Roughly a year after the international community pledged to limit the heat-trapping gas pollution that is warming the world, a crucial step in the right direction is happening in the Gulf.
In April 2019, the United States, the world’s largest oil producer, announced that it would withdraw from the historic 2015 Paris Agreement, under which it had pledged to cut its climate-changing emissions. Saudi Arabia, the United Arab Emirates, and other members of the Organization of Petroleum Exporting Countries (OPEC) quickly followed suit, explaining that the deal was “unfair” to their industries.
In response, countries like Germany, France, and the United Kingdom announced their intention to forge ahead with the agreement independently, while other major oil-producing countries, like Russia and Iran, signaled their support. This left an important question unanswerable: Will oil’s rise as a fuel source be powered by clean energy or polluted air?
Clean Energy
The oil industry has historically relied on fossil fuels for its energy supply, yet the sheer volume of carbon emissions generated by burning them are now considered to be one of the major determinants of climate change. Over the years, the industry has continuously shifted its focus to finding alternative energy sources that are both sustainable and cheap. Today, the shift is clearly underway, with the likes of solar and wind energy seeing a surge in popularity as an alternative to fossil fuels, especially in developed economies. As a result, more and more oil companies are in the process of upgrading their operations to become greener and more sustainable.
This trend was first noticed in the United Kingdom, where in 2018 the energy provider Drax committed to investing £10 million (US$13.3 million) in a solar farm that will generate 7.5 million kilowatt hours of electricity per year. In the same year, Sustainability UK PLC, a company that advises businesses on sustainable investment opportunities, reported that 63% of its clients plan to invest in renewable energy in the next year, and 69% plan to invest in energy efficiency.
Elsewhere in Europe, Statoil ASA, one of the world’s largest oil and gas companies, recently partnered with the German firm Kiel SE to establish the first commercial-scale battery storage project in Europe. The battery will help power the German offshore wind industry, ensuring that green energy sources like wind are always available to supply energy to the continent’s grid. Similar schemes are emerging across Europe as an increasing number of countries struggle with achieving energy independence from fossil fuels.
Sustainable Energy
Oil companies are also taking notice of the burgeoning global market for green consumer goods, with the likes of Unilever and Procter & Gamble turning to sustainable sourcing to meet the growing demand for greener products. Last but not least, the fossil fuel industry is taking note of climate change awareness, with Royal Dutch Shell recently establishing the world’s first offshore wind farm to provide energy to its operations in the U.S. Arctic.
All these developments have serious consequences for the oil industry. Without a doubt, cleaner energy sources will provide the fuel to power the future of oil, but not without a fight. For one thing, oil prices will almost certainly rise as a result of the transition to cleaner fuels; a 2018 report from Credit Suisse (the investment bank) estimated the cost of extracting a barrel of oil to be around US$76, as opposed to the current price of about US$52. Similarly, without a doubt, the switch to green energy sources will cut carbon emissions, helping to combat climate change – but it will also reduce the energy supply, putting more pressure on the global energy market.
Against this backdrop, the Gulf appears to be in the midst of a transformation, as reflected in the region’s economic growth in recent years. The International Energy Agency (IEA) expects the economy of the Arabian Gulf to grow by 3.9% in 2019 and 4.0% in 2020.
This trend is being noticed across the board, with many large multinational oil companies (MNCs) deciding to base their regional headquarters in the Gulf, especially as labor costs and energy prices remain low and stable.
Oman, the largest of the Arab countries in the Gulf, is a prime example of this phenomenon. Dubai’s property market is dominated by multinational firms, with many well-known international real estate companies having offices in the city. Similarly, Kuwait’s economy has been dramatically reshaped by the influx of foreign workers, and many of the country’s biggest businesses are now owned by multinational companies. Finally, Saudi Arabia, the world’s largest oil producer, has become a major transit point for many international companies seeking to profit from the country’s vast oil reserves.
Eco-Friendly Investing
As an investor, should you be following the path of least resistance, that is, the conventional wisdom and staying the course with conventional energy sources? Perhaps not. Consider that at the end of last year, nearly 20% of the S&P 500 stocks underwent a brand restructuring or relaunch to improve their “green” credentials. That follows a similar trend in 2019, with similar measures, such as the “rebranding” of FedEx as “FCL”, the “renewal” of Kellogg’s, and the “reinvention” of American Apparel’s.
When it comes to investment performance, past practice suggests that you should always go with the flow. After all, following the herd is often the easiest route to profit – at least, it’s the route that’s easiest for someone else to convince you to take. This is where the “green” trend is heading. After decades of relying on fossil fuels, there’s no clearly defined path for oil and gas investment in the future. The best course, therefore, is to position yourself to profit from a trend rather than to succumb to it.
Consider the alternative: betting on rising oil prices. When the going gets tough, it’s often the most obvious choice that becomes available. At the very least, you’ll be among the first to realize that something extraordinary is afoot. And if you’re right, you could end up enjoying profitable investment returns – even if fossil fuel prices do take a hit.
In short, the race is on to find alternatives to fossil fuels, as the future of oil and gas investment is anything but certain. But while some may still be skeptical of the energy transition, it’s undeniable that the world’s largest oil producers are taking the step in the right direction.