Big Oil: What Investors Should Look Out For
The oil industry has been one of the most volatile and hotly-debated global economic sectors of the last few years. It seemed to begin in the summer of 2014 when OPEC nations decided to launch a battle to maintain their market share against foreign oil producers, such as U.S. shale oil. Prices dropped precipitously, while OPEC continued to pump out supply, which far exceeded demand, in hopes their competition wouldn’t be able to hold out.
Fast forward three years and a new plot twist has developed: U.S. oil companies withstood the low oil values and learned to become leaner and more efficient, while OPEC countries eventually realized that they were only hurting their own economies. Now, production cuts aimed at lifting oil prices and allowing the marketplace to determine pricing is replacing the old OPEC oil cartel and the U.S. oil industry is taking advantage of every concession.
But the long term issues concerning fossil fuels, climate change and more affordable alternative energy sources haven’t changed. It’s left investors wondering whether the newly robust domestic oil industry is here to stay, or if it’s only a temporary stop-gap until something else takes over.
The Big Three Fossil Fuels
Oil, coal and natural gas are the three most commonly used fossil fuels. But their use in society in often misunderstood by investors. The oil industry is by far the largest of the three, but oil isn’t actually responsible for powering homes or cities. The oil industry is known for petroleum products for transportation services, including automobiles, aerospace, trucking, shipping and more.
Coal and natural gas, along with technologies like nuclear, are industries that are facing the biggest competition from alternative energy sources like solar and wind. While the oil industry is definitely being challenged with new innovations like electric vehicles, the source of that power still comes from the energy grid, which is powered by traditional means.
As solar and other green energy resources become more and more cost competitive, we’ll see a transition away from fossil fuels. Already the coal industry is facing virtual extinction in the U.S. Despite the political power behind getting the coal industry revitalized, the economic fundamentals for coal power over solar power just aren’t there. In the next decade, coal power could be all but eliminated in the U.S.
But What About Oil?
Technology is constantly improving, creating more fuel efficient and electric vehicles that have begun to inundate the market. But the transition away from oil and gas power is still going to be a slow one. Unless a major technological breakthrough happens, the oil and gas industry will continue to thrive for the next few decades.
In the short term, investors shouldn’t be worried about a fallout in the oil industry from green energy alternatives. With OPEC in disarray, U.S. production climbing and improved global economic growth, the energy industry should continue to grow at a healthy pace.
Still, it doesn’t hurt to diversify your portfolio and add a little green into the mix.