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 says, consumption of oil, coal and natural gas needs to be reduced much more rapidly, and clean energy sources like wind and solar power need to expand at a far faster pace.
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 crushed lately, in a rout that encompasses just about every alternative energy sector, including solar, wind and geothermal power.
At the same time, rather than weaning themselves off oil, Exxon Mobil and Chevron, the two biggest U.S. oil companies, are doubling down. They have announced acquisitions that will vastly increase their oil reserves. Exxon intends to buy Pioneer Natural Resources, a major shale drilling company, for $59.5 billion. Chevron plans a $53 billion purchase of Hess, a big integrated oil company. These are enormous bets on oil for years to come.
It’s a perplexing state of affairs. The evidence that carbon emissions are warming the planet is persuasive. Yet the stock market, which is supposed to be forward-looking, is treating alternative energy companies with disdain and big oil companies with respect.
There’s something wrong here, obviously.
I think the problem resides 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.”
That means that eventually the market gets things right, but in the short run, it’s prone to enthusiasms, snap judgments and myopic thinking.
That seems to be what’s happening now.
The Big Picture
The scientific consensus is clear. It sometimes seems there is a new and compelling study on climate change, with disturbing conclusions, every day.
Last month, for example, in its latest comprehensive report on the world’s chances of achieving net-zero carbon emissions by the year 2050, the International Energy Agency, the world’s leading energy authority, said the climate was warming all too rapidly. The probability of a benign outcome is receding, it said, yet odds will improve if the world shifts aggressively from fossil to alternative fuels.
In a separate study released this past week, a group of scientists said the planet probably had only a little over five years before global warming would exceed the most ambitious goal of the Paris climate agreement: warming of no more than 1.5 degrees Celsius, or 2.7 degrees Fahrenheit, above temperatures that prevailed before the Industrial Revolution.
Breach that limit and there will be catastrophes far worse than what we have experienced so far, the study said. Already, the planet has warmed 1.2 degrees Celsius. Governments, companies and consumers around the world need to take aggressive measures to curb carbon emissions immediately, the study said.
If the stock market heeded such calls to action, you might expect that the alternative energy shares would be booming and that big oil companies would be pouring most of their money into renewable resources.
But in its collective wisdom, the stock market seems to be embracing a different and contrary vision.
Stock Losses
Hundreds of billions of dollars are, in fact, being invested in renewable energy projects, even if the stock market generally isn’t favoring them right now.
The returns are ugly. The iShares Global Clean Energy E.T.F., an exchange-traded fund that tracks the entire industry, is down more than 30 percent this year. Even worse, since the start of 2021, it has lost more than 50 percent.
Narrower sectors are being punished, too. The Invesco Solar E.T.F. is down more than 40 percent this year and almost 60 percent since Jan. 1, 2021. The First Trust Global Wind Energy E.T.F. has lost about 20 percent this year and about 40 percent since Jan. 1, 2021.
Rising interest rates have increased costs and tempered consumer enthusiasm in many countries, reducing stock valuations for fast-growing companies that aren’t churning out big profits. Renewable energy companies have been hard hit.
SolarEdge, which provides equipment needed to convert energy from solar panels into power that can be transmitted through electric grids, warned on Oct. 17 that demand for its products was lagging. The market responded harshly.
Shares of the company, which is based in Israel, dropped nearly 30 percent in a single day. A host of other solar companies followed. Enphase Energy, a rival firm in Fremont, Calif., has lost almost 40 percent since Oct. 17.
Wind energy companies haven’t been spared, either. Shares of Orsted, the Danish wind turbine company, fell nearly 26 percent on Wednesday after it said it might have to write down as much as $5.6 billion on the value of its offshore wind projects in the United States.
One Orsted venture, South Fork Wind, a set of turbines being installed 30 miles east of Montauk Point, is scheduled to start 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 to supply New Jersey with green energy, and some of its projects for New York and Connecticut have run into trouble, too.
In October, New York State’s Public Service Commission rejected requests from Orsted and several other companies — including BP and Equinor — for billions in electric rate increases to help defray their ballooning costs. The companies say that with inflation and higher interest rates increasing their costs, the viability of some of their projects in the New York metropolitan area is in doubt.
Betting on Fossil Fuel
Big oil company profits and revenue have flagged since last year, when energy prices soared after Russia’s invasion of Ukraine.
For the entire S&P 500, earnings per share in the third quarter grew only 2.7 percent from a year earlier, John Butters, a senior earnings analyst for FactSet, estimated. Exclude the big energy companies, though, and that total increased to 8.4 percent. That’s because earnings per share for big, fossil fuel energy companies declined 38.1 percent, more than for any other sector.
Oil prices are volatile, and their trajectory in the years ahead is far from certain. But Exxon and Chevron are staking their futures on oil. Exxon’s acquisition of Pioneer would be its biggest purchase since it bought Mobil in 1999. And Chevron will deepen its commitment to oil by acquiring Hess.
Though I know better, I can’t stop thinking of Hess as “the green company.” That’s only because I’m an old New York Jets fan. Hess shares corporate history and a green-and-white motif with the Jets. Leon Hess founded the company, owned the team and liked the color green. But the Hess product line is petroleum-based. It’s not a green company otherwise.
But no matter. Oil has been good to Hess’s shareholders, and to shareholders of the three other companies. Over the last 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 oil bulls say.
Plus, there is a wild card.
As the World Bank warned on Monday, if the war between Israel and Hamas widens, conflict in the Middle East could easily set off a steep surge in oil prices. An escalation of the Russian-Ukrainian war could make oil soar as well. So could any number of potential military or political conflicts.
If scientific findings dominate, oil could become a stranded asset, one that can’t be sold. But the market consensus is that the viable life of Big Oil has a long way to go.
Confounding Choices
What are we to make of the messages the market is sending?
For one thing, I wouldn’t view them as inevitable. Prices shift every minute, and despite its vaunted reputation, the stock market doesn’t provide a guide to the future. Sometimes it can’t see what’s right in front of it, and it certainly can’t see around corners. I remain hopeful, despite discouraging tidings from the stock market.
But I wouldn’t dismiss the stock market’s signals entirely. Market prices incorporate the views of an awful lot of people who can’t agree on much, except, at a particular moment, on the appropriate price for a specific offering. In that sense, the market is, as Benjamin Graham said, a voting machine.
Pouring money into unprofitable ventures isn’t a good strategy unless those ventures ultimately generate a great deal of cash. The jury is still out on many alternative energy companies, much as the world needs their products. Oil companies, on the other hand, are prized for their ability to gush cash.
But if you’re seeking a guide to the future, don’t count on the stock market. I expect it to rise over the long run, and to make fickle and foolish choices along the way.