A couple of decades ago, there was widespread fear that global oil supplies were peaking and we would soon enter a world of ever higher energy prices. Remembering that fear brought to mind the great economist Julian Simon, who observed:
“Discoveries, like resources, may well be infinite: the more we discover, the more we are able to discover”
– Julian L. Simon, The Ultimate Resource 21
Simon understood that the ultimate natural resource, human ingenuity, is the best weapon against scarcity. After peaking in 2008, the shale revolution led to much greater supply and much lower prices of fossil fuels.
Fast forward to 2023 and the conversation around peak oil has changed. The International Energy Association (IEA) recently published a report proclaiming that global demand for fossil fuels would peak and start declining in 2030, due largely to the growth in renewable energy sources. The report, published in October, estimates that under current policy, fossil fuels as a share of the global energy supply will decline through 2030 and at that time demand will peak and begin to decline on an absolute basis.
The report was widely covered in the media, and was met with both positive and critical coverage. Critics included producers of fossil fuels, which is unsurprising given they have “skin in the game”. Some accused the IEA of engaging in political advocacy. Others praised the report as a blueprint for the energy transition, called “unstoppable” by the Executive Director of the IEA.2
We would agree that the transition to renewable energy is a secular trend, and we’ll have to wait and see if the IEA’s predictions come true.
As investors, however, we always pay close attention to where market participants are making significant investments. Two things happened in October 2023 that piqued our interest, and were noticed in the financial press as well:
- On October 11, ExxonMobil announced a ~$60 billion deal to acquire Pioneer Natural Resources, which would dramatically expand Exxon’s exposure to the Permian Basin.3
- On October 23, Chevron agreed to acquire Hess Corporation in a deal valued at $53 billion, giving Chevron access to Hess’ acreage in the Bakken Shale, Gulf of Mexico and a 30% ownership of 11 billion barrels of oil equivalent resources in Guyana.4
Neither of these companies appear to be acting as if the growth in fossil fuels is set to peak in the next several years, with both expecting these investments to generate attractive returns years into the future. A combined investment of over $100 billion does cause us to pay attention, however.
Portfolio Implications
We at SS&C ALPS Advisors do not have a crystal ball, and do not know exactly how the energy transition will play out over the next years and decades. As long term investors, we do continue to believe that the energy transition is real and could provide an opportunity for investors, but it’s unlikely to be a straight line process. As always, we pay attention when market participants put significant capital to work.
Important Disclosures & Definitions
1 Simon, Julian L (1996). The Ultimate Resource 2. Princeton University Press.
2 International Energy Agency, World Energy Outlook 2023, October 2023.
3 ExxonMobil Press Release, ExxonMobil Announces Merger with Pioneer Natural Resources in an All-Stock Transaction, October 11, 2023.
4 Chevron Press Release, Chevron Announces Agreement to Acquire Hess, October 23, 2023.
AAI000458 11/07/2024
