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Oil companies in 2021 still form an important part of modern stock markets. The FTSE 100 has Royal Dutch Shell, Total Energies and British Petroleum (BP), for instance, whilst the S&P 500 in the US has ExxonMobil, Chevron and APA Corporation. With the world pushing towards a world more reliant on green energy – highlighted recently by the COP 26 Summit in Glasgow – what is the future of oil shares? Can these companies reposition themselves as cleaner energy companies in a decarbonising world, or are they destined for decline?
In this article, our team at Hanson Financial Services (financial advice in Liverpool) explores these questions in more detail – suggesting ways that oil companies could feature in an investor portfolio, especially if they are concerned about the environment. We hope you find this content useful and invite you to get in touch if you’d like to discuss your financial plan with us.
The future demand for oil
The core product of oil companies is, of course, oil. A key question, therefore, is whether people will still be demanding it between now and 2050 (the “net zero” target set by many countries). If not, could today’s oil giants reposition themselves to another product – e.g. renewable energy – to prepare for a world no longer reliant on fossil fuels? After all, if the answer to both questions is no, then this suggests that oil shares should – at some point – be avoided.
Here, we are reliant on forecasts which differ in their projections and assumptions. For instance, OPEX expects that oil demand will increase between now and 2035 – after which, it is expected to plateau. The US Energy Information Administration (EIA) also expects demand to rise despite global pledges to decarbonise. This is partly because worldwide energy needs are expected to rise as the population increases, and more people exit poverty and enter the middle classes. Also, fossil fuels will still be required in the production process of “renewable” products. Tesla’s electric cars, for instance, are still built heavily using plastic and lithium batteries – all requiring a carbon-intensive production and extraction process.
How oil giants could evolve
Bill Gates has said that long-term investors should avoid big oil companies, which will be worth “Very little in 30 years”. Yet is this inevitable? If oil demand does decline in the years ahead, could ol giants reinvent themselves towards a renewable business model – much like many auto manufacturers are currently doing with electric vehicles? Whilst some may be too cumbersome to pivot like this, many oil giants seem to already be laying the groundwork in this direction. The CEO of Royal Dutch Shell, Ben van Beurden, recently claimed that the business could transition to net-zero by 2050 – provided its legacy oil and gas business was not split.
One option is that oil giants could focus more of their business away from oil towards natural gas. This is often viewed as a more “eco-friendly” fossil fuel (CO2 emissions are about half that of coal), and worldwide demand is expected to rise by 50% to 5.92tn cubic meters by 2050 from 2019 levels. Another option, offered by Bill Gate and others, is that oil companies could move into low-carbon hydrogen. If a “cleaner” method can be developed to separate hydrogen and oxygen from water, then this could transform how today’s oil companies meet energy demands. Chevron, for instance, has recently formed a unit for hydrogen and carbon capture, and $10bn has been invested by ExxonMobil into emissions reduction technologies like green hydrogen.
Investment implications
One interesting fact which many people do not know is that most UK pensions are currently invested in oil companies. Shell, for instance, is a leading component of the UK’s FTSE 100, which is heavily invested in by UK pension funds. If you have a workplace pension and are contributing to it via auto-enrolment, then you may be investing in energy companies. Should you change your investment strategy, if this is the case? Not necessarily.
Remember, few people invest in individual stocks via their pension. Rather, most invest using funds which track, say, the FTSE 100 (which includes various companies, such as oil giants). It’s worth noting that, if an oil company fails to adapt to a “greener” future world’s energy needs, then it is likely to fall out of the FTSE 100 as its fortunes fall. However, for many people it is not enough simply to let the market “work itself out” like this. Rather, more action is needed to align investment choices with environmental protection.
Here, you may wish to speak to a financial planner about your “ESG strategy” (i.e. investments which take the environment, society and governance into account). It may be that you wish to re-examine the funds in your portfolio, for instance, to include more “ESG funds” which perhaps exclude their exposure to oil – or, which only include those with viable “net zero plans”. Bear in mind that if you divest, you do lose your influence as a shareholder. You need to decide whether you wish to wield that influence or forsake it upon principle.
Conclusion & invitation
Are you interested in talking to a financial adviser about your financial planning needs? We’d love to assist you here at Hanson Financial Services.
Please contact us to arrange a consultation with our team – free and without obligation – to gain more clarity and peace of mind over your financial plan.
You can call us on:
Liverpool Office: 0151 708 7616
Manchester Office: 0161 401 0991
Chester Office: 01244 960 039
