Heat, drought, flood and famine. The evidence of climate change is all around us.
If the planet is to avoid even more serious consequences of global warming, the world’s leading energy agency They sayConsumption of oil, coal and natural gas needs to be reduced more rapidly, and clean energy sources such as wind and solar power need to be expanded at an even faster pace.
But it seems that the stock market has not received this information.
Instead, shares of a wide range of clean energy companies have been crushed recently, including nearly every alternative energy sector, including solar, wind and geothermal power.
Also, rather than divest themselves of oil, Exxon Mobil and Chevron, the two largest US oil companies, are doubling down. They have announced acquisitions that will drastically increase their oil reserves. Exxon intends to buy major shale drilling company Pioneer Natural Resources for $59.5 billion. Chevron plans to buy Hess, a large integrated oil company, for $53 billion. This is a huge bet on oil for the coming years.
This is a shocking situation. There is strong evidence that carbon emissions are warming the planet. Yet the stock market, which is considered forward-looking, is looking at alternative energy companies with disdain and big oil companies with respect.
Obviously something is wrong here.
I think the problem is with the stock market, not scientists.
The great value investor and Columbia professor Benjamin Graham once said, “In the short term, the market is a voting machine, but in the long run, it is a weighing machine.”
This means that eventually things get right in the market, but in the short term, it suffers from enthusiasm, quick decisions and short-sighted thinking.
This seems to be what is happening now.
The scientific consensus is clear. Sometimes it seems like every day there is a new and fascinating study on climate change with disturbing findings.
For example, last month, in its latest comprehensive report On the world’s prospects of achieving net-zero carbon emissions by 2050, the International Energy Agency, the world’s leading energy authority, said the climate is warming too fast. It says the likelihood of a benign outcome is diminishing, yet the situation will improve if the world aggressively shifts from fossil to alternative fuels.
one in separate study Released last week, a group of scientists said the planet probably only has a little more than five years to go before global warming exceeds the most ambitious goal of the Paris climate accord: warming of no more than 1.5 degrees Celsius or 2.7 degrees Fahrenheit. No. Temperatures that existed before the Industrial Revolution.
Break that limit and there will be a catastrophe far worse than anything we have experienced so far, the study says. Already, the planet has warmed by 1.2 degrees Celsius. The study says governments, companies and consumers around the world need to take aggressive steps to immediately curb carbon emissions.
If the stock market heeded such a call to action, you could expect alternative energy stocks to rise and big oil companies to put most of their money into renewable resources.
But in its collective wisdom, the stock market seems to be taking a different and contrary view.
In fact, there are hundreds of billions of dollars, investment is being made into renewable energy projects, even though the stock market is generally not in their favor right now.
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. What’s worse, it has fallen by more than 50 percent since the beginning of 2021.
Narrow areas are also being punished. The Invesco Solar ETF is down more than 40 percent this year and nearly 60 percent since Jan. 1, 2021. The First Trust Global Wind Energy ETF is down nearly 20 percent this year and nearly 40 percent since Jan. 1, 2021.
Rising interest rates have raised costs in many countries and dampened consumer enthusiasm, leading to lower stock valuations for fast-growing companies that are not making big profits. Renewable energy companies have suffered a huge blow.
SolarEdge, which provides the equipment needed to convert energy from solar panels into energy that can be transmitted through the electrical grid, warned on October 17 that demand for its products was falling. The market reacted strongly.
Shares of the company, which is based in Israel, dropped it Nearly 30 percent in a single day. Many other solar companies followed suit. Enphase Energy, a rival company in Fremont, Calif., has lost about 40 percent since Oct. 17.
Wind energy companies have also not been spared. Shares of Danish wind turbine company Orsted fell nearly 26 percent on Wednesday after it said it may have to write down as much as $5.6 billion on the value of its offshore wind projects in the United States.
A set of turbines being installed by South Fork Wind, an Orsted venture, 30 miles east of Montauk Point, is scheduled to begin sending power 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 trouble.
In October, the Public Service Commission of New York State rejected Ørsted and several other companies – including BP and Equinor – have requested billions of dollars in electricity rate hikes to help offset their rising costs. Companies say their costs are rising due to inflation and high interest rates, putting the feasibility of some of their projects in doubt in the New York metropolitan area.
Bet on fossil fuels
Big oil companies’ profits and revenues have fallen since last year, when energy prices soared after Russia’s invasion of Ukraine.
FactSet senior earnings analyst John Butters estimates that for the entire S&P 500, earnings per share in the third quarter rose just 2.7 percent from a year earlier. Remove the big energy companies, however, and the total rises to 8.4 percent. That’s because earnings per share of large, fossil fuel energy companies declined 38.1 percent, more than any other sector.
Oil prices are volatile, and their movement in the coming years is not 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 by acquiring Hess, Chevron will deepen its commitment to oil.
Even though I know better, I can’t stop thinking of Hess as a “green company.” That’s simply because I’m a longtime New York Jets fan. Hayes shares corporate history and green-white motif with the Jets. Leon Hayes founded the company, owned the team and loved the color green. But the Hess product line is petroleum based. Otherwise it is not a green company.
but never mind. Oil has been good for Hess’s shareholders and those of three other companies. Over the past three years, Exxon has returned nearly 275 percent, including dividends; Chevron, 135 percent; Pioneer, 260 percent; and Hayes, 310 percent. The S&P 500 returned about 32 percent.
As long as the world consumes oil, companies like this will remain profitable, or so the oil bulls say.
Plus, there’s a wild card.
As the World Bank warned on Monday, if the war between Israel and Hamas escalates, the conflict in the Middle East could easily lead to a massive surge in oil prices. Oil may also rise as the Russian-Ukrainian war escalates. So there could be any number of potential military or political conflicts.
If scientific findings prevail, oil could become a stranded asset that cannot be sold. But the market consensus is that Big Oil has a long way to go before it becomes viable.
What do we care about the message the market is sending?
For one thing, I wouldn’t consider them indispensable. Prices change every minute, and despite its stellar reputation, the stock market provides no guidance for the future. Sometimes it can’t see what’s right in front of it, and it certainly can’t see around corners. Despite discouraging news from the stock market, I remain optimistic.
But I wouldn’t completely dismiss stock market signals. Market prices consist of the opinions of many people who may not agree on what, except at a particular moment, is a fair price for a particular offering. In that sense, as Benjamin Graham said, the market is a voting machine.
Investing money in unprofitable ventures is not a good strategy unless those ventures eventually generate large amounts of cash. The jury is still out on many alternative energy companies because the world needs their products. Oil companies, on the other hand, are prized for their ability to spread cash.
But if you’re looking for guidance for the future, don’t rely on the stock market. I expect it to rise in the long run, and make unsustainable and foolish choices along the way.