In a warming world, clean energy stocks fall while oil thrives

In a warming world, clean energy stocks fall while oil thrives

Heat, drought, floods and famine. The evidence of climate change is all around us.

For the planet to avoid even more serious consequences of global warming, the world’s main energy agency saysConsumption of oil, coal and natural gas must be reduced much more quickly, and clean energy sources such as wind and solar must expand at a much faster pace.

But the stock market doesn’t seem to have gotten the memo.

Instead, shares of a wide range of clean energy companies have been crushed lately, in a rout that spans nearly every alternative energy sector, including solar, wind and geothermal energy.

At the same time, instead of abandoning oil, Exxon Mobil and Chevron, the two largest American oil companies, are doubling down. They have announced acquisitions that will greatly increase their oil reserves. Exxon intends to buy Pioneer Natural Resources, a major shale drilling company, for $59.5 billion. Chevron plans to buy Hess, a large integrated oil company, for $53 billion. These are huge bets on oil for years to come.

It is a disconcerting situation. The evidence that carbon emissions are warming the planet is compelling. Yet the stock market, which is supposed to be forward-looking, treats alternative energy companies with disdain and Big Oil with respect.

Something is wrong here, obviously.

I think the problem lies with the stock market, not with scientists.

Benjamin Graham, the great value investor and Columbia professor, once said, “In the short term, the market is a voting machine, but in the long term it is a weighing machine.”

That means that eventually the market gets things right, but in the short term it is prone to enthusiasm, snap judgments, and short-sighted thinking.

That seems to be what is happening now.

The scientific consensus is clear. Sometimes it seems like every day a new and compelling study on climate change appears, with disturbing conclusions.

Last month, for example, in its latest comprehensive report report On the world’s chances of achieving net-zero carbon emissions by 2050, the International Energy Agency, the world’s top energy authority, said the climate was warming too quickly. The likelihood of a benign outcome is decreasing, he said, but the odds will improve if the world aggressively shifts from fossil fuels to alternative fuels.

in a separate studio Published last week, a group of scientists said the planet was probably just over five years away before global warming surpassed 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.

If that limit is exceeded, there will be catastrophes much worse than those we have experienced so far, according to the study. The planet has already warmed by 1.2 degrees Celsius. Governments, businesses and consumers around the world must take aggressive action to curb carbon emissions immediately, according to the study.

If the stock market heeded those calls to action, you could expect alternative energy stocks to be booming and big oil companies to invest most of their money in renewable resources.

But in its collective wisdom, the stock market seems to be taking a different, contrarian view.

In fact, hundreds of billions of dollars are being invested in renewable energy projects, even if the broader stock market does not favor them at the moment.

The returns are ugly. The iShares Global Clean Energy ETF, an exchange-traded fund that tracks the entire industry, is down more than 30 percent this year. Worse still, since the beginning of 2021 it has lost more than 50 percent.

The narrowest sectors are also being punished. The Invesco Solar ETF has lost more than 40 percent this year and nearly 60 percent since Jan. 1, 2021. The First Trust Global Wind Energy ETF has lost about 20 percent this year and about 40 percent since January 1, 2021. cent since January 1, 2021.

Rising interest rates have raised costs and tempered consumer enthusiasm in many countries, reducing stock valuations of fast-growing companies that aren’t generating big profits. Renewable energy companies have been hit hard.

SolarEdge, which provides the equipment needed to convert energy from solar panels into energy that can be transmitted over power grids, warned on Oct. 17 that demand for its products was lagging. The market responded harshly.

The shares of the company, based in Israel, abandonment almost 30 percent in a single day. Many other solar companies followed. Enphase Energy, a rival company in Fremont, California, has lost almost 40 percent since October 17.

Wind energy companies have not been spared either. Shares in Orsted, the Danish wind turbine company, fell nearly 26 percent on Wednesday after it said it may have to write down up to $5.6 billion on the value of its U.S. offshore wind projects.

An Orsted company, South Fork Wind, a set of turbines being installed 30 miles east of Montauk Point, is scheduled to begin 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 supposed to supply green energy to New Jersey, and some of its projects for New York and Connecticut have also run into problems.

In October, the New York State Public Service Commission refused requests from Orsted and several other companies, including BP and Equinor, for billions in electricity rate increases to help defray their rising costs. The companies say that as inflation and higher interest rates increase their costs, the viability of some of their projects in the New York metropolitan area is in doubt.

Big oil companies’ profits and revenues have declined 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 just 2.7 percent from a year earlier, estimated John Butters, senior earnings analyst at FactSet. However, if large energy companies are excluded, the total rose to 8.4 percent. That’s because earnings per share for large fossil fuel energy companies fell 38.1 percent, more than any other sector.

Oil prices are volatile and their path in the coming years is far from certain. But Exxon and Chevron are betting their future on oil. Exxon’s acquisition of Pioneer would be its largest purchase since it bought Mobil in 1999. And Chevron will deepen its commitment to oil with the acquisition of Hess.

Even though I know better, I can’t help but think of Hess as “the green company.” That’s just 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, he owned the team and liked the color green. But Hess’ product line is based on petroleum. Otherwise it is not a green company.

But it does not matter. Oil has been good for shareholders of Hess and the other three companies. Over the past 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 the oil bulls say.

Plus, there is a wild card.

As the World Bank warned on Monday, if the war between Israel and Hamas widens, the conflict in the Middle East could easily trigger a sharp rise in oil prices. An escalation of the Russo-Ukrainian war could also cause oil to soar. The same could happen with any number of possible military or political conflicts.

If scientific findings dominate, oil could become a stranded asset, one that cannot be sold. But the market consensus is that the viable life of Big Oil still has a long way to go.

What should we do with the messages that the market sends?

On the one hand, I wouldn’t consider them inevitable. Prices change by the minute, and despite its vaunted reputation, the stock market does not provide a guide to the future. Sometimes he can’t see what’s right in front of him and he certainly can’t see what’s behind corners. I remain hopeful, despite the discouraging stock market news.

But I wouldn’t completely discount stock market signals. Market prices incorporate the opinions of a large number of people who cannot agree on much except, at a particular time, the appropriate price for a specific offering. In that sense, the market is, as Benjamin Graham said, a voting machine.

Investing money in unprofitable companies is not a good strategy unless those companies ultimately generate a lot of cash. The jury is still out on many alternative energy companies, as much as the world needs their products. Oil companies, on the other hand, are prized for their ability to make money.

But if you’re looking for a guide to the future, don’t count on the stock market. I expect it to escalate in the long run and make fickle and foolish decisions along the way.

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John C. Johnson

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