Jasmine Birtles
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A future for fossil fuels? Why investors should embrace oil & gas
Karl
25th May 2023
ESG and renewable energy investing is all the range these days. Yet the fact is, roughly 80% of the world’s energy is still derived from fossil fuels.
And yes, while the shift towards cleaner energy is a crucial step for our planet, we really shouldn’t underestimate the role oil & gas continues to play in our thirst for energy.
In this article we’re going to explain some reasons why investors may wish to include old-fashoned fossil fuels in their portfolio. Keep reading for all the details or click on a link below to jump straight to a specific section…
Investing in fossil fuels: The facts
Over the past decade or so fossil fuels have become almost a dirty word. Multiple David Attenborough documentaries have eagerly reminded us how burning oil & gas is simply not sustainable, and that we all need to quickly transition to renewable energy sources.
In the UK, £198 billion has been poured into low carbon energy since 2010 alone. Meanwhile, British-based banks are reported to have reduced their fossil fuel financing by almost a third (31%) in 2022.
Yet while transitioning to green energy is important for the sake of humanity, the vast majority of our planet’s energy needs are still derived from burning fossil fuels – 80% in fact according to some estimates.
Fossil fuel reliance around the world
Despite the repeated Western narrative that says we need to move quickly away from fossil fuels, Europe is actually the largest importer of natural gas in the world, with Russia, Germany, Italy, France and the UK the biggest consumers.
Elsewhere, China is the biggest consumer of energy in the world – which is arguably understandable considering its population. Roughly half of China’s energy consumption is derived from burning coal. While this is down significantly from 2011 – when it was a whopping 70% – fossils fuels are, for the time being at least, still playing a massive part in powering the Chinese (and therefore global) economy.
Meanwhile, take a look at the Indian energy market and you’ll discover that oil, gas and coal consumption is now back to pre-pandemic levels, making up almost 90% of the country’s energy usage. India accounts for 12.5% of coal consumption globally.
Of course, just because fossil fuels are still heavily relied up today doesn’t mean we shouldn’t look to transition away from them. The whole of the EU, plus 194 states – including China and India – are signatories to the Paris Agreement. So, it is fair to say that most of the entire globe is on board with reducing our reliance on fossil fuels – at least on paper!
Yet it’s also worth bearing in mind that the world is still massively reliant upon fossil fuels, and this likely to remain the case for at least a number of years. We also shouldn’t forget that fossil fuels have powered the earth for over 150 years, which has directly helped to raise living standards across the globe. So, lets not be too ungrateful!
5 reasons to invest in Oil & Gas
While we’re often encouraged to ditch oil & gas, there are a number of decent reasons why investors may wish to gain exposure to the fossil fuel industry. Let’s explore some of these reasons..
1. Global demand
As highlighted above, despite efforts to transition to renewable energy, the demand for fossil fuels remains robust across the globe. We know that industries such as transportation, manufacturing, and electricity generation still heavily rely on oil, coal, and natural gas, and they will continue to do so for some time.
It should also be recognised that developing nations in particular remain thirsty for fossil fuels to support their growing energy needs.
2. Infrastructure
Oil refineries, pipelines, storage facilities, and power plants are all essential components of the globe’s energy ecosystem, and we shouldn’t forget that these have been developed over many decades.
The scale of investment required to replace or transition these infrastructure networks will be immense, which is why the world wont fully move to renewable energy tomorrow.
3. Advancements in technology
While emissions caused by burning fossil fuels are harmful for the environment, it’s worth bearing in mind that there are ongoing technological innovations taking place to reduce the amount of carbon being released into the atmosphere when utilising fossil fuels.
Carbon capture and storage (CCS) is one major technology currently being developed. CCS is a process that involves capturing CO2 and storing it underground as opposed to letting it sit in the atmosphere. Interestingly, the UK Government is making £20 million available from its ‘Energy Innovation Programme’ for CCS, so there is clearly a feeling that this kind of technology has huge potential.
Meanwhile, cleaner burning processes are also continuing to be developed, which is helping to reduce the amount of CO2 being released into the atmosphere.
As a result, investing in companies at the forefront of carbon capture and improved burning processes could pay dividends – quite literally!
4. Fossil fuel companies are diversifying
Invest in firms involved in the fossil fuel industry are you won’t necessarily be supporting unclean energy. As the world gradually shifts to renewable energy sources, fossil fuel companies are also supporting clean energy investments, such as wind, solar, and biofuels.
Investors who understand the significance of this transition, rather than following the simplistic ‘fossil fuels are bad’ narrative might actually turn out to capitalise on the transition.
5. Attractive valuations
Yes, fossil fuels are no longer cool. Yet the reason why many investors are staying clear is potentially also one of the reasons why you may wish to put your faith into the sector.
This is because there’s a chance the current value of oil & gas firms may not necessity reflect the near-term demand for fossil fuels. In other words, for value-oriented investors, fossil fuel stocks may be an attractive an investment opportunity.
At the time of writing on 19 May 2023, fossil fuel giants, BP and ExxonMobil, have both seen their share prices rise by over 17% in the space of 12 months. This is far greater than a number of other sectors. For example, the FTSE 100 has risen just 6.5% over the same period.
The risks of investing in fossil fuels
As with any type of investing, there’s a risk that your investments will fall in value. This is why if you invest in a particular sector, it’s worth taking steps to diversify your portfolio so you aren’t overly reliant on a single industry.
For fossil fuel investors in particular, ongoing political pressure and the rise of ESG investing are two big factors worth paying attention to when thinking about the risks of investing in non-renewable energy. Let’s take a closer look…
Political pressures
With climate change regularly at the forefront of the news, there is ongoing political pressure to impose tariffs or levies on the fossil fuel industry. In fact last year, after some initial reluctance the UK Government pressed ahead with a windfall tax on domestic energy suppliers. The tax is currently 35%, and is set to remain in place until 2028.
While the levy is designed to target excess profits, it’s no coincidence that much of this tax will be paid by the fossil fuel industry. Whatever your thoughts on the levy, such taxes can have a massive negative impact the value of shares, which is why investors can suffer when a specific industry is made an example of.
Similarly, in the UK we also have a green energy levy which is added to everyone’s energy bills. While this is said to be used to support the development of renewable energy it’s another unwelcome tax for investors.
While these levies are already in place there is a risk that they could be hiked in future. There’s also a risk new levies could be introduced, which is worth bearing in mind if you are looking to invest in fossil fuels.
The rise of ESG investing
ESG investing, which stands for ‘Environmental, Social, and Corporate Governance’, refers to buying shares in ethical companies or funds.
ESG investing has come under fire in recent times, partly because when it comes to ESG investing, it’s very difficult to determine whether an investment is indeed ethical. For more on this, see our article that explains how to check if an investment is genuinely green
Putting aside these concerns, it’s worth knowing that ESG funds are prohibited from investing in fossil fuels. So if you choose to invest in certain funds, you may not be able to gain exposure to fossil fuel investments, even if you wouldn’t personally be against it.
More funds, or fund managers, may soon turn away from investing fossil fuels, as general sentiment continues to turn against the industry. This is another factor to consider if you’re interested in investing in fossil fuels.
How to invest in fossil fuels
Keen to invest in fossil fuels? Well, you’ve essentially two options. You can buy shares directly in firms involved in oil or gas. Alternatively, you can buy an exchange-traded fund. Here’s what you need to know about these two options…
1. Buying shares in energy firms.
If you want to buy shares directly in fossil fuel companies, such as BP, Shell, or ExxonMobil, then you can do so via a investment broker. This is just like buying shares in any other sector.
To learn more about the process of buying shares and finding the right broker for you, take a look at our article that explains how to buy shares.
2. Buying a exchange-traded fund.
Rather than putting your faith in individual fossil fuel companies, you can instead gain a wide exposure to the industry by buying an ETF.
ETF’s are available that cover various energy commodities, such as natural gas, or oil. Some examples include
- Vanguard Energy ETF (VDE)
- SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
- VanEck Oil Services ETF
Alternatively, there are also ETFs out there that track the price of Brent crude oil, such as the WisdomTree Brent Crude Oil ETF – potentially a good option if you’re mostly interested in ‘black gold’.
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Disclaimer: When investing your capital is at risk. Remember, the value of any investment can both rise and fall. Always do your own research.
MoneyMagpie is not a licensed financial advisor. Information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.
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