Integrated oil giant Chevron Corporation (CVX 0.53%) isn't ignoring the environmental impact of oil and natural gas -- it realizes that global warming is a very real issue. But it also has to operate in the world as it exists today. And that means Chevron still needs to produce these carbon fuels, something it expects to be doing for many years to come. Here's why.

It's not that simple

If you are a die-hard environmentalist or even a steadfast ESG investor, you might be OK with the oil industry facing hard times. After all, oil companies like Chevron produce dirty fuels that make global warming worse. But talk to the CEOs of companies like ExxonMobil (XOM 1.26%) and Royal Dutch Shell (RDS.B) and you get a slightly different story. Recently Chevron's CEO, Michael Wirth, offered his thoughts on the matter.

Oil rigs with the sun setting in the background

Image source: Getty Images

In an interview with CNBC, Wirth was asked specifically about the future of oil, leading him to explain:

There's a long future in a growth environment and there's a long future even in an environment that begins to plateau for good economic investment to continue to provide the affordable, reliable, and ever cleaner energy the world will need.

This isn't that much different from what Exxon and Shell have been saying. Exxon, for example, is so confident in the future of oil and natural gas that it has been doubling down on its exploration efforts. Shell has been hedging its bets by dipping its toes into the electricity space, but CEO Ben van Beurden recently explained in a Reuters interview: "Despite what a lot of activists say, it is entirely legitimate to invest in oil and gas because the world demands it."

With the world increasingly concerned about global warming, how can these CEOs still be so positive? The answer is simpler than you might think.

Seeing the world realistically

First off, oil giants aren't ignorant to the issue of global warming. As noted, Shell is investing in the electricity space. Exxon is experimenting with algae produced fuel as a way to help the world reduce carbon emissions. And most of the oil giants are following along with Chevron, which is working on ways to reduce the emissions it produces while drilling for oil and natural gas. In fact, it has set environmental goals that target flaring (burning off excess natural gas), methane emissions, and using renewables to power its drilling efforts, among other things. To even skeptics, oil majors are making a token effort to be good environmental stewards.

While some might think ceasing to produce oil and natural gas altogether would be the best way to achieve that, it just isn't pragmatic. For example, the International Energy Agency (IEA) states that, based on existing policy intentions and targets, oil demand isn't likely to peak until at least 2040. To be fair, growth won't be robust, with the IEA predicting that between the mid-2020s and 2040 demand growth "slows to a crawl." But demand will keep rising even if the world puts in place all of its current environmental plans. 

Only that's not exactly how things are shaping up, since many countries around the world are actually falling short of their environmental goals and commitments. So unless countries get really serious about carbon reduction, the future for oil is likely to be pretty robust.

The story is even better for natural gas, which is being used as a transition fuel in the utility sector because it burns more cleanly than coal. That said, the IEA's estimates have missed the mark in the past, underestimating renewable power's growth rates. It is currently offering up another scenario in which oil and natural gas don't do nearly as well. But that scenario requires exceeding the environmental goals that exist today. Based on current success rates, this seems unlikely. 

There are two big problems. The first is that the infrastructure to support oil and natural gas is in place, pervasive, and huge. You can't just replace oil and natural gas overnight. It takes time, money, and effort, and it is likely to be a multi-decade endeavor. At the same time, the world's population continues to grow (largely driven by emerging markets), meaning there will be more need for energy. One form of energy is unlikely to be able to support all of the world's energy needs, meaning that even carbon-based fuels will still have an important place at the table.  While clean energy will likely displace oil and natural gas over time, the chance of a wholesale shift in the next couple of decades seems remote given the current set of circumstances.

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But demand is just half the story. The other side of the equation is supply. Oil and natural gas are depleting assets. Once a barrel is pulled from the ground, it is gone forever. If all of the energy companies in the world stopped looking for new oil and natural gas to replace what they are currently producing, future production would plummet. This is why a driller's replacement rate is so important, as it shows how well a company is "replacing" what it produces (between 2013 and 2017 Chevron's replacement rate was a bit over 100%, one of the best rates of its closest peers).

The big takeaway here, however, is that oil and natural gas companies need to keep drilling in order to produce the energy the world continues to demand. So the drilling business can't simply end -- companies like Chevron need to keep doing what they do or the world would fall woefully short of oil and natural gas. So, at least for now, Chevron's core exploration business is supported by both supply and demand issues. While there's no way to tell what the future will bring, Chevron's Wirth appears spot-on when he says there's a "long future" ahead for oil and natural gas... and the companies that produce it.

Look past the headlines

It can be hard for long-term investors to get beyond Wall Street's whims. Today ESG investing is a headline-grabbing investment approach that doesn't look kindly on oil and natural gas companies like Chevron, even though they remain vital cogs in the global economic machine. With a roughly 4% dividend yield, decades of annual dividend increases, and a strong balance sheet, Chevron is a solid option for dividend-focused investors that are willing to take a contrarian view. The core of that view, meanwhile, is something that all of the major energy CEOs are trying to explain -- and it's pretty simple: Carbon fuels aren't dead yet.