oil stocks could weather the storm. The depressed prices gave them even better investing opportunities. They could be more selective when it comes to M&A.
With pressure on the supply side and energy demand climbing again, we’re seeing higher oil prices. WTI crude has climbed back to about $80 a barrel. That’s the highest it’s been in over five years. As a result, oil stocks have rebounded as well. I’m up close to 30% on Exxon in about a year and a half… Not bad for a fossil fuel company that many people think will disappear. I also plan on continuing to hold.
I won’t double down on my fossil fuel investments anytime soon and I’m not automatically reinvesting the dividends. I still like many of the big oil stocks at current levels but need to keep a disciplined portfolio strategy. Instead, I see even better investing opportunities in industries with faster growth.
If you’ve been following my recent videos, you’ve seen that I’ve bought shares of Alibaba. I caught a falling knife and it’s been painful seeing so much red in my portfolio. There’s still plenty of risk with this Chinese company… but my long-term outlook hasn’t changed. And Charlie Munger seems to agree.
Alibaba is trading at a steep discount and is growing rapidly in multiple industries. So, I doubled down a few weeks ago. You can check out why I like BABA stock – and the company behind it – with that video link.
As always, I really appreciate any comments or questions, whether on my blog or YouTube channel.