In oil they trust, despite all the climate talk

Islam Zween

By Islam Zween

Some corporations publicly commit to transitioning to clean energy and reducing carbon emissions. However, the actual investments in financial markets appear to favour fossil fuels – if profitability is any indication!

This creates a gap between stated intentions and real-world actions.

Let’s take British Petroleum as an emphatic case in point. It seems – from the company’s latest financial reports – that investors and stakeholders weren’t keen on the new long-term renewable energy strategy adopted in February 2020, which involved big investments in renewables at the expense of oil and gas projects.

Since then, BP’s shares are down about 4%, while its big oil rivals that stick to fossil fuel projects are up 35% to 80%, according to data compiled by S&P Global and published by Bloomberg.

Admitting that this strategy was going so fast and far away, BP CEO Murray Auchincloss announced on February 26 he was reversing these plans, which were driven by vaulting ambitions. BP will increase investment into oil and gas to about $10 billion a year, with the intention of growing production to 2.3 million to 2.5 million barrels of oil equivalent a day by 2030.

Fossil fuel investments apparently can yield immediate profits, making them attractive despite the growing recognition of climate risks.

It’s because the financial markets often reward companies that demonstrate strong quarterly earnings. The value of giant oil companies that are rivals to BP – Exxon Mobil ($474 billion), Chevron ($265.7 billion) and Total Energies ($132.9 billion), has further skyrocketed over the past decade compared to the British company which is worth today about the same as it was 25 years (around $81 billion), when oil changed hands at $10 a barrel, rather than today’s Brent price of around $75.

The stocks of the three giants have also attracted investors due to their strong dividend payouts.

I shall interpret this as many investors are risk-averse and prefer to invest in industries and projects with a proven track record of profitability. Fossil fuels have historically been a stable source of revenue, while renewable energy technologies can be perceived as more volatile and perhaps uncertain (the last July nosedive of AI companies stocks is an example). More and more, the transition to a low-carbon economy may also have broader economic implications, such as job losses in fossil fuel industries and shifts in energy prices. These changes can create uncertainty in the markets, affecting investor confidence and leading to increased volatility.

This risk aversion can lead to a reluctance to shift capital away from fossil fuels, even in the face of growing climate concerns.

Hedge funds and private equity firms often have investment horizons that focus on quick returns, which can lead them to favor fossil fuel investments that promise immediate cash flow over longer-term sustainable projects that may take years to become profitable.

However, it's important to note that the long-term viability of these investments may be challenged by increasing regulatory pressures in particular. Here we are talking about politics. So, as these political regulations become more stringent, fossil fuel companies may face higher operational costs, reduced profitability, and potential legal liabilities. Still, politics is a strife of interests masquerading as a contest of principles.