In this new series exploring some of the key long-term global structural shifts reshaping investment opportunities, David Prosser examines the impact of the move away from oil to more sustainable energy alternatives.
There has been a mountain of speculation about when the world will finally reach peak oil, that much-feared moment when the planet’s reserves begin to run out and production starts to inexorably decline.
However, the answer to the conundrum may surprise you: while economists and politicians have spent much of the past two decades fretting about peak oil, there is a growing consensus that this turning point will never be reached – or at least not in the foreseeable future.
Concern in the oil industry these days is rarely about when finite supplies will dry up, particularly given advances in technology such as shale oil extraction and deep-water drilling that have unlocked new reserves. What unnerves oil executives is peak oil demand, a tipping point when their customers’ appetite for the black stuff begins to diminish.
The International Energy Agency (IEA) says that point is closer than we might imagine. As governments around the world seek to cut carbon emissions, they are using powerful policy levers to wean society off energy production based on fossil fuels and motoring dependent on oil.
Spencer Dale, chief economist at oil giant BP, says: ‘The combined forces of improving efficiency and building pressure to reduce carbon emissions and improve urban air quality are likely to cause oil demand to stop increasing, after more than 150 years of almost uninterrupted growth.’
The IEA’s forecast is that there will be 50 million electric vehicles on the road worldwide by 2025 and 300 million by 2040, compared with two million today. While it expects conventionally fuelled vehicles to increase in number too, oil demand will be down by 2.5 million barrels a day by 2040, the IEA says, courtesy of the electric vehicle revolution.
A massive ramp-up in renewable energy generation, particularly solar power production, will further depress demand, the agency predicts. In the near term other forms of transport, especially air travel, and the petrochemicals sector, notably plastics producers, are likely to take up some of the slack.
In time, however, these oil-guzzlers will become less thirsty too as environmental imperatives force us to consume less and investigate fossil fuel alternatives.
The oil industry itself has seen the writing on the wall. The Opec group of oil producers forecasts a steady deceleration in oil demand over the next two decades.
BP has recently predicted that demand for oil will peak by 2040, electric vehicles will account for 30 per cent of all car passenger miles travelled by then, consumption of renewable power will rise from 4 per cent of global energy to 14 per cent and demand for plastics will fall slightly.
What’s more, the influential oil market analyst Wood Mackenzie has just ruffled feathers in the oil sector by suggesting that peak oil demand will come as soon as 2036.
Against this backdrop, the story of the past two-and- a-half years, a period in which the oil price has rebounded from a low of around $29 a barrel to almost $80 at this summer’s high-point, might be regarded as a last hurrah for the industry.
Certainly, the heady days of 2008, when the oil price climbed to almost $140, are a distant memory. The IEA’s view is that oil prices do not now have any long-term future outside a range of $50-$70 a barrel.
Expect the unexpected
What does all this mean for investors? Well, one counterintuitive effect may be that oil stocks outperform in the short to medium term. With the giant oil companies less inclined to make huge investments in unlocking new resources for which demand is declining, many will be able to return more cash to shareholders.
Chevron, for example, has already revised its investment targets for the next few years, emphasising its determination to generate sufficient free cash flow to cover its dividend payments rather than pursue every last growth opportunity.
In the medium to longer term, however, investors’ attention will need to shift to new sectors of the economy – ‘new’ in the sense that these sectors don’t currently exist, or at least not at any scale.
The electric car industry is an obvious example. As more countries promise to outlaw sales of the internal combustion engine – that’s due to happen by 2040 in the UK – growth is accelerating. Valeo, a leading supplier to the automotive industry, has just doubled its forecast for market penetration of electric vehicles: it thinks they will account for 10 per cent of all vehicles sold globally by 2025.
At consultancy Bearing Point, electric vehicles specialist Alexander Bock suggests there is good reason to be that optimistic. He says: ‘In 2016 China became the global leader in terms of electric cars sold – surpassing the US for the first time.
China’s electric-friendly policies mean the country accounts for more than 40 per cent of electric car sales worldwide.’
Bear in mind that exposure to such growth may come from existing players rather than innovative new disruptors. Ford has already pledged to spend $11 billion (£8.6 billion) by 2022 on developing electric vehicles, while Volkswagen is committed to investing €20 billion (£17.9 billion) by 2030, to become the world’s biggest seller of electric cars.
Highly valuable opportunities will often be found in adjacent sectors too. To take just one example, the electric car and broader mobility revolution will add hugely to demand for specialist electronics and chips. The automotive industry market for semi-conductors is expected to be worth more than $35 billion this year alone. Demand for commodities crucial in the manufacture of electric vehicles is likely to rise.
Investors moving out of oil might want to consider the forecasts made by Bloomberg’s New Energy Finance group. It sees demand for graphite rising to 852,000 tonnes a year by 2030, from just 13,000 tonnes in 2015, while nickel and aluminium demand will see demand rise to about 327,000 tonnes a year from just 5,000 tonnes in 2015.
Elsewhere, the renewable energy sector is also creating much excitement. Bloomberg New Energy Finance suggests wind and solar energy alone could supply 34 per cent of the world’s electricity within 25 years, compared with 5 per cent today.
That would be much faster growth than is anticipated by the energy industry – ExxonMobil said last year that 11 per cent was more realistic – and it would benefit a very wide range of companies.
The wind sector already features large businesses, including wind turbine manufacturer Vestas, as well as conglomerates such as GE and Siemens; but more will emerge. In the solar power sector, similarly dominant players are emerging in manufacturing and power generation, but the industry is moving quickly.
Alternative energy producers have huge potential, but so do manufacturers of the products they need. For example, there is a growing need for power storage capacity in the intermittent renewables sector. That provides a fillip for the battery industry, where new technologies are evolving at pace.
Bloomberg’s Seb Henbest predicts that $548 billion will have been invested in battery capacity by 2050. ‘The arrival of cheap battery storage will mean it becomes increasingly possible to finesse the delivery of electricity from wind and solar, so these technologies can help meet demand, even when the wind isn’t blowing and the sun isn’t shining,’ he says.
The oil sector has accepted its fate. Indeed, many businesses in oil, gas and the broader energy industry are now trying to transition to renewables or adopt very different business models, but it is not yet clear which companies will be successful.
Meanwhile, forget about oil running out. You’ll be barely using the stuff by the time that’s even a remote possibility.
How to invest for a non-oil fuelled future
For investors truly focused on the long term – say the next 10-20 years – the world’s retreat from oil is a megatrend that cannot be ignored. New industries, business models creating valuable investment opportunities.
However, getting exposure to those may be difficult. The most exciting of the accessible stories may arise in nascent industries where businesses are unquoted or high risk. Specialist funds spanning sectors such as technology and renewable energy may be the way forward.
‘Guinness Alternative Energy is one possibility,’ Services. ‘Baillie Gifford Global Discovery looks for disruptive companies and is invested in Tesla, for example. RWC Global Emerging Markets has BYD and Brilliance China Automotive Holdings, two big electric vehicle players. Liontrust SF Managed holds Infineon Technologies, a German semiconductor manufacturer that makes chips for car safety systems.’
At financial adviser Informed Choice, Martin Bamford likes the closed-ended fund Greencoat UK Wind. ‘It’s a renewables investment trust that invests in a £1.4 billion portfolio of domestic wind farms in the UK and currently trades at an 11 per cent premium to net asset value,’ he says.
Ben Willis, head of portfolio management at Chase de Vere, suggests BlackRock GF New Energy, an actively managed fund investing in a specialist area.