Oil and Gas

Are Oil and Gas Stocks Still Good Investments?

For the last century, the oil and gas industries operated as if their supply were infinite. They just had to explore, find and develop new fields.

The industries also operated as if demand for these fossil fuels would continue to increase.

But along came the recognition and realization of the devastating effects of climate change…

Coal was the first fossil fuel to make an exit. And even though a few countries are still using it, coal is set to be the first fossil fuel to disappear altogether.

But this picture starts to get murky when we talk about oil and gas.

Here to Stay? Or Go?

More than a century ago, Henry Ford started rolling Model T’s and Model A’s off his Detroit assembly lines. Ever since, world transportation systems have relied increasingly on oil’s derivatives: gasoline, diesel fuel and, more recently, jet fuel.

But today, all aspects of transportation are in various stages of transitioning away from oil.

The problem for the oil industry can be summed up in two words: demand uncertainty. How do you plan your business around a range of dizzying outcomes?

A gradual shift away from oil is one thing. But that’s not what’s happening.

There is an increased sense of urgency around climate change today. It’s reinforced by epic floods, melting and retreating glaciers, rising sea levels, heat waves, wildfires, tornadoes, hurricanes, and cyclones.

They all seem to be happening with greater frequency.

And now, to combat greenhouse gas emissions and climate change, the world’s carmakers are moving to all-electric models as rapidly as they can.

The move away from fossil fuels combined with the increased demand for electric vehicles makes it extremely difficult for an upstream oil exploration company to decide how much capital to deploy in developing new fields.

However, this picture gets a little clearer when we look at natural gas. It’s widely viewed as the transition fuel between the age of fossil fuels and the age of renewables.

Natural gas is used for domestic heating and cooking. It’s also used to power some of our heaviest industries, like cement-making and steelmaking. These are very difficult to decarbonize.

In addition, it is used to power utilities’ peak generating plants. But those peaker plants are starting to be replaced by large banks of battery storage.

The energy transition away from natural gas is going to take decades, perhaps as long as 50 years. So the demand for natural gas will likely increase (albeit slowly) for at least the rest of this decade.

Investors, Steer Clear!

I would steer clear of any company in the oil business. There’s just too much uncertainty about future demand.

But I would be less concerned about investing in a well-run natural gas driller or a large natural gas pipeline company.

Some of the largest institutional investors have already made up their minds regarding fossil fuel investments.

Most are choosing to distance themselves from Big Oil. But in the end, individual investors need to decide what’s right for their own portfolios.

The good news is there are plenty of excellent investment options to replace fossil fuel companies.

And I’ll keep you updated on the latest energy technologies and the companies behind them right here.

Good investing,

Dave

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