”Give me oil in my lamp,
Keep me burning;
Give me oil in my lamp, I pray.”
”Give me oil in my lamp” a Christian Children’s Song, Author Unknown
Sometimes a paradigm shift is obvious; other times it creeps up on us. Let’s consider investments in fossil fuels. Simply stated, markets currently do not favor these commodities the way they once did. Is this a short-term or long-term issue?
Recently I penned a series of columns about the future of the U.S. auto industry. With the market currently trading at 25 times earnings and GM trading at five and a half times earnings, the forecast for the car industry is less than stellar, according to investors.
Understand that I am not suggesting that you buy or sell any individual stock in any sector. We do make recommendations, of course, but only to clients whose financial situation, risk tolerance and goals are known to us in detail.
It is instructive, though, to witness a decline in some of the most prominent market sectors of our time. With electric cars poised to replace internal combustion engine vehicles, and with economists worried that fossil fuel demand is peaking, the oil and gas industry comprises a smaller component of capital markets than in years past. There are several reasons for this decline and for this smaller market weighting.
Last summer Amazon announced that the company will use 10,000 electric delivery vehicles within three years. The company estimates that in four years (by 2024), it will be operating on 80% renewable energy. So here we have one of the world’s largest companies committing to renewable energy and electric cars in the relatively near future. The cost of battery production and battery storage is also decreasing. And this can only mean more rapid growth for electric cars and renewable energy, and a more rapid decline for gas-powered autos and its sister industry of oil and gas.
The issue is complicated by the growth and weighting of the largest U.S. tech companies, which represent an unprecedented percentage of the current market makeup. This has led to a lesser weighting in oil and other sectors. The price per barrel of oil, in the low 60’s at this writing, has dipped this low before. But investors may be eyeing more than a short-term fall in prices; perhaps they see a paradigm change.
Oil and gas investments have not performed well lately. But the true investment change will come when the profitability of investing in renewable energy is greater than the profitability of investing in fossil fuels. The question, of course, is how long this will take, but many investors are already moving in this direction.
While my firm still owns some pipeline investments, and we plan on harvesting cash from these investments for a number of years, the future may involve renewable energy sources replacing these fossil fuels. The oil sector will not disappear from our radar overnight. But investors are currently putting their money to work in other sectors.