Fossil fuels will be a primary source of energy for some years to come. This means that Alaska’s oil will be part of that primary source of energy over those years. However, renewable energy sources, such as onshore wind and onshore solar, have captured and will continue to capture a greater share of the energy markets.
Energy markets look for a supply of energy which is reliable and affordable. It also means energy markets, as part of the world’s money system, will seek out companies and projects to supply energy to consumers. That leads to a question: Can shareholders make money owning shares in oil companies during the period of transition from fossil fuels to renewables.
Look at ExxonMobil [EM], one of the biggest oil companies in the world and a major operator in Alaska. EM’s market capitalization in mid-July 2021 was about $250 billion. But on Jan. 31, 2007, EM’s market capitalization was about $490 billion. Its market capitalization was about $330 billion on Jan. 4, 2010. A recent low of about $140 billion occurred on March 16, 2020. Currently, a shareholder who invested in EM in early 2007 has lost about 50% of EM’s company value, which fell from $490 to $250 billion.
On a slightly different point, consider Norway’s sovereign wealth fund. It was started after Alaska’s sovereign wealth fund — Alaska’s Permanent Fund. In late 2017, Norway’s fund was advised, to protect its fund, to divest [sell] all its shares in oil and gas companies, sometimes called black stocks, and to invest in renewable energy companies, sometimes called green stocks. Norway’s fund rejected a complete divestment of oil and gas companies selling only shares of oil and gas companies which had not begun an actual transition to producing energy by way of renewable energy sources. In early 2021 [using Dec. 31, 2020 data], it became apparent that Norway’s continued ownership of shares in oil and gas companies during 2018-2020 resulted in an 11% loss. By not fully investing in renewable energy companies, green companies, Norway’s loss equated to an opportunity cost of over $125 billion.
So, what are some of the reasons for this type of disruption to the oil and gas business. One of the reasons started over a decade ago — the combination of horizontal drilling with hydraulic fracturing made possible the recovery of oil and gas from shale/source rock. This increased, for example, the United States’ production of oil from about 5,000,000 barrels of oil per day to over 12,000,000 barrels per day. Oil and gas became more plentiful [including the U.S. could start exporting oil]. But increased supply could create downward pressure on oil price. In economic terms, supply exceeded demand and price drops.
Another reason impacting the oil and gas business is increasing commercial investment in renewable energy projects rather than investment in oil projects. Since 2018-2019, the cost of producing electricity from solar energy has been lower than that of fossil fuels. This is a “permanent change” according to David Bailin, chief investment officer of Citi Private Bank. The transition from oil, gas and coal sources to solar for generating electricity becomes “the ultimate cap” on fossil fuel prices. That means Citi’s clients are advised to invest in renewable energy based upon an “unstoppable trend because you can identify that cost point, it’s a great opportunity.” 2021 has become, because of this transition, the year renewable energy projects become the area of largest energy investment ... and will surpass oil and gas project investment.
The energy conversation decades ago was around the risk of peak oil, when oil would run out. The conversation in the investing world has now changed to that of peak demand, when demand for oil will start to decline. Oil will be a primary source of energy for years but maybe not forever. This brings us back to the initial question as to whether shareholders can make money owning oil company stock, looking at short- and long-term investment horizons.
Oil pricing is volatile; but, now that means higher oil prices in the short-term will result in sooner and larger investment in long-term renewable energy projects, increasing the speed of transition away from oil. That’s the way capitalism works.
The world is changing. Alaskans need to think about our place in a world which is transitioning away from oil. Words such as “permanent change,” “ultimate cap,” “unstoppable trend” and “identify that cost point” are meaningful to the long-term financial stability of Alaska. Alaska’s oil customers on the U.S. West Coast are part of the transition to renewable energy sources. Just because Alaska’s North Slope ground contains a lot of oil does not mean there will be infinite demand for it; supply for future energy needs will more and more come from renewable energy sources. Alaskans must think about the world, not too far in the future, less and less reliant upon oil, the unstoppable trend.
Joe Paskvan is retired after almost 40 years as an attorney in private practice. He is a former state senator who served as chairman of the Senate Resources Committee. He lives in Fairbanks.