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With the push for green energy, electric automobiles, and the attempted reduction of coal, oil and natural gas processing around the world, many investors wonder if they should maintain investments in the oil sector. Stockholders in companies like Exxon Mobil Corp. (XOM) find themselves wondering if their investment is going to continue to be profitable.
Fracking Reduces Cost For Big Oil
Supporters of bills and laws surrounding the drive to bring clean energy to the world have caused massive increases in costs surrounding oil extraction and refining. While the United States has long been recognized as the most effective place to extract and refine oil products using environmentally friendly methods, there are many who believe it could be done with less harm to the Earth.
Fracking is the method most used to extract oil and natural gas from the surface of the Earth, but it has been blamed for all sorts of problems. Some have even claimed fracking causes earthquakes in fault lines around drilling sites. In spite of these claims, fracking continues to be the safest and most cost-effective method of extraction.
In order to extract oil and natural gas from shale formations in the US, oil companies like BP p.l.c. (BP) use fracking to extract the product from tight fissures within the rock. Directional drilling is used to find the tight cracks below the surface, then sand, water and chemicals are pumped into the fissure to cause it to widen. This allows the oil to flow to the well head freely, thus enabling the company to extract the product for refinement.
However, fracking definitely has its opponents in the world, and many laws and regulations have been written in an effort to limit fracking and try to make it less invasive to the areas surrounding the extraction site. In an effort to ban fracking in the US altogether, S.3247 was presented to Congress by Bernie Sanders in January 2020. This bill seeks to completely eliminate fracking, which will force oil companies to use more expensive measures to extract oil. This in turn will boost the cost of the oil and that cost increase will be passed on to consumers.
Increased Prices Do Not Mean Zero Profit
In May of 2021 an intentional attack on the Colonial Pipeline caused it to shut down. This immediately caused fuel shortages in some places and drove gas prices upward across the entire US. President Biden also revoked the Keystone XL Pipeline’s permission to build in Pennsylvania within days of first assuming office. Both of these events had a major influence on fuel prices across the country, as well as forcing investors to reconsider investing in energy stocks.
Other factors that have contributed to oil prices moving upwards over the last two years include a major labor shortage. In the wake of Covid 19 the government issued multiple rounds of stimulus checks to the US population, claiming these would help compensate for lost time at work. The problem with that logic is that many people decided not to return to work for long periods of time. This caused major labor shortages across the country, and left many transportation companies scrambling to find drivers to cover their freight.
The oil industry again took a hit from the labor shortage as drivers were not available to deliver fuel to gas stations. Again, we saw prices increase to a national average of over $4.00 per gallon in 2022. In July, CNN reported that only 1 in 5 gas stations in the US was offering fuel for less than $4.00 per gallon. However, in spite of all of these factors, oil companies still make profits for their investors.
EVs Will Not Push Big Oil Out Of Auto Market
The supporters of clean energy are also big proponents of the push for all vehicles to become electric-powered. When only part of the facts is considered, the idea of all-electric vehicles makes perfect sense. However, if you factor in all of the necessary information, EVs could be more of a problem than a solution.
In order to charge an EV, one must plug it in at a fast charging station, either at home or at a public charging location – a fuel station for EVs. A rapid charge takes anywhere from 20 minutes to an hour, depending on the brand of EV and the amount of charge needed. A level 1 home outlet charger can take up to 40 hours to fully charge your EV. A level 2 home charger would require 8 to 12 hours, which could be accomplished overnight. The level 3 rapid chargers, which are what you would find at a public station, can push the charge much faster.
A home charging outlet also requires a 75-amp service for the car alone. Most homes built pre-1970 in the US have only a 100-amp service for the entire home. This means that if you have your car charging you would be able to run your microwave but not your dryer or electric oven while charging your car, or you would trip your home’s main power breaker. To solve this problem, you would need to install a completely upgraded service panel in your home with a 200-amp service. This can range in cost from a few hundred up to a few thousand dollars depending on where you live.
The other issue to consider about EVs is that in places like California, where rolling blackouts are common, it might become impossible to get a full charge on your vehicle. The United States power grid is not strong enough to support even 1/3 of its current drivers to be charging EVs at the same time. It would cause massive power outages across the country. The only way to solve that issue is to completely rebuild the power grid infrastructure, or to limit citizens’ ability to charge their vehicles.
In short, while EVs may be the car of the future, they are not the solution for today.
Oil Investors Will Continue To See Profits
The US economy is struggling in the wake of the COVID-19 pandemic. Widespread shutdowns caused massive financial issues for businesses of all sizes. However, the oil companies have managed to make money in this economy simply because we must have the products they manufacture in order to maintain our lifestyle.
The limited capabilities of the EV in today’s power grid means that the oil industry is a necessary evil for years to come. No amount of legislation or committees can overcome the physical limitations of the power grid within the next decade. This means that an investment in big oil will continue to turn a profit, as long as people need to get from point A to point B. The cost of electricity over the cost of natural gas also makes oil the best choice for home heating.
Overall, an investment in oil is a guaranteed payout over time. Yes, prices will fluctuate with market demand. Yes, there is always the chance of a spill or accident driving prices up temporarily. However, the oil industry is resilient and always manages to rise to the occasion. This is why investors who are in for the long term are able to see profits that are growing exponentially from what they were, say, 20 years ago. In spite of opponents, fracking continues to be the extraction method of choice, and because of its relatively low cost compared to other methods, it delivers big profits.
Hold on to your shares of Chevron Corporation (CVX), Shell plc (SHEL), and other companies. Over time, they will pay out because we must have the products they manufacture in order to function.
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