May 26, 2021 is not “a date that will live in infamy,” unless you work in the oil and gas industry. That day saw three events across the world being cited as the “end to Big Oil.” In The Netherlands, a Dutch court ruled Shell Oil must accelerate its carbon emissions reduction efforts to comply with the climate change goals of the Paris Agreement. In the U.S., activist shareholders voted three of their candidates onto the ExxonMobil board of directors with a mandate to accelerate the company’s transition to renewables. Further west, Chevron shareholders directed management to implement more stringent emission targets for their products. Environmentalists cheered these victories. Is this really the beginning of the end for Big Oil?
The importance of oil and gas in the modern world is well established. It is what has delivered a century of global economic growth, raising living standards worldwide.
Burning fossil fuels is cited as a cause of global warming and unsettled climate conditions, although no scientific determination can tell us how much is due to humans versus the natural cycle. The debate over fossil fuels’ role in our climate has been underway for over 50 years.
As the debate grew more mainstream, questions were raised about the long-term outlook for fossil fuels and the companies that find, produce, and refine them.
The oil crisis of the 1970s ushered in a new era for oil and gas companies. An industry dominated by the United States and its corporations was overwhelmed by the power of OPEC, who had become the supplier or denier of the marginal barrel of oil, thereby dictating global oil prices. Oil prices soared from $3 to $37 in seven years. In 2021 dollars, the 1980s oil price peak was nearly $130 per barrel!
That price peak also marked the highpoint weighting for oil and gas stocks in financial markets. From that peak, the energy stock weighting in the Standard and Poor’s 500 Stock Index fell, as did oil prices.
Economics worked! High oil prices drove drillers to seek and develop huge new resources in places such as the North Sea, West Africa, Latin America, and Southeast Asia. This new supply overwhelmed OPEC’s power to dictate oil prices, leading to a price war among its members that cut oil prices by three-quarters to $10.
The oil and gas industry, devastated by the oil price collapse, needed years to recover, culminating in a wave of industry mergers at the end of the 1990s. That wave produced today’s leading oil giants. It also witnessed a decline in investor interest in energy stocks, but which stabilized in 2000. By 2003, the oil market was on the move.
A decade of underinvestment restrained oil supply growth, just as China embarked on a major industrialization phase that exploded global demand growth, surprising the industry and the market. Energy stocks were hot! Their weighting in the overall stock market climbed to a modern high, which was supported by years of $100-plus oil prices. But the handwriting was on the wall. Technology, which had crashed around 2000 with the collapse of the dotcom stocks and the Y2K fiasco began to rebound, just as investor interest in oil peaked and oil prices fell sharply during the 2008 Financial Crisis.