Heat, drought, floods and famine. Evidence of climate change is all around us.
If the planet wants to avoid even more serious consequences of global warming, the main world energy agency saidconsumption of oil, coal and natural gas must be reduced much more quickly, and clean energy sources like wind and solar must expand at a much faster rate.
But the stock market does not seem to have understood the message.
Instead, shares of a wide range of clean energy companies have been crushed lately, in a rout that encompasses just about every alternative energy sector, including solar, wind and geothermal. .
At the same time, rather than weaning themselves off oil, Exxon Mobil and Chevron, the two largest American oil companies, are doubling down. They have announced acquisitions that will significantly increase their oil reserves. Exxon intends to buy Pioneer Natural Resources, a major shale drilling company, for $59.5 billion. Chevron plans to acquire Hess, a large integrated oil company, for $53 billion. These are huge bets on oil for years to come.
It’s a confusing situation. The evidence that carbon emissions are warming the planet is compelling. Yet the stock market, supposedly forward-looking, treats alternative energy companies with disdain and big oil companies with respect.
There is obviously something wrong here.
I think the problem is with the stock market, not with scientists.
Benjamin Graham, high-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 the market eventually gets things right, but in the short term it is prone to enthusiasm, hasty judgments, and short-sightedness.
This seems to be what is happening now.
The big picture
The scientific consensus is clear. It sometimes seems like a compelling new study on climate change is released every day, with disturbing conclusions.
Last month, for example, in its latest global publication report On the world’s chances of reaching net zero carbon emissions by 2050, the International Energy Agency, the world’s leading energy authority, said the climate was warming too quickly. The likelihood of a benign outcome is diminishing, he says, but the odds will improve if the world aggressively shifts from fossil fuels to alternative fuels.
In a separate study Published last week, a group of scientists said the planet likely has just over five years left before global warming exceeds the Paris climate agreement’s most ambitious target: warming no more than 1.5 degrees Celsius, or 2.7 degrees Fahrenheit, above. temperatures that prevailed before the industrial revolution.
If you exceed this limit, you risk disasters much worse than those we have experienced so far, according to the study. The planet has already warmed by 1.2 degrees Celsius. Governments, businesses and consumers around the world must take aggressive action to immediately reduce carbon emissions, the study said.
If the stock market heeded these calls for action, one would expect alternative energy stocks to be booming and major oil companies to invest most of their money in renewable resources.
But in its collective wisdom, the stock market seems to take a different and contrary view.
Inventory losses
Hundreds of billions of dollars are actually being invested in renewable energy projects, even though the stock market generally does not favor them at the moment.
The returns are lousy. The iShares Global Clean Energy ETF, an exchange-traded fund that tracks the entire sector, is down more than 30% this year. Worse still, since the start of 2021, it has lost more than 50 percent.
Smaller sectors are also punished. The Invesco Solar ETF is down more than 40% this year and nearly 60% since January 1, 2021. The First Trust Global Wind Energy ETF is down about 20% this year and about 40% since January 1 2021.
Rising interest rates have increased costs and dampened consumer enthusiasm in many countries, reducing the valuation of stocks of fast-growing companies that don’t generate big profits. Renewable energy companies have been hit hard.
SolarEdge, which provides the equipment needed to convert energy from solar panels into power that can be transmitted through power grids, warned Oct. 17 that demand for its products was lagging. The market reacted harshly.
The shares of the company, based in Israel, abandoned almost 30 percent in a single day. A host of other solar companies followed. Enphase Energy, a rival company in Fremont, California, has lost nearly 40% since October 17.
Wind energy companies have not been spared either. Shares of Orsted, the Danish wind turbine company, fell nearly 26% on Wednesday after announcing that it may have to write down as much as $5.6 billion on the value of its offshore wind projects in the United States. United.
An Orsted company, South Fork Wind, a set of turbines being installed 30 miles east of Montauk Point, is expected to begin sending electricity to Long Island before the end of the year. But the company canceled two projects, known as Ocean Wind 1 and 2, that were supposed to provide green energy to New Jersey, and some of its projects for New York and Connecticut also struggled.
In October, the New York State Civil Service Commission rejected demands from Orsted and several other companies – including BP and Equinor – for billions in electricity tariff increases to help them meet their rising costs. The companies say that with inflation and rising interest rates driving up their costs, the viability of some of their projects in the New York metropolitan area is in doubt.
Betting on fossil fuels
Profits and revenues at major oil companies have fallen since last year, when energy prices soared following Russia’s invasion of Ukraine.
For the S&P 500 as a whole, third-quarter earnings per share rose just 2.7% from a year earlier, estimated John Butters, senior earnings analyst at FactSet. However, if large energy companies are excluded, this total rose to 8.4 percent. Indeed, the earnings per share of large fossil fuel companies fell by 38.1%, more than that of any other sector.
Oil prices are volatile and their trajectory in the coming years is far from certain. But Exxon and Chevron are betting their future on oil. Exxon’s acquisition of Pioneer would be its largest purchase since purchasing Mobil in 1999. And Chevron will strengthen its commitment to oil by acquiring Hess.
Even though I know better, I can’t help but think of Hess as “the green company.” That’s only because I’m an old New York Jets fan. Hess shares company history and a green and white motif with the Jets. Leon Hess founded the company, owned the team and loved the color green. But the Hess product line is petroleum-based. Otherwise, it’s not a green business.
But that doesn’t matter. Oil has been good for Hess shareholders and for shareholders of the other three companies. Over the past three years, Exxon has returned about 275 percent, including dividends; Chevron, 135 percent; Pioneer, 260 percent; and Hess, a whopping 310 percent. The S&P 500 returned about 32 percent.
As long as the world consumes oil, companies like these will be profitable, or so the oil bulls say.
Additionally, there is a joker.
As the World Bank warned on Monday, if the war between Israel and Hamas worsens, the conflict in the Middle East could easily trigger a sharp rise in oil prices. An escalation of the Russo-Ukrainian war could also make oil dream. The same goes for many potential military or political conflicts.
If scientific discoveries dominate, oil could become a stranded asset, unsaleable. But the market consensus is that the viability of Big Oil still has a long way to go.
Confusing choices
What do we think of the messages sent by the market?
On the one hand, I don’t see them as inevitable. Prices change every minute and, despite its vaunted reputation, the stock market does not provide a guide to the future. Sometimes he can’t see what’s right in front of him, and he definitely can’t see around corners. I remain hopeful, despite discouraging news from the stock market.
But I wouldn’t entirely dismiss stock market signals. Market prices incorporate the opinions of very large numbers of people who cannot agree on much except, at any given time, the appropriate price for a specific offering. In this sense, the market is, as Benjamin Graham said, a voting machine.
Investing money in unprofitable businesses is not a good strategy unless those businesses ultimately generate a lot of cash. The jury is still out on many alternative energy companies, even though the world needs their products. Oil companies, on the other hand, are valued for their ability to generate cash.
But if you’re looking for a guide to the future, don’t rely on the stock market. I expect him to rise in the long run and make some inconsistent and foolish choices along the way.
