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Is It Time To Sell Oil Stocks?

Summary

Will electric cars reduce petroleum demand?

Will self-driving cars turn people away from petroleum?

Will the "Leave It In The Ground" movement get traction?

With growing numbers of countries and automobile manufacturers saying they will turn their backs on the petroleum-powered internal combustion engine and transition to electric vehicles, one question that now faces long-term and dividend investors is: should I sell my oil stocks?

Leave it there
The growth of the “leave it in the ground” movement that blossomed with coal and has expanded to other fossil fuels, along with climate change, air pollution, and the effects of added carbon in the atmosphere all point to a potential for major risks for these companies.

The prospect of long-term declines in the business of the oil companies would be a major setback for a large segment of the economy. So let’s look at petroleum.

Petroleum use
Transportation uses about 50% of all petroleum. (Is this more or less than you expected?)

Other uses include: running oil-based power plants, creating fertilizer for agriculture, lubricants, plastics, tires, pharmaceuticals, dyes, detergents, etc. The list is pretty long.

And it is also conceivable that more uses for petroleum could be found, which would increase demand.

Who gets affected?
Let’s suppose the number of vehicles using gasoline declines substantially in the coming years. This will affect some oil companies more than others. Namely, I suspect that companies whose major business includes supplying gasoline for passenger vehicles will be more affected than those that supply industrial lubricants for example. But overall, it is doubtful that all uses of petroleum could be easily replaced in any short amount of time.

I would suspect that any such major changes to the economy will include local gasoline stations and industries that service them. Less gasoline sales bodes poorly for local owners/operators, oil transport and storage infrastructure, and related products and services. One survival possibility for local gasoline stations is to implement charging stations for electric vehicles that could be used at some low rate.

Charge It?
Since charging an electric vehicle takes longer than filling up a tank of gas, stations will need to change. For those not adjacent to other amenities such as restaurants and shops, etc., stations wishing to survive would likely need to upgrade facilities for customers being in place for the time it takes to recharge. The current state of your average filling station is not conducive or comfortable enough to entertain waiting customers.

I had heard of a technology to allow quick swapping of pre-charged batteries to cut the recharge time down to just a swap time, but without any recent news updates, I don’t know the state of that idea. The plan may have been shelved.

Another service industry that likely will need to change is the mobile repair vehicle (as in AAA). When now a tow truck can bring you a container of gas so you can make it to the nearest filling station, the repair vehicle of the future will need to carry equipment to repair and recharge batteries, cables to fit a multitude of electric cars, etc.

With any new technology that disrupts the status quo, there are always unexpected consequences.

The Consideration
The worst case (which in my view is useful to consider as an analogy in this context) would be that major oil companies become the energy equivalent of tobacco companies. As it happens, despite their vilification, tobacco companies experienced the highest return on investment for any industry during the 20th century, and that continues into the 21st century. And their dividends are among the highest in any industry. Although we generally see tobacco industry prospects as less than stellar, and with substantially reduced future growth capabilities, they still have managed to return exceedingly high rates of return to their shareholders.

In addition, while the tobacco companies did have some strong political muscle in their day, I would hazard to suggest that the oil companies are in an even stronger position politically now compared to where the tobacco companies were when, say, the first Surgeon General’s report came out on the dangers of smoking. That was a tumultuous time then, too.

The oil companies are in a strong financial position to diversify. Already mentioned is that the use in transportation is only about 50% of all petroleum use. Secondly, many of the oil companies already have, or easily could, diversify into non-petroleum industries. They have already done so in many cases, even beyond natural gas.

I would expect that most if not all oil companies in general can continue to produce growth in the short and medium term. Longer term predictions which ones may win and which may fail is uncertain.

So, if anything, oil companies are at least a “hold.” They may even yet surprise us. I wouldn’t write them off. That’s my view anyway.

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