The oil industry is in the fight of its life. It's in the midst of another difficult downturn, the second in the past five years. However, this one seems different as the COVID-19 pandemic has caused so much demand destruction that the oil industry might never recover its former peak. That's mainly because renewable energy hasn't skipped a beat during the pandemic, as it has taken advantage of this downturn to grab even more market share.
Because of that, the oil industry's future has dimmed considerably over the past year. That's why it might be time for investors to forget about buying oil stocks and instead concentrate their efforts on the renewable energy industry.
Polar opposite outlooks
Earlier this year, oil giant BP ( BP 0.77% ) unveiled its latest long-term energy market outlook. The company painted a bleak picture. It sees fossil fuels losing market share to renewables even in its best-case scenario where governments don't enact legislation that further accelerates the transition to renewables. In its business-as-usual view, fossil fuels will account for less than 70% of the total share of primary energy by 2050, down from 85% this year. Meanwhile, under two other scenarios (rapid and net-zero), that number would decline to 40% and slightly more than 20%, respectively, by 2050.
The main reason fossil fuels will be losing ground is that they can't compete with renewables, which are cleaner and increasingly cheaper. Onshore wind is already less expensive than using combined-cycle gas turbines to generate electricity. Meanwhile, solar is on track to become the lowest-cost form of bulk power within the next few years.
Leading renewable energy project developers including Brookfield Renewable Partners ( BEP 1.42% )( BEPC 2.14% ) and NextEra Energy ( NEE 1.41% ) are seeing an acceleration in opportunities to invest in new renewable energy projects. For example, Brookfield Renewable anticipates growing its earnings per share at an 11% to 16% annual rate through at least 2025, powered in part by its extensive development project pipeline. Meanwhile, NextEra recently boosted its 2021 earnings growth outlook and extended its guidance through 2023 because of all the growth it sees ahead from renewables.
Contrast those views with the outlooks of most oil companies. For example, Chevron ( CVX 1.48% ) recently lowered its long-term investment guidance range from a range of $19 billion to $22 billion per year through 2025 to a range of $14 billion to $16 billion annually. Meanwhile, ExxonMobil ( XOM 1.12% ) recently cut $10 billion per year out of its long-term spending plan, bringing its new budget range down to $20 billion to $25 billion annually through 2025. Because of these reduced spending levels, most oil companies won't grow very much, if at all, in the coming years.
If you can't beat 'em, join 'em
Given that dire outlook for the oil patch, BP plans to transition away from fossil fuels over the next several years. The company intends to cut back its investments in fossil fuels and redirect that capital toward low-carbon projects. As a result, the company anticipates that its oil-equivalent production will decline by 40% over the next decade. Meanwhile, the company expects to grow its low-carbon businesses, such as renewables and bioenergy, tenfold during that timeframe.
Several other energy companies are making similar moves. For example, Total ( TTE 0.63% ) plans to de-emphasize oil, as it sees oil products sales falling 30% over the next decade. It plans to steadily replace oil by focusing on gases (including liquefied natural gas) and electrons (by growing into a world leader in renewable energy). Meanwhile, Enbridge ( ENB 2.19% ) and Equinor ( EQNR 3.09% ) are developing offshore wind projects as they begin to slowly transition away from their current oil focus. Even Chevron is starting to move away from oil. It plans to invest more than $300 million in 2021 to advance the energy transition.
The choice seems clear
It's becoming increasingly likely that global oil consumption has peaked. the industry seems to be heading toward a decline over the next several decades, which could be quite steep. Thus, there's limited upside for oil stocks.
Contrast that view with renewable energy, which is on track for accelerated growth over the next decade as costs continue to come down. Companies focused on this industry have the potential to generate strong growth and high investment returns. That's why it makes more sense to forget about oil stocks and focus on the brighter future in renewables.