What's Wrong with Oil?

In a recent article in Horsesmouth (February 3, 2016), Debra and Robert Taylor infer the recent sharp drop in oil prices is signaling the imminent demise of fossil fuels at the hands of alternative energy. It’s an enticing thesis for SRI investors, but I think it’s much more complicated than that right now, having very much to do with current global economic trends. Most likely, economic slowdowns, especially in China, are what have played havoc with oil prices for over a year now. Basic economics dictates if demand for a product or commodity decreases - or is expected to decrease - its price will also go down.

Yet, the Taylors’ thesis is certainly worth considering, and SRI investors are wise to pay attention to some interesting disturbances within the energy sector itself that could shed more light, and might reap more profits.

Disrupting Energy Technologies

The Taylors remind us that periods of change are brought on by innovation. A shortage of stones didn’t shift the Stone Age into the Bronze Age. Rather, the discovery of a superior technology (bronze) made stone tools obsolete. Similarly, the horse and buggy era didn’t come to a close due to fewer horses. The internal combustion engine made traveling by horse antiquated and inefficient.

Today, a global energy disruption could be dawning, caused by more efficient, renewable technologies exposing the increasing costliness of developing fossil fuels, as well as the damage being done to our atmosphere.

Fossil fuels are increasingly costly and time-consuming to transfer into energy. They must be mined, drilled, refined, and transported - and that’s after the actual discovery of the raw materials, which is becoming more and more difficult.

Compare that to renewable energy sources like wind and solar. The raw materials required - wind and sunshine - are all around us. Furthermore, they only need to be collected and converted into electricity. No exploration, mining, drilling, or refining is needed, and renewable energy gives off practically no pollution.

This is a game changer because the cost of the raw materials used to produce renewable energy is zero. Fossil fuels simply can’t continue to compete with that, even with crude oil being as low as $30 per barrel.

Until recently, one of the biggest limiters to the growth of renewable energy has been storage. Fossil fuels store energy in their natural state, and release it when the fuels are burned. Renewable energy must be stored once it is created so consumers can use it as needed. Without storage, renewable resources are only an intermittent source of energy. To solve this issue, companies are investing billions in the advancement of electric storage technology. Leading the pack, Tesla* has announced its new Powerwall, a home-based electricity storage system that stores the electricity produced by solar panels.

As alternative energy technologies advance and prices decline, electric vehicles will replace gasoline-powered ones. Already, the benefits of an electric car over a gasoline one are almost too overwhelming to ignore. A recent example from Consumer Reports estimated that it cost about $3,000 annually to fuel a Jeep Cherokee in 2013 (assuming roughly 12,000 miles were traveled). Comparatively, the cost of driving a Tesla Roadster the same distance is only $315 per year. That means, over a five-year period, there is a fuel savings of over $13,000. Not only are electric vehicles cheaper to drive, they are cheaper to maintain. They require less service and have fewer parts, meaning fewer things to repair over the life of the car.

Its Complicated, but…. 

The recent precipitous drop in oil prices is very likely due to a variety of complex economic factors. The price of oil has long been a leading indicator of the health of a global economy dependent on fossil fuels for its crucial energy needs, so oil’s recent price drop has the markets fearing a global recession. Yet, could the problem be about oil itself as well as the economy? 

The Saudi Arabian Oil Company (Aramco) has recently stated it is considering an initial public offering to sell off some of its assets. This could be aimed purely at diversification, but the company could also be seeking to divest itself of assets that might become obsolete in the next 20 years.

If the world's largest oil-producing country is considering diversifying part of its fossil fuel-based energy holdings, maybe it’s time individual investors contemplate doing the same. The market currently distinguishes little between fossil fuel energy prices and alternative energy prices - but if the latter is truly beginning to displace the former - SRI investors are in the right place. 

Mention of specific securities is not a recommendation to buy or sell that security.  Past performance is not indicative of future results.