Heat, drought, flood and famine. Evidence of climate change is all around us.
If the planet is to avoid even more severe consequences from global warming, the world’s leading energy agency states that consumption of oil, coal and natural gas needs to be reduced more rapidly, and clean energy sources like wind and solar power need to expand faster.
But the stock market doesn’t seem to have gotten the memo.
Instead, the shares of a broad range of clean energy companies have been hit hard lately, in a downturn that affects every alternative energy sector, including solar, wind and geothermal power.
Meanwhile, Exxon Mobil and Chevron, the two largest U.S. oil companies, are doubling down on oil. They have announced acquisitions that will significantly increase their oil reserves. Exxon is set to buy Pioneer Natural Resources, a major shale drilling company, for $59.5 billion. Chevron plans to acquire Hess, a big integrated oil company, for $53 billion. These moves indicate a strong commitment to oil for the coming years.
This is a perplexing situation. The evidence of carbon emissions warming the planet is strong. Yet, the stock market, which is expected to be forward-looking, seems to be favoring big oil companies over alternative energy companies.
There is clearly something wrong here. I believe that the problem lies with the stock market, not the scientists.
Benjamin Graham, the great value investor and Columbia professor, once said, “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”
This means that while the market eventually gets things right, in the short term, it is prone to enthusiasms, snap judgments, and narrow thinking.
And it seems that is what is happening now.
The Big Picture
The scientific consensus on climate change is clear. There are new and compelling studies on climate change and its dire consequences almost daily.
For example, in its latest comprehensive report on achieving net-zero carbon emissions by 2050, the International Energy Agency warned that the climate is warming rapidly. The report states that a shift from fossil fuels to alternative fuels is crucial to improve the odds of achieving a benign outcome.
In another study, scientists estimated that global warming could exceed the most ambitious goal of the Paris climate agreement in just over five years. They warned that breaching this limit would lead to catastrophic consequences. Governments, companies, and consumers need to take immediate action to reduce carbon emissions.
If the stock market truly believed in the urgency of these warnings, one would expect alternative energy shares to be thriving and big oil companies to be investing heavily in renewable resources. However, the stock market seems to have a different perspective.
Stock Losses
Renewable energy projects have attracted hundreds of billions of dollars in investments, despite the stock market’s lack of enthusiasm.
However, the returns for clean energy investors have been disappointing. The iShares Global Clean Energy E.T.F., which tracks the entire industry, has declined by more than 30 percent this year and over 50 percent since the beginning of 2021. Other sectors like solar and wind energy have also suffered losses.
Rising interest rates and reduced consumer enthusiasm in many countries have affected the valuations of fast-growing clean energy companies. For example, SolarEdge, an equipment provider for converting solar energy, experienced a drop in demand, leading to a significant decrease in its stock price. Similar trends have been observed in the wind energy sector.
The stock of SolarEdge, based in Israel, plummeted nearly 30 percent in a single day. Other solar companies, like Enphase Energy, also suffered significant losses. Orsted, a Danish wind turbine company, faced a decline of almost 26 percent due to the potential write-down of its offshore wind projects in the U.S.
Even in the face of these challenges, big oil companies have performed well in the stock market. Exxon, Chevron, Pioneer, and Hess have all seen substantial returns over the past three years.
Despite the uncertainty surrounding oil prices and the potential risks associated with fossil fuels, the market consensus is that big oil companies will remain profitable as long as global oil consumption continues. Additionally, geopolitical conflicts in the Middle East and other factors could lead to a surge in oil prices.
Betting on Fossil Fuel
Although big oil companies have faced declining profits and revenue, Exxon and Chevron are making significant investments in oil. Exxon’s acquisition of Pioneer would be its largest purchase since acquiring Mobil in 1999. Chevron’s acquisition of Hess further demonstrates its commitment to oil.
While some might think of Hess as a “green company” due to its association with the New York Jets, it is important to note that its product line is petroleum-based.
Ultimately, market prices reflect the views of numerous individuals who may have different opinions but agree on the price at a given moment. The market is a voting machine, as Benjamin Graham stated.
While the stock market may not always provide an accurate guide to the future, it is worth considering its signals. Investing in unprofitable ventures is not a viable strategy unless those ventures eventually generate significant cash flow. The future of many alternative energy companies remains uncertain, whereas oil companies are known for their ability to generate cash.
If you are seeking guidance on the future, it is important to look beyond the stock market. The market may make fickle and short-sighted decisions along the way, and it cannot predict the future with certainty.
