Oil prices had been on the mend, but that rebound ran into trouble last month—and Friday, crude dropped 4.4%. So the market, amid signs that the recovery may be faltering, is again taking a dim view of what once was called “black gold.”
Well, hold on, says Wells Fargo Securities. “It is hard to overstate how cruel 2020 has been to oil-and-gas equities,” wrote Roger Read, senior analyst at the firm. Still, he went on, “It may be a while before oil enjoys a boom, but its demise has been greatly exaggerated.”
For sure, oil producers are under siege. Sinking petroleum prices, first from over-production and then from this recession, have pushed many of the big oil companies into the red. University endowments are hustling to divest themselves of energy stocks. Exxon Mobil even got kicked off the Dow Jones Industrial Average—not because of politics but due to its shrinking market value.
For investors, this is a signal to shun energy stocks. But in Read’s view, that is way premature.
The Wells analysis underscores the difficulty of breaking free from legacy energy’s hold. While alternative energy sources, namely solar and wind, have made great strides, they remain merely a small part of the nation’s and the world’s energy production.
By 2050, according to the Energy Information Administration (EIA), fossil fuels will still hold a decent chunk of the energy space. True, projections like this are hardly iron-clad, and scientific and engineering advances may arrive that will speed the demise of fossil fuels.
In three decades, by the EIA’s estimation, renewable energy will constitute 28% of global energy consumption, almost double the amount it did in 2018 (15%), making it the leading source, by a tiny margin. Right behind it: petroleum at 27% (down from 32% now), then natural gas, static over the 30-year stretch, at 22%.
How come? As Wells’ Read, with the help of colleague Lauren Hendrix, pointed out, the alt energy buildout from here won’t be easy logistically. They wrote that “it is worth considering the amount of material and energy that will be required to build and sustain this new green world.”
For one thing, they reason, oil and gas best provide the heat needed for the amount of manufacturing required for green infrastructure. Not to mention diesel’s superior ability to power the trucking industry’s internal combustion engines, at last for now: “Good luck hauling all of those windmills blades and mining, processing, and creating all of the metals and carbon fibers without the oil-and-gas sector.”
And the buildout will be very expensive, they warned. “Expect more negative headlines about those costs (visible and hidden) in coming years,” they said.
Democratic presidential nominee Joe Biden talks of creating a $2 trillion federal commitment to renewables and clean energy projects. President Donald Trump is on the opposite side of that. Regardless of who is right, the Wells analysts make a persuasive case that none of this will be easy.