Even when we're not writing about stocks, we're probably discussing some investment theme or stock that sparks our interest. Here's a peek at some of the conversations that go on behind the scenes with some of our writers here at The Motley Fool.
Jason, Tyler, and I (Matt here) have a long-running conversation on Slack about various energy-related topics that pique our interest. One recurring theme has been our long-term view of the oil market and if renewables and electric vehicles (EVs) will completely disrupt the sector. Since we're all at different points on that spectrum, we thought we'd polish up our thoughts and share this behind-the-scenes conversation so that readers can get a better idea of how these views frame our investment theses.
Oil will do just fine
Tyler Crowe: There are no rules that say you can't invest in renewable energy and oil stocks at the same time. To think that one will be successful at the expense of the other just doesn't seem to jibe with the demand trends in energy over the next decade and even beyond. These guys will show the viability of renewables, so I'm going to make the case that oil will be a viable investment for the next decade and beyond. Here are three key considerations:
- Growth in emerging markets: I think that the discussion about emerging markets tends to center around China more than it should. As large as China is, both it and the OECD (aka mature markets) only represent 35% of the world's population. More important, energy demand for transportation in these regions is growing faster than in China by a wide margin. Even considering current projections for EV adoption over the next decade, oil demand in these emerging markets will more than offset the amount of oil that EVs will displace.
- We haven't found a suitable replacement for oil's other uses: Natural-gas trucks, EVs, and fuel cells are likely going to be the first technologies to significantly disrupt oil demand. While road transportation is a large chunk of that demand, it isn't everything to the oil world. Petrochemicals, aviation fuel, and asphalt are a few examples of oil demand that will be much harder to disrupt, and will likely continue to grow significantly over the next couple of decades.
- The development pipeline for oil is pretty dry right now: After several years of cheap oil prices, companies took a hatchet to their exploration and development budgets. New resource finds were at a 70-year low last year. And major development projects slated to go live over the next five years aren't even enough to offset the natural decline rate of current production, let alone meet new demand. Underinvestment leads to higher prices, and will likely start the next supercycle that Matt will mention. This could accelerate EV adoption rates, but still not enough to close oil's availability in a decadelong window.
I could be wrong. EV adoption rates in markets outside the OECD and China could be faster than most projections, and shale drilling in North America and other parts of the world could grow fast enough to make up for the dry development pipeline. Those are some high hurdles to jump, though, and it suggests that oil will be a very lucrative investment over the next decade.
Oil still has plenty left in the tank, but maybe not for a decade
Matt DiLallo: I believe that we have at least one more oil supercycle left in the tank. Several factors drive my opinion. First, I tend to agree with the view that oil demand doesn't appear as if it will slow down anytime soon, even with the rapid rise of EVs. Because of that, the oil industry will need to continue drilling new wells to try to match supplies with demand. That's going to get harder in the coming years as production from shale fields in the U.S. peaks. According to a report by the International Energy Agency, that could happen in the early 2020s.
That scenario could send oil stocks soaring, making them a much better investment option versus renewables in the near to medium term. However, I worry that the next spike in oil could also be the beginning of the end for crude's reign on the global stage. It could be just the pressure point needed to accelerate the adoption of EVs, which could cause weaker oil demand than expected later in the decade.
Because of that, I'm not willing to go out on a limb and say that oil stocks will outperform renewables in the next decade. Instead, I see a five-to-seven-year boom followed by another big bust. That's why I plan to continue buying oil-related stocks in the near term, with the hopes of cashing in on the next boom. At the same time, I also intend to allocate more of my retirement-focused investments toward renewables, where I see a much brighter future in the decades ahead.
The storm before the calm
Jason Hall: I agree that the next five years will probably be very good for many oil stocks, particularly if the recent bout of discipline that's infected the world's biggest oil producers (hint: OPEC isn't flooding the market with oil anymore) becomes permanent. That's why I continue to own a number of oil stocks, and why I've made a fairly large investment in offshore oil drillers, which continue to remain undervalued in my book.
But looking out a decade, I'm far more bearish than either the optimistic Tyler or the more conservative Matt. I think the oil industry will be in steeper decline than most are predicting in 10 years. Tyler -- who is experiencing the challenges of energy access in the developing world firsthand -- could be right that the growth in demand from an expanding global middle class makes up for the advances of renewables. He's also right that there are plenty of things we use oil for that we don't have a viable replacement for.
But my expectation is that innovation will continue its progress, and will eventually undercut oil's advantages in the vast majority of applications. Wind turbines and solar panels have become far more efficient (and far cheaper) over the past decade. Paired with nascent energy-storage technology that's also going to make huge cost and efficiency gains in coming years, I expect to see a further acceleration of investments in renewables -- at the expense of oil development.
There will be oil companies that survive and even thrive a decade from now. But I expect they will be the ones that have already begun shifting their resources into renewables and cleaner alternatives to oil.
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