Markman Capital Insight

Oil industry under siege

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Things are going to get a lot tougher for the embattled fossil fuels industry. That’s according to a new Bloomberg research piece predicting a slow, inevitable death.

To be sure, fossil fuels have been under siege for a while. The politics of climate change coupled with spills, fires, explosions and other self-inflicted wounds have made industry survival challenging. Commodity prices weakness has made it all much worse. In the past, the industry has persevered. The difference this time is competing energy sources are finally starting to make economic sense.

Take solar. Prices for solar panels are plummeting. The cost of solar panels declined 95% since 2008 and the trend is accelerating. While that makes it very difficult to be in the business of making panels, it’s a dream scenario for large utility businesses building out capacity. That’s exactly what has been happening. There has been more investment in solar in the first quarter of this year than all of the other energy sources combined.

The math is simple: Solar is getting cheaper every day and it is renewable so there is no need to worry about supply chain bottlenecks, environmentalists or politics. And it’s a virtuous circle. Falling prices lead to greater demand which leads to economies of scale, network effects, and still lower prices for panels. It’s sunshine version of Economics 101.

Meanwhile the math for fossil fuels has been predictable and grim. Prices for coal can’t fall fast enough. There is no demand for new supply. In the developed world environmentalists have squashed debate. Coal’s share of U.S. electricity production has gone down 17% since 2005. This comes even as companies like General Electric (GE) use big data analytics to make the idea of cleaner coal a reality. In the developing world economic upheaval in China has meant less demand, leaving most producers waiting for India to come on line with new coal-fired power plants. In the current world political climate, good luck with that.

Oil and gas has not fared much better. U.S. oil and gas drilling rig counts sit at a 40 year low as investment grinds to a noisy halt. And while prices for oil have rebounded from their recent moribund lows, there remains little appetite for new investment because most believe it’s just a matter of time before prices resume their downward trek. It’s the very same deflation dilemma solar panel makers face, which, if you think about it is weird because oil doesn’t really compete with most energy types. It’s mostly used for transportation, powering planes, ships and cars.

Bloomberg’s New Energy Outlook suggests the peak of the fossil fuel business will come as early as 2025, just nine years away. That’s the year researchers expect a tipping point as electric cars eat into excess demand for oil and renewable finally kill the growth potential of coal and natural gas. That’s not to suggest these energy sources will go away. They won’t. They’ll just begin a gradual decline that suddenly steepens, like horseback riding after the automobile went into mass production.

That should produce a reliable list of winners. Refiners thrive with low feedstock prices and the future will bring plenty of that. Tesoro (TSO) and Valero (VLO) are key operators in the US. Utilities companies have been aggressive investors in renewable, especially solar and wind. Southern Company (SO) is an all-of-the-above company with scale. And Tesla (TSLA) has a battery technology that will finally allow the cost effective storage of solar power.

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About Jon Markman:  A pioneer in the development of stock-rating systems and screening software, Jon Markman is co-inventor on two Microsoft patents and author of the bestselling books The New Day Trader Advantage, Swing Trading and Online Investing, as well as the annotated edition of Reminiscences of a Stock Operator.  He was portfolio manager and senior investment strategist at a multi-strategy hedge fund from 2002 to 2005; managing editor and columnist at CNBC on MSN Money from 1997 to 2002; and an editor, investments columnist and investigative reporter at the Los Angeles Times from 1984 to 1997.

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