Twenty-five years can bring a world of change. In celebration of The Motley Fool's 25th birthday, the Industry Focus team is diving into what 25 years have meant and could mean for their industries.
In this week's Energy show, host Sarah Priestley and Motley Fool contributor Taylor Muckerman explain what future of energy is shaping up to be in fossil fuels, electric vehicles, renewable energy, and more. Investors, take note -- renewables are bound to take off, but the world won't want to write off oil and gas just yet. Tune in to find out why. Also, the hosts take a look at what the last 25 years have meant for energy and the funny ways that history repeats itself in cyclical industries like these.
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A full transcript follows the video.
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This video was recorded on June 28, 2018.
Sarah Priestley: Welcome to Industry Focus, the show that dives into a different sector of the stock market every day. Today, we're talking Energy and Industrials. It's Thursday, the 28th of June, and we're going to be celebrating The Fool's 25th anniversary by doing a bit of a look back and look forward at the energy industry.
I'm your host, Sarah Priestley. Joining me in the studio is Motley Fool Canada Premium analyst, Taylor Muckerman. Taylor, welcome to the show!
Taylor Muckerman: How's it going?
Priestley: It's good. You're back-to-back featured.
Muckerman: I know.
Priestley: [laughs] You're going to get sick of me.
Priestley: Have you been enjoying the World Cup?
Muckerman: Yeah. So far, so good. Portugal's still in it. Big match Saturday.
Priestley: Your wife's Portuguese, right?
Priestley: So, it's going to be a busy day in your household.
Muckerman: 02:00 PM, yeah. [laughs] Or not busy.
Priestley: Yes, sedate. So, it's The Fool's 25th anniversary this week. We thought we'd take this opportunity across the Industry Focus shows to talk a little bit about what the industry looked like 25 years ago and what it might look like 25 years in the future.
Late June 25 years ago was when The Motley Fool was founded. I took the liberty of looking up some 1993 trivia for us. Bill Clinton was President. My mum's favorite movie, Sleepless in Seattle, came out. Meatloaf had the top-selling single of the year, and Jurassic Park was the summer blockbuster. There you go!
Muckerman: I remember watching Sleepless in Seattle in a hotel room with my family. Well, the second half. We didn't realize. We started it, and it started at a part, it seemed like a logical beginning to a movie, only to find out 45 minutes later that we started it halfway through.
Priestley: [laughs] Oh, I don't know what that says about the film, really.
Muckerman: I know. I've never seen the full thing, just the second half.
Priestley: Wow, you need to. My mother would not be happy to hear that. 1993 was also the year that the Natural Gas Policy Act of 1978 was finally phased out. That was where the government had price controls on natural gas. In July of that year, there was a dip in oil prices on speculation that Iraq would accept U.N. missile test inspections and receive approval to resume oil exports.
Muckerman: Sounds very similar to Iran.
Priestley: Yeah, exactly. History does repeat itself. In November, the combination of OPEC overproduction, surging North Sea output, and weak demand lowered the price of Brent to near $15 a barrel. I think today, we're at $74-75, something like that.
Muckerman: Yeah, on an international level.
Priestley: History has cycles. Overall, the 90s were a period of economic boom. GDP rose for nearly ten years. The economy grew by an average of 4% between 1992 and 1999. We were in that same kind of era of a long bull market -- not quite to the same extent as this, and obviously, we've had hiccups in recent memory, especially in oil. But, as far as the wider, macro economy goes, we're in a similar situation. Over that time period, oil prices fell by a third, which is a lot. Top ten companies in the S&P included GE -- oh, GE. [laughs]
Muckerman: Oh, now it's not even in the Dow anymore.
Priestley: Yeah. And spinning off Healthcare. We're going to be GE Healthcare investors.
Muckerman: And Baker Hughes, that's right.
Priestley: But, also Exxon and Shell. The U.S., enjoying global dominance, enjoying this long period of economic prosperity, and the oil industry really continuing its legacy of being very pivotal to the founding of the nation, as it was that day.
There's an Economist quote that, "If coal drove the Industrial Revolution, oil fueled the internal combustion engine, aviation, and the 20th century notion that mankind's possibilities are limitless. It flew people to the moon and beyond. Products that have changed lives, from lipsticks to CD players, from motorcycle helmets to aspirin, contain petrochemicals."
Muckerman: Is lipstick life-changing? I don't know.
Priestley: Some would say. [laughs]
Muckerman: [laughs] CD players were life-changing, no longer.
Priestley: Steve Jobs, we have to thank you for that. So, yeah, it was definitely still at the peak of its heyday. Since then, we have seen something that a lot of people probably wouldn't have expected -- the collapse of oil prices, which began in June 2014. The oil prices fell below $30 a barrel in January 2016. Those are the lowest prices that we've seen. And it had far-reaching effects. Oil producers in Venezuela and Nigeria suffered budget blowouts as, obviously, economies that are incredibly tied to the performance of --
Muckerman: Yeah, fossil fuels are vital.
Priestley: Yeah. And, American Shale bankruptcy. Current shape is, obviously, we're a little bit removed from that now, but that was a dire situation. You were an analyst at that time.
Muckerman: I was, yeah.
Priestley: How was that for you, covering the industry?
Muckerman: You basically said the same thing, everybody's in a world of hurt. It was a big shake-up. I remember when it happened. I had been hiking around Thanksgiving and had no connection to the outside world. Then I turned my phone on for the first time, and I go, "Oh, let's see what's happening in the markets." Every energy stock was down 20-40% in a single day. I felt like, "Wow, work's going to be pretty busy when I get back."
Priestley: [laughs] Yeah. The other consequence of this is, we've seen a massive contraction in the investment, in both people and projects.
Muckerman: Yeah, and these are long-tail projects. You don't really feel the impact immediately, other than having, maybe, some more cash flow up front, but the longer-tail effects are yet to be seen from that large cut-back over the course of two to three years. As you reminded me, 40% budget cuts from 2014 to 2016 from oil and gas companies. That's a big deal.
Priestley: Yeah. And, like you said, we could be seeing, in the next five to ten years, that really starts to impact the price of oil. One other factor that's often seen as a soft factor, but it really isn't, is that they let 400,000 workers go during this period. Now, there's a bit of a rush for talent in the industry, which is definitely going to have knock-on effects.
Muckerman: That seems like a big number, but prior to that, out of the financial crisis, energy jobs were pretty much the entirety of the net gain in jobs. You did lose 400,000, but the years prior to that, from 2008 to 2014, you saw millions of jobs created in the energy sector. So, a little bit more of a re-balancing, rather than a big-time crisis. They just got out ahead of themselves.
Priestley: I did read -- PWC does a report every year on the oil market, and they were saying that it's one of the most aging workforces, in oil and gas, and that they really need to pass on some of that knowledge that they have from these older baby boomers, who are going to be looking to retire soon.
Saying that, a lot about the contraction in spending, the positive of this, the fruit that it's borne is that cost per barrel is down, even on offshore. I think we're seeing $25 per barrel for some projects. That means, if we do see a rebound in the price per barrel, the margins are going to be high. We're not quite at that now. I think we're kind of in that middle ground, where you're going to start to see service companies not giving as much of the cut as they previously were giving.
Muckerman: For sure. They've already, on their conference calls, talked about that. Not going to pass it on. At one point, Halliburton was even giving financing to oil companies to drill, so that Halliburton could at least get some business.
Priestley: Wow. We're starting to see capital expenditure increase. I think it was up 7% last year. We're in this in-between phase. A lot of companies are looking into diversification. Countries that are heavily concentrated in oil, like Saudi Arabia, are beginning to look at ways that they can expand. Saudi Arabia's looking to privatize some of its oil in order to fund some of this expansion, like solar projects. We're seeing renewables really being embraced. It's been a golden era for solar for the past few years.
Muckerman: Yeah, they've performed quite well as stocks.
Priestley: We've seen this period of hiatus in investment, and artificially constraining demand through OPEC and other kinds of agreements, and financially it not being viable to extract a lot of oil. What are your macro thoughts on how the energy industry -- not necessarily oil and gas -- might look in 25 years?
Muckerman: Probably quite a bit different. I think that's safe to say. But you're going to need to see a dramatic reformulation in how things are made in order to see a dramatic reduction in the demand for oil and natural gas, simply because, you talked about some of the things that were possible because of fossil fuels -- lipstick, CD players, motorcycle helmets, aspirin. And, anything you can think of that fits in between those four things -- cellphones, MP3 players, the table we're sitting at, the computer we're working on, the tires we drive on.
You are going to see, in my mind, the continuation of growth in renewables. But they're not going to be a substitute as a feedstock for the goods that we buy every day. Unless we can discover some way to substitute the feedstocks, I still think we're going to be reliant on oil and natural gas in 25 years. Maybe not to drive, maybe not to power our homes, but certainly to build and make things.
Priestley: Yeah. I completely agree with you. There seems to be two schools of thought. The first school is, there is a pivot away from asking, "When are we going to run out of oil," to, "How long will we continue to use oil." It's no longer peak oil, but peak demand. We can talk about that a bit more. The second thought dismisses this. They think that governments don't necessarily have the political will that they're suggesting to implement climate goals, anything like what people are thinking.
Muckerman: We're already backing out of the Paris Accord.
Priestley: Yes. [laughs]
Muckerman: That wasn't too hard. All Trump had to do was say, "Alright, we're done," and we were done. No punishment.
Priestley: I mean, if you look at a country like America, for instance, it's been built around the automobile, and it's been built around a lot of oil and gas infrastructure. I absolutely agree with you, I think we will eventually all be driving electric vehicles, but there is going to be a learning curve.
Muckerman: Yeah. And, unless we go 100% recyclable material -- which, I don't think we're anywhere close to that. We're much closer to having renewable energy be a dominant force than I think recyclable material being a dominant force, in their respective industries. Cars still need tires to drive on, and tires still need oil to be a feedstock.
Priestley: Yeah. Bioplastics, I think, is going to become bigger. There's a lot more investment in that. But it's a long way away, from making a straw compared to making all the components that go into making a vehicle.
But, to talk a little bit more about this peak demand subject, the Paris Accord agreement -- which you mentioned, the U.S. has backed out on -- envisions keeping global temperatures at about 2 degrees Celsius above pre-industrial levels. It says, in order to do that, we need to cut fossil fuel usage, particularly unclean fuels -- so, coal and petrol and oil, rather than natural gas.
The International Energy Agency has said, to reach this, we would have to peak consumption in 2020 at 93 million barrels per day. That's just above current levels. But, as you said, it's a fact that aeroplanes, ships, heavy goods vehicles and plastics will need to use oil for many, many years. And, as much as there is a slowing in the population growth in the U.S., that is not necessarily the same in other growing nations in the world.
Muckerman: No. Far from it, actually. Absolutely. Africa is supposedly going to be the largest continent, population-wise, in maybe a decade. I can't remember the exact year, but it's supposed to surpass Asia within a fairly recent time frame. If you phase out coal, natural gas is still a fossil fuel, and that's going to be one of the bigger fuels to replace coal as you see countries like India, China, the U.S., and Europe continue to phase it out.
Priestley: That's a big problem that you see, generally, in a lot of analysts' reports. We're sometimes so insular in the way that we look at things that it's hard for us to see the global scale. The global scale is, OK, the population looks like it could potentially contract within the next 20 years in the U.S., but elsewhere, that's not the same.
In order for this to happen, a lot of countries would have to tighten vehicle emission standards. That is happening. We are seeing that. Countries like China and India are looking very seriously at alternatives for petrol and diesel. We have Tesla, Chevrolet, and Nissan. It's not unusual for us to see an electric vehicle, especially in a metropolitan area like D.C.
Across the world, the contribution of energy to nations' GDP is declining. So, yes, I can see that we are on our way to being that, but certainly not in the next 25 years.
Muckerman: Yeah. The rapidity of the change would have to dramatically increase.
Priestley: Yeah. This second school of thought, I think the camp that you and I sit in, to a variable degree, is supported by a lot of people within the oil industry -- surprise, surprise. [laughs]
Saudi Arabia's energy minister actually estimated that the world still needs to invest in oil to the tune of almost $1 trillion a year for the next 25 years. The reason for this is, we're talking about, people are still going to need all of these products, we're still going to need gas for the foreseeable future, and the investment just hasn't been there. If investors start to come away from oil and gas as an investment option, then that industry's really going to suffer, because it still needs to look at new wells, new extractions techniques, and things like that to be profitable.
Muckerman: They have driven down the cost to extract, but at the same time, these companies go for the low-hanging fruit first. Unless technology continues to advance, new oil finds are going to continue to be more expensive, which is one reason why you saw deep offshore oil development hit the brakes when oil prices fell. It's very expensive, still, comparatively, to drill offshore. That continues to be the next, next, next frontier as it gets pushed out further and further. But you would have to imagine that it's going to play a role at some point in the supply of oil. And when it does, it will be more expensive to produce.
Priestley: It will be interesting, watching renewables, as more of these traditional oil companies start to invest in diversification, reaching a harmony of investment, where it's not seen as a competition between oil and gas. It's not a zero-sum game, investing in solar farms and investing in oil and gas technology.
It's a fact that the industry has lost about $1 trillion of investment -- according to Saudi Aramco's CEO, I should say -- since the oil price downturn of 2014 to 2016. Whether you dispute that number exactly, the implication remains the same.
Muckerman: $1 trillion. That sounds familiar. It's the value of Saudi Aramco, potentially.
Priestley: [laughs] I think it's looking like Hong Kong is going to be the favorite to float the second trade for that.
Muckerman: Oh, wow!
Priestley: So, 25 years, very long time. I would just caution people to say that 99% of the vehicles on the road right now are not electric. As much as I think it's great, I would love to see more electric vehicles on the road, we don't yet have the infrastructure development, the production development, the interest --
Muckerman: Yeah, it's a small slice of automobiles on the road.
Priestley: Yeah. So, that's our very balanced view of the next 25 years. Oil and gas will still be important, but definitely, we're going to see a huge amount, hopefully, of upswing, in terms of renewables.
Priestley: Anything else? Anything I haven't mentioned?
Muckerman: Only to see what actually happens.
Priestley: [laughs] Yeah, we'll have to wait and see.
Muckerman: There will probably be a bunch in retrospect that we didn't mention, but only time will tell.
Priestley: I mean, for everybody else's sake, I hope that we're not still doing the show in 25 years. [laughs]
Muckerman: [laughs] Right.
Priestley: That's it from us today. If you would like to get in touch, please feel free to email us at email@example.com, or tweet us on Twitter @MFIndustryFocus. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. Thank you, as always, to the marvelously patient Austin Morgan for mixing the show. For Taylor, I'm Sarah Priestley. Thanks for listening and Fool on!
Sarah Priestley owns shares of General Electric. Taylor Muckerman owns shares of General Electric, Halliburton, and Tesla. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.