Should You Invest in Oil AND Green?
Since this blog is about green investing and green economy - is it heresy for me to consider that big oil might be a good investment? Taking aside the value of the social responsibility of investing in green (a topic I want to revisit in another post) big oil might be a good investment alongside green from a thematic standpoint.
When I think about trends and investment themes I like to look at them from all sides - winners and losers. I don’t necessarily think it always (or even often) makes sense to invest in both sides of any particular trend (long the winners - short the losers), but I like to consider these angles because it helps me when sector valuations and sentiment swings around - often creating valuation opportunities on the other side of where you started out with an investment thesis. In tech that dichotomy is often spelled out in net sum zero terms - new companies take or make obsolete old companies.
On the topic of the emergence of alternative energy, though, I am pretty sure those rules don’t fit.
Yesterday,towards the end of my post I talked about how I thought that green investing was following a path I observed in Telecom during the 90’s post-dereg days - where one of the biggest - if not the biggest winner of the post-dereg consolidation was old line SBC (now AT&T). SBC followed a strategy of foot-dragging on investment and deployment of new technologies and protection of its old line businesses through political lobbying - then using the cash it had saved up from that approach to buy up its bigger brethren that had spent much of their cash on early deployments of those technologies (many of which never panned out) that SBC had eschewed - only then throwing itself heavily into winning technologies such as DSL.
Could the big energy companies be following a similar strategy with alternative energy technologies such as solar power?
Today, I came across several pieces to toss into the mix on this topic. First is a piece from early May where Standard Oil founder descendents in the Rockefeller family are lobbying Exxon to plow more of its profits back into alternative energy.
While other oil companies such as BP, Shell and Chevron have sought to paint themselves as green, ExxonMobil has adopted a hardline position. The Texas-based firm has $25bn (£12.6bn) of capital investment planned in exploration and research of carbon-based fuels. Its main environmental commitment is a relatively modest $100m to fund a Stanford University centre researching technical solutions to global warming.
It would seem to be a bit shortsighted - and that is what the big shareholders are arguing - that ExxonMobil is ignoring the future of energy - just like SBC ignored the future importance of data and the Internet until they started buying up their competitors. From a purely investment standpoint, however, ExxonMobil’s approach might very well be the right direction. This piece by Sean Maher at Dead Cats Bouncing highlights one possible underlying reason for ExxonMobil’s reticence - he argues from an investment return standpoint - oil is a better investment and will be for some time to come - not like we have a choice - because with those weak green ROI’s its unlikely that we will see enough alternatives brought to market to bite into oil’s overall demand (which is still growing) any time soon. Eschewing green for more drilling makes double sense if you believe Jeff Rubin at CIBC World Markets who predicted oil to $100 a barrel back in 2005 - and now is predicting (shades of Henry Blodgett) oil to double again to $225 inside four years.
Now I don’t know if Mr. Maher’s view is how things will play out - its entirely possible that new technological breakthroughs will drive green ROIs much faster than is predicted in his post (one would hope that is the case) - but even then its obvious that the need for oil isn’t disappearing overnight - which gives ExxonMobil time to be a footdragger - especially given the fact that most of these alternative energy approaches have huge capital requirements with long paybacks - perfect acquisition targets for cash rich companies… like big oil. Of course that is provided they don’t blow it on new technologies that might not work - or that are way, way, ahead of their time - e.g., the vast sums that the big local telcos not named SBC spent on trials of things like fiber to the home, etc.
Does this mean skip the green? No. First off I think that if Mr. Rubin is right then a great deal of these green ideas will become profitable faster than is projected. And because of the low operating cost, renewable nature of many of these approaches, once they reach profitability they have an attractive annuity-like revenue stream going forward - which oil cannot match with its labor and process intensive business model. Also, there is no doubt that political pressure will continue to swing in green’s favor - and should oil ever lose some of those subsidies (like actually paying the American taxpayer the true value of the resources it draws from pubic land to name just one of many) then these green ideas will look even better. But given where it looks like oil prices are headed, and the fact that we just can’t flip our energy consumption to green technologies overnight, oil and alternative energy might just be on the same side of this investment thesis for the time being.
Just an update on that post re Exxon and the minuscule contribution alternatives are likely to make in the foreseeable future to our energy needs, In Europe a couple of the largest offshore wind farm projects have just seen their major sponsors including oil giant Shell pull out because the economics have deteriorated so dramatically due to rising construction and material costs, and that despite public subsidy.Simple energy conservation measures will prove the most effective way of reducing fossil fuel reliance for the US and particularly the hugely wasteful emerging markets such as China (which uses 4 times as much energy per unit of GDP as Japan for example).
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Sean - Thanks for point that out. I was reading about VCs here in CA noting the same problems with steel costs for large solar implementations. Conservation in the U.S. is usually a tough sell - VP Cheney’s crack about how we can’t “conserve our way out of this crisis” embodies the opinion of a large swath of the population - but its not impossible. During the electrical shortages in CA in 2000-2001 Californians cut electrical usage by 20% in a matter of weeks… so we know it can be done.
One thing that I don’t see many discussing yet is the potential for more point solutions for energy - micro installations that help individuals and communities capture the value of their particular renewable resource. Most of these huge installations that you cite are such long tail investments and require such large sums of capital and supporting infrastructure - its not surprising that investors are skittish.. Of course if small installs were to take off this would radically change the nature of the energy industry - shifting revenues from recurring to one time - good for the consumer - bad for the guys spending massively on infrastructure - and something that the energy firms with all the necessary money to invest in green technologies have no interest in supporting.
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Mark,
Micro generation is a great idea, and distributed micro power gives the grid more resilience to disruption, but it requires a radically upgraded two-way electrical distribution network form the current analogue one-way system, so that the surplus power can be ‘exported’ from the generation point. We watse about a third of all the energy we create in power stations through grid loss. One of the best long term investments the US could make would be in a digital energy distribution network, but the numbers are huge, at least $100bn over a decade.
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Mark Langner replied on May 19, 2008 11:09 am:
Sean - I don’t know if I would say that upgrading the network is a requisite cost for micro distribution - which is why I think that this direction may be the way that we close the oil demand gap you have pointed out. We have net-metered solar and wind co-metering in California with the same crappy grid that failed so spectacularly in 00-01 - the analog meter just runs backwards when you are putting more into the grid than you are taking - good for balancing the grid as you point out - e.g., excess solar capacity on hot days when AC demand is high. But the hurdle to more co-generation in the U.S. is the fact that the majority of states do not have co-metering requirements for their utilities - making the payback on homeowner installed green energy even longer. Changing that is merely (chuckle) a change in legislation. I see the primary hurdle to a German or Japanese like electrical regime not technical or economic but instead legislative - e.g., I can’t sell power as an individual to my grid above and beyond 100% of my usage - and it only makes economic sense for me to sell back up to 70% because the tariff for grid bought power is so low for that last 30% that the payback for the equipment would be something like 30 years.
Granted if you want to get a check from the electrical distributor you would need to meter the amount going into the grid - either digital two way meters or a second analog meter - but that should be a cost that the generator (homeowner) should bear - hell the utilities in CA are trying to get the homeowner to bear that anyway just to cut down on their meter reading costs.
Lastly, I understand your point about the grid being fragile -though that is decidedly more about dereg, bad planning on the transmission owner’s side and moving large amounts of power from the large private generation plants (the ones we are pointing out are tough sells right now) through long distances than potential imbalances caused by 1 watt solar installs on people’s homes. As such its going to need to be upgraded anyway - whether or not we see an explosion of micro generation.
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