In a Warming World, Clean Energy Stocks Fall While Oil Prospers

The Big Picture

Heat, drought, flood, and famine. Evidence of climate change is all around us.

If the planet is to avoid even more severe consequences from global warming, the world’s leading energy agency says, consumption of oil, coal and natural gas needs to be reduced much more rapidly, and clean energy sources like wind and solar power need to expand at a far faster pace.

But the stock market doesn’t seem to have gotten the memo.

Instead, the shares of a broad range of clean energy companies have been crushed lately, in a rout that encompasses just about every alternative energy sector, including solar, wind and geothermal power.

At the same time, rather than weaning themselves off oil, Exxon Mobil and Chevron, the two biggest U.S. oil companies, are doubling down. They have announced acquisitions that will vastly increase their oil reserves. Exxon intends to buy Pioneer Natural Resources, a major shale drilling company, for $59.5 billion. Chevron plans a $53 billion purchase of Hess, a big integrated oil company. These are enormous bets on oil for years to come.

It’s a perplexing state of affairs. The evidence that carbon emissions are warming the planet is persuasive. Yet the stock market, which is supposed to be forward-looking, is treating alternative energy companies with disdain and big oil companies with respect.

Stock Losses

Hundreds of billions of dollars are, in fact, being invested in renewable energy projects, even if the stock market generally isn’t favoring them right now.

The returns are ugly. The iShares Global Clean Energy E.T.F., an exchange-traded fund that tracks the entire industry, is down more than 30 percent this year. Even worse, since the start of 2021, it has lost more than 50 percent.

Narrower sectors are being punished, too. The Invesco Solar E.T.F. is down more than 40 percent this year and almost 60 percent since Jan. 1, 2021. The First Trust Global Wind Energy E.T.F. has lost about 20 percent this year and about 40 percent since Jan. 1, 2021.

Rising interest rates have increased costs and tempered consumer enthusiasm in many countries, reducing stock valuations for fast-growing companies that aren’t churning out big profits. Renewable energy companies have been hard hit.

Betting on Fossil Fuel

Big oil company profits and revenue have flagged since last year, when energy prices soared after Russia’s invasion of Ukraine.

For the entire S&P 500, earnings per share in the third quarter grew only 2.7 percent from a year earlier. That’s because earnings per share for big, fossil fuel energy companies declined 38.1 percent, more than for any other sector.

Oil prices are volatile, and their trajectory in the years ahead is far from certain. But Exxon and Chevron are staking their futures on oil. Exxon’s acquisition of Pioneer would be its biggest purchase since it bought Mobil in 1999. And Chevron will deepen its commitment to oil by acquiring Hess.

But if you’re seeking a guide to the future, don’t count on the stock market. I expect it to rise over the long run, and to make fickle and foolish choices along the way.

Confounding Choices

What are we to make of the messages the market is sending?

For one thing, I wouldn’t view them as inevitable. Prices shift every minute, and despite its vaunted reputation, the stock market doesn’t provide a guide to the future. Sometimes it can’t see what’s right in front of it, and it certainly can’t see around corners. I remain hopeful, despite discouraging tidings from the stock market.

But I wouldn’t dismiss the stock market’s signals entirely. Market prices incorporate the views of an awful lot of people who can’t agree on much, except, at a particular moment, on the appropriate price for a specific offering. In that sense, the market is, as Benjamin Graham said, a voting machine.

Pouring money into unprofitable ventures isn’t a good strategy unless those ventures ultimately generate a great deal of cash. The jury is still out on many alternative energy companies, much as the world needs their products. Oil companies, on the other hand, are prized for their ability to gush cash.